Cellular regional round-up Q3 2004

This round-up is based on aggregating selected operators in three regions into super carriers and comparing their relative progress in the light of their Q3 2004 results.

The regions are the US, Western Europe and Asia-Pacific, and we have selected those major operators who have reported their Q3 results to make up our super carriers: UScom, Eurocom and APcom. Between them these regions account for 940 million users across different technologies (roughly two-thirds of the world's cellular users).

The purpose of this round-up is not to look in depth at particular operators, nor to attempt a complete assessment of the world market, but rather to get an overall sense of how the market is behaving in each of these key regions at this stage.

The aggregates for Asia-Pacific are heavily influenced by data from China. For example, China Mobile alone accounts for 36 million of the 45 million net additions, thanks to its acquisition of ten regional networks in Q3.

Where some operators have not yet reported Q3 results, we have either estimated them (if the trend is sensible) or left them out of the calculation (for KPIs that show larger quarterly fluctuations).

Summary

Overall

Across the three super carriers the Q3 results served to maintain recent trends. At the top level there were no major surprises, although flat ARPU and rising churn in the US and Europe were disappointing given the scale of investment in new services.

Europe

Eurocom's market continues to mature, and it is not being successful enough in pushing up ARPU. Care will be needed in 2005 to deal with pricing pressures from discount MVNOs and aggressive pricing from new WCDMA launches. EBITDA has fallen slightly, but this comes at a time when:

• depreciation will rise because of recent capex increases
• amortisation will rise as WCDMA licences start to be written off.

This will put pressure on EBIT, so expect an opex squeeze in 2005 as operators try to hold their margins.

US

UScom continues to grow its subscriber base while keeping ARPU high and stable. It is helped here by having a very small prepaid market. However, revenue per minute is low and falling, while capex levels are high and rising. The value of the current dash to build out high-speed networks will come under close scrutiny over the next 12 months.

Asia-Pacific

APcom is very diverse, containing the biggest market (China) and some of the smallest, together with some of the wealthiest and the poorest. It has a mixture of maturing markets that are carrying heavy investments in high-speed networks, and markets that are in their very high growth phase and which are early in the development of advanced services and higher networks. The two imperatives over the coming year will be to start pushing ARPU higher in all areas and to continue rolling out coverage to unserved areas in order to expand the subscriber base.

Connections and net additions

There are no major surprises here, with overall connections growing 19% year-on-year.

• Eurocom had the slowest growth (6%) over the year, with 18.5 million net additions taking it up to a base of 343 million connections. Eurocom's growth rate is slowing towards 5% per year.
• UScom was up 16% to a base of 145 million, continuing the growth pattern seen over the last two years, but showing a slight lift to 5.9 million quarterly net additions from 4.5 million in Q2 2004.
• APcom posted a bumper quarter with 32% annualised subscriber growth taking it to a base of 452 million. China Mobile alone accounts for 36 million of the 45 million additions in the quarter. APcom's annual growth rate has lifted over the last two quarters.
• The erratic pattern of net additions for APcom is due to China Mobile and China Unicom acquiring regional networks, rather than due to organic growth.

Minutes of use

• Eurocom has the lowest minutes of use (MoU) per connection at 140 minutes per user per month, and its annual growth rate slowed slightly in Q3.
• UScom's very high average MoU continued to grow in Q3 at roughly the same rate we have seen during this year. It has now reached 729 minutes per user per month.
• APcom's MoU is showing an annual growth rate of roughly 40% this year, and it has now reached 286 minutes per user per month. This is mostly down to strong growth in China and Korea.

Note: we understand that US carriers' MoU include both inbound and outbound (they receive retail rates for both and include both in their tariff bundles), where Europe and Asia-Pacific carriers' MoU are outbound only.

Blended ARPU

• Eurocom's monthly blended ARPU shows a 1% gain over the quarter to euro31 ($38) but is flat over the year. Eurocom's annual ARPU growth has slowed over the past three quarters because of the effect of discount MVNOs in some markets and aggressive pricing from early WCDMA launches.
• UScom reported blended ARPU down 1% at euro46 ($56), which continues the last two years' trend of small fluctuations around an average of euro45 ($55). It is doing well to hold its ARPU at this high level, while experiencing strong growth in the subscriber base. Having a low prepaid market and high reliance on 'big-bucket' plans keeps ARPU high. However, big-bucket plans bring their own difficulties - MoU, average revenue per minute and capex.
• APcom's blended ARPU fell 6% in the quarter, 17% year-on-year, to euro18 ($22), continuing a steady trend as market penetration rises. The dilutive impact of China Mobile and China Unicom's acquisitions is clear in the change in ARPU. APcom's average masks a large range of ARPUs, as it is the most diverse region, ranging from euro55 ($67) at DoCoMo down to euro5 ($6) at China Unicom.

