Since the Covid-19 (coronavirus) pandemic started spreading around the globe, most of the attention has been on two areas: health and the economy. One of the main questions over the past few months was what the global economic outlook is looking like in 2020 and beyond, and which sectors of the economy will suffer the least and the most. Some analysts were forecasting moderate growth for telecoms, while others were more conservative in their outlook, predicting a decline, in line with the global GDP.
The first results for Q2 will be published in the coming weeks and give us a great indication on how well the industry is holding up in the crisis. For a bit of clue to what we should expect to see, this is a great chance to take a look at the most recently published results, Q1 2020.
So how much of those fears or hopes have actualised in Q1 2020?
GSMA Intelligence conducted an analysis of the financial performance for 27 biggest telecom groups by revenues based on Q1 2020 reported results, which can be accessed via the latest Global Financial Benchmarking report . The good news is that 17 groups out of 27 reported a year-on-year revenue growth. While the aggregated revenue for all 27 groups declined by 0.5 per cent, the decline was slower than the drop in global GDP, which Fitch Ratings states shrank by 1.7 per cent.
There are several factors regarding why that happened. First of all, group performances were largely influenced by their geographical footprints, as the spread of the virus and severity of the lockdown has varied by region. Secondly, telecom operators are non-cyclical companies, meaning their performance is less volatile in times of recession, due to an ongoing demand in the essential service they provide; connectivity. It is important to mention as well that while Covid-19 was among the factors affecting the financial performance Q1, it was not the only factor, and mainly had an indirect link to financial performance via the economic impact.
The financial results of the first quarter in 2020 demonstrate that (see chart, below, click to enlarge).
While most telecom operators suffered from reduced non-recurring revenue, as the lockdown restrictions meant they had to close down most of their retail outlets, service revenue was up due to an increase in data usage, both on the fixed and mobile side, due to a switch to homeworking an increase in usage of online services for entertainment.
In our latest Global Financial Benchmarking report we selected three groups with presence in South America, MENA and Africa to deep dive into their financial performance and key strategic changes and assess the regional impact of Covid-19. Looking at the regional differences, Telefonica, which has a vast footprint in South America, reported a negative effect of Covid 19 on its operations in Q1, with revenues declining 5 per cent, impacting profitability. Enterprise clients affected by the pandemic, and declines in prepaid, roaming and handset revenues were the main contributing factors.
Etisalat, which is mainly present in MENA, saw 1 per cent growth in revenue, boosted by the businesses in Egypt and Chad. However, growth slowed compared to the 2.4 per cent rise recorded in Q4 2019, due to the impact of Covid-19 on domestic operations.
And MTN, operating in Africa, reported limited impact from Covid-19 on its performance for Q1, as the lockdown measures across most of its footprint were not introduced until the last week of the quarter. In April 2020, however, the pandemic proved a catalyst for an increase in data traffic across MTN’s footprint, up 115 per cent compared with April 2019, with the highest increases in Nigeria and Ghana.
Regarding profitability, the aggregated EBITDA margin of the 27 analysed groups declined only slightly, from 34 per cent in Q1 2019 to 33.7 per cent in Q1 2020, with 20 groups reporting EBITDA margin of more than 30 per cent. On the capital expenditure side, as the 2020 budgets set in 2019 did not foresee the global pandemic, groups continued with 5G rollouts and 4G upgrades in Q1 and spent $4 billion more in the quarter than Q1 2019.
Despite these reassuring results, it is worth understanding that Q2 may look less positive. This is due to majority of lockdowns being introduced at the end of March, therefore mainly affecting second quarter results. At the same time the worsening economic situation across the world means an increase in unemployment, which will have a negative impact on telecom revenues, particularly in developing markets with limited fixed broadband coverage and where the majority of subscribers are on prepaid tariff plans.
The main challenge in upcoming months therefore will be managing the bad debt and balancing the liquidity. On the capex side, devaluation of local currency against the US dollar in developing markets may result in an investment slow down. Other factors that may decrease capex are supply chain disruptions and new site installation limitations due to lockdown restrictions, especially in case of a second wave of Covid-19.
In terms of capex drivers, capacity improvements may lead to an increase in the infrastructure spend. However, most of the 27 groups report their networks are coping with the increased data traffic and since most countries have already seen the transition to homeworking, it is unlikely the Q1 rate of growth in data traffic will continue to increase across the remainder of 2020.
– Alla Shabelnikova – senior financial analyst/forecaster, GSMA Intelligence
The editorial views expressed in this article are solely those of the author and will not necessarily reflect the views of the GSMA, its Members or Associate Members.