Mobile operators set for steady growth in uncertain times - Mobile growth to outperform GDP, but high-speed network investment at risk

A new GSMA Intelligence report published this month reveals that mobile operators are well-placed to ride-out the current global financial crisis, but warns that the industry will not be completely immune to factors such as currency fluctuations and a slowdown in consumer spending. In a study of the 30 member countries* of the Organisation for Economic Co-operation and Development (OECD), the report forecasts that total revenues generated by mobile operators will grow by 4.5% this year to around €401 billion, and grow by a further 4.1% next year to €418 billion.

Despite being one of the countries hardest hit by the economic downturn, the US is forecast to account for almost 30% of mobile operator revenue this year, reaching €116.5 billion, a rise of 6.7% over the previous year. This growth is being driven by the country's three largest mobile operators, AT&T, Verizon Wireless and T-Mobile USA, which are all forecast to report double-digit revenue growth in 2008, the report says. US mobile growth is linked to forecasts that the US economy will begin its recovery in mid-2009, while other major economies are not expected to improve until mid-2010.

Meanwhile, revenue growth at mobile operators in Western Europe is less encouraging and is being impacted by the continuing decline in voice revenue, increased competition, currency fluctuations, and difficulties in meeting expectations in high-speed services. In the UK, for example, mobile revenues are forecast to decline by 6.4% in 2008 and grow by just 1.14% next year. The situation is the same in other major countries in the region such as Germany, Italy and Spain. Only France is forecast to report significant revenue growth; rising 3.7% in 2008 and 4.5% in 2009. However, most countries in Eastern Europe are expected to defy the gloomy economic outlook and report double-digit growth this year. Total mobile revenues in the eurozone are forecast to grow by 2.6% in 2008 and 3.6% in 2009. Revenue growth at the mobile operators is underpinned by a generally solid financial foundation. As the world's credit markets tighten, investors are looking closely at liquidity and cash flow as an indicator of a company's ability to survive the downturn. GSMA Intelligence forecasts that earnings (EBITDA) at mobile operators in the OECD 30 currently account for around 30% of revenue - representing a healthy margin - and are expected to remain stable during 2009. Operating free cash flow also appears stable, accounting for 15-20% of total revenue.

Although the market capitalisation of most operators has declined as the economic situation has worsened this year, the industry has generally been outperforming most other sectors. This means the projected 4.1% growth in mobile revenue in 2009 will be acheived despite a predicted slump to -0.4% in real GDP growth across the 30 OECD countries.

However, while liquidity is not a major concern, the economic situation still means that mobile operators will be required to control costs, which could mean they come under pressure to scale back any significant new network upgrades or rollouts, or even reign in new service launches. GSMA Intelligence predicts that mobile operators in the study will look to maintain capex at current levels - around 13% of revenue - and keep a watchful eye on opex, which is currently around 68% of revenue. Despite healthy balance sheets, mobile operators are likely to remain cautious in the face of numerous uncertainties (such as currency fluctuations) in the short term, and could wait for the cash injected into financial systems by governments to provide the desired rebalancing of private consumption levels and financial market stability before making further investments. This could create problems for mobile operators looking to invest in areas such as improving 3G network coverage.

At more immediate risk from a slowdown in consumer spending, the report says, are the mobile handset vendors. Recent warnings from major players such as Nokia and BlackBerry-maker Research In Motion suggest that vendors are already feeling the effects of lengthening handset lifecycles, a slowdown in demand for higher-end devices and a decline in average selling prices. Mobile operators may also look to reign in their handset subsidies as a cost- cutting measure.

Joss Gillet, Senior Analyst, GSMA Intelligence:

Over the last few weeks, mobile operators in mature markets seem to have shifted their focus from revenue stimulation to operating profitability. This is a direct response to the financial crisis, which forces most telecom players to show signs of healthy liquidity to face short- term debts and challenges. It also reflects the fact that, in mature markets, where penetration is high and competitive pressure drives down voice revenues, short term solvency is as important as revenue share. Managing costs will be the key challenge for the coming quarters, especially in mature markets. If mobile operators expect to offset voice price decline by driving mobile data usage, it will require network coverage improvement, consumer segmentation/targeting and marketing efforts. In other words, mobile operators that decide to squeeze capex and drastically reduce opex should not dismiss the effect such decisions can have in the medium to long term.