Average revenue per minute

The data highlights huge differences between the regional players.

• Eurocom's revenue per minute is four times higher than UScom's at euro0.25, and Q3 continues its upward trend for this year. It is clear why discount MVNOs are so interested in Europe and why European operators are so concerned.
• UScom's revenue per minute continues to fall at some 15% per year, and has now reached euro0.07.
• APcom's revenue per minute growth rate fell strongly in its Q3 results to euro0.03. Again, this is because of the impact of acquisition by China Mobile. In many of the markets it was flat.

Total revenues

• Eurocom lifted its total revenues for the quarter to euro32 billion ($39 billion), which is 8% growth over the year. The rate of revenue growth is slowing as ARPU growth slows.
• UScom's revenues increased by 14% to euro21 billion ($26 billion), matching subscriber growth figures, but are showing a lower rate of growth than earlier this year thanks to a slight decline in ARPU.
• APcom showed only a 5% rise in revenues, as high subscriber growth was heavily offset by falling ARPU.

Churn

• Both Eurocom and UScom suffered slight quarterly rises in their monthly churn during Q3, having seen reductions in recent quarters.
• Eurocom's annualised churn has continued to improve this year. We expect this to deteriorate as discount MVNOs enter more markets and as 3G networks are launched more widely across Europe during 2005.
• UScom seems to have stabilised its year-on-year change in churn after a period of some increase.
• In both regions we can see a seasonal dip in the Q2 summer months followed by a small rise in Q3.
• APcom's reporting of churn is weak for Q3 and is not shown.

Capex

Total capex for the three super-operators is not adequately reported for Q3 2004 yet. However, we can get a useful picture from capex per subscriber and capex to sales.

• The US is currently the heaviest spending area, with major rollout programmes for coverage and network upgrades underway. Capex per subscriber for UScom has averaged euro30 ($37) over the last three years, although it has shown large seasonal swings with clear spikes in Q4.
• Eurocom averages just over euro10 per subscriber ($12), showing a different but also predictable seasonal pattern with spikes in Q4.
• APcom is on a gently rising capex per subscriber trend, currently averaging euro8 ($10). We expect this trend to continue as networks are rolled out further into rural areas, and as network upgrades and 3G are introduced. Note that Q3 2004 data is not yet available for enough of Apcom.
• The recent boost in capex in all three regions is clear in the year-on-year change and capex to sales graphs. There has been investment both to expand the capacity of 2G networks that are suffering congestion, and to roll out higher-speed networks, either GSM/CDMA enhancements or WCDMA.
• Capex to sales is highest in UScom, now running back up above 20%.
• Capex to sales has run at very similar levels in both Eurocom and APcom, although APcom's level has lifted more markedly during this year. This is because of investments in new networks in Korea and Japan, and in expanded coverage for China.

EBITDA margin

Here we show the EBITDA margin and year-on-year EBITDA margin growth to Q3 2004 for the individual operations within Eurocom, UScom and APcom. The bubbles are scaled to their revenues. We focus on those that have reported Q3 EBITDA numbers and who have a clean dataset going back over the previous eight quarters.

• The average EBITDA margin across the regions is close to 40% and operations are converging. The best performers are slipping slightly, while the lesser performers are improving.
• The larger Eurocom operations have generally been performing above the average, but have also seen a small reduction in EBITDA margins over the past year. This is because revenues are slowing at the same time as the complexity of their service portfolios is rising. There are several smaller outliers whose EBITDA position is most strongly governed by their national market share - scale in a national market counts.
• The UScom operations are slightly below average for EBITDA, but have generally improved slightly. T-Mobile US has shown the strongest improvement with a 9% change over the year.
• Apcom's operations have followed the general pattern, apart from China Netcom who posted a stellar 18% growth up to a 52% margin.