Monday, February 25, 2013

Global telecoms operators risk losing investors’ confidence unless they overhaul their performance metrics

ENGLAND & SPAIN: The fast-changing changing nature of the telecommunications sector is driving the need for substantive changes in the ways operators measure and report their operational and financial performance according to Metrics transformation in telecommunications, a new report by Ernst & Young to coincide with the World Mobile Congress.

Current metrics have not kept pace with business model changes and operators must align information assets and reporting to an environment where they are offering a growing range of data-centric services.

Jonathan Dharmapalan, Ernst & Young’s Global Telecoms Leader says: “As traditional markets are now hyper-penetrated, the business case for investment by operators is no longer driven by net additions and penetration of legacy services. Shareholders and analysts are looking for new sector growth stories in the wake of the infrastructure upgrades, yet institutional investors’ view of the telecoms sector remains fundamentally ambivalent, reflecting uncertainty over the trade-off between the costs and value of new growth opportunities in data.”

Telecoms needs to move beyond its defensive positioning with investors
Capex guidance for many operators remains conservative, despite rising demand for new data services. A subdued perception of growth potential has seen telecoms stocks characterized as a defensive play offering strong cash flows. However, even this view of the industry now under pressure in the wake of dividend cuts announced by leading players.

A comparison of major telcos’ share performance over the past five years highlights defensive qualities giving way to underperformance in 2012. Overall, the industry’s performance has been resilient but unexciting over this period. Only 11 percent of respondents cited telecommunications as a top sector to invest in, compared to technology (20 percent), oil and gas (26 percent) and consumer products (27 percent) according to the new Ernst & Young’s Institutional investors survey 2013.

Comments Dharmapalan: “Metrics need to reflect take-up of new services while also providing greater granularity in terms of profitability of data services. For example, smartphone take-up has proved to be a double-edged sword given the effect of device subsidies on margins.

"At the same time, new types of coverage and penetration metrics will be needed to communicate the socio-economic benefits of new infrastructure. Ultimately, new performance metrics can do much to help investors evaluate the sector and its transformational qualities in the years to come.”

Current metrics fail to capture growth and profitability
Performance metrics commonly used across the industry, such as net additions and Average Revenue Per User (ARPU), are no longer sufficient to provide management and investors with a compelling story. Instead, telecoms operators need to provide the evidence that the business model is performing well and that there is a solid track record of growth and an actionable plan to sustain profitability.

In addition, many new connections are now being generated by multi-SIM consumers and by enterprise and machine-to-machine connections, blurring what a net addition means. These new types of connectivity also have very different usage revenue and margin profiles compared with traditional customer base.

Adrian Baschnonga, lead analyst, Global Telecommunications at Ernst & Young says: “Successful players in the future will differentiate through their ability to up-sell new services to existing customers in both the consumer and enterprise markets. Metrics such as revenue generating units (RGU) per subscription have already been successfully leveraged by cable companies – operators should find new ways to communicate the benefits of a widening services portfolio.”

A wider set of financial metrics is vital
On the financial side, operators should consider moving beyond earnings before interest, tax, depreciation and amortization (EBITDA) as a primary metric. Core earnings do not factor in capital expenditure, which is very much a key concern for investors as they consider the infrastructure upgrades required to support new demand scenarios.

Metrics such as return on capital employed (ROCE) and return on invested capital (ROIC) are becoming more important tools through which performance can be assessed. In addition, new services offered by operators would benefit from evaluation through a wider set of financial metrics beyond EBITDA margin, which has been the mainstay of operator financial reporting for many years.

Migrating to new metrics will bring additional challenges
Operators are already starting to move forward to new industry metrics – the rise of Average revenue per account (ARPA) in the United States is one such example. Yet the need to build industry consensus on new metrics is paramount, while operators should also ensure that their systems and processes are able to capture new insights in a consistent way.

Dharmapalan concludes: “Looking ahead, as operators migrate to new metrics, they should bear in mind a number of key considerations. This involves evaluating which metrics should be used to communicate profitability at a time when margins remain under pressure, but also the internal challenge of ensuring that data can be collected in a consistent and robust manner. Greater levels of comfort with internal metrics will in turn spur more confident communications of performance levels externally.”

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.