Mobile revenue growth outperforms GDP; investment scaled back - Mobile operators reduce opex and capex to counter global recession

A new GSMA Intelligence study reveals that mobile revenue growth continued to outperform GDP growth in the world's major economic countries during the last 12 months, but has not been immune to the effects of the global recession. According to the new report - The Cellular Telecom Crunchonomics: One Year On – mobile revenues across the 30 OECD member countries* are forecast to drop from EUR411 billion in 2008 to EUR408 billion in 2009, a decline of 0.7 percent. However, GDP growth is forecast to decline by 4.1 percent over the same period (see chart).

Operator revenues in the year to Q3 2009 were hit by unfavourable currency fluctuations and a slowdown in private consumption, both consequences of the economic instability that hit the world's markets around the third quarter of last year. The report notes that currency fluctuations reached a peak in late 2008 but have become more stable since then. Meanwhile, domestic demand fell by 3.7 percent, the first decline registered across OECD markets in the past decade, while private consumption fell by 1.5 percent.

The European mobile industry was deemed to be hardest hit by the economic downturn. Total operator revenues in Europe are forecast to fall by 4.3 percent this year to reach EUR171.6 billion, with declines of 5 percent expected in key markets such as the UK, Spain, Portugal, Ireland, Greece and Austria. Countries such as Poland and the Czech Republic, which reported double-digit revenue growth in 2008, are forecast to report double-digit declines this year. By contrast, operator revenues in North America (USA/Canada) are proving resilient and are forecast to grow by 4.3 percent this year to reach EUR125 billion. Large mobile operators in the US - including Verizon Wireless, AT&T and T-Mobile USA – are all expected to report double-digit revenue growth in 2009.

Mobile operators across the world have significantly reduced opex and capex levels to counter the effects of the global recession. The study found that opex accounted for 60 percent of operator revenues in Q3 2009, compared to 63 percent a year ago, while capex declined to 10 percent of revenues, compared to around 14 percent a year ago. However, the significant reduction in opex helped keep EBITDA stable at 33 percent of total revenues, while capex reductions meant that operating cash flows increased to 22 percent of total revenues, up from 20 percent a year ago.

The economic crisis has had an even greater effect on handset vendors, according to GSMA Intelligence. Device makers saw channel inventories fall from approximately 6 weeks to 4 weeks due to extensive destocking by operators and distributors looking to bring their stock levels into line with lower sales. This trend was particularly evident in Q4 2008 and the first quarter of 2009. The volatility of money markets and the decline in private consumption – as was the case for mobile operators – also had a large impact on vendor performance.

Between 2007 and 2008, global shipments from the top five handset vendors (Nokia, Samsung, LG, Sony-Ericsson and Motorola) grew by 2 percent, but GSMA Intelligence predicts that 2009 shipments are likely to decline by 10 percent year-on-year. However, the report notes that many handset vendors have recently forecast bullish growth for next year. For example, Nokia – the world's largest mobile device manufacturer – has said it expects global device volumes to rise by 10 percent in 2010.

Joss Gillet, Senior Analyst, GSMA Intelligence:

The industry is facing a dilemma as it must invest in 3G network expansion and service improvements to meet consumer expectation as well as generate substantial profits to offset falling voice revenues, yet at the same time it is cutting marketing budgets and squeezing capital expenditure. The financial crisis has served to exacerbate already existing difficult market conditions such as user saturation in developed markets, regulatory pressures, on-going voice-centric price wars and the slow take-up of data consumption. As most economies have now started to recover from the recession - and since mobile operators are reporting healthy balance sheets - we hope that 2010 will mark the time when mobile operators invest money in high-speed network coverage to meet the growing expectations behind data services. Meanwhile, the top five handset vendors rationalised their portfolio mix by launching fewer devices and focusing on high-end and low-end segments, which has led to a recovery in their operating margins over the past 9 months. In 2010, we expect handset vendors to report healthier operating margins driven by larger smartphone portfolios in the mid price tier, a refresh of their high-end portfolios, more predictable quarterly demand, stabilised money markets and reduced operating expenditures.

Real GDP Growth vs Cellular Revenue Growth (2007-2009)
Source: GSMA Intelligence, OECD