Results for 2Q20 were mixed, but the sector looks resilient
The financial results of telecom operators in the second quarter of 2020 were always going to make for interesting analysis, as this was the first full quarter since lockdown measures were widely imposed owing to the Covid-19 pandemic.
In an earlier blog, I talked about how networks had stood firm amid surging usage as most people were confined to their homes. As we rely on connectivity like never before, the telecom industry should be well placed to gain from the restrictions. Yet operators have recently struggled to monetize soaring usage, and it remains to be seen whether changing customer behaviour will ultimately translate into a better financial performance.
As many operators have now reported their results for the second quarter, here I reflect on some of the leading themes.
Operators’ reputations are enjoying a resurgence, as I suggested in a previous article. Their brands may never become the most loved, but it seems they’re becoming a little more appreciated.
In the UK, O2 said that customer satisfaction based on net promoter scores reached record levels in the second quarter (see Instant Insight: Telefonica Results, 2Q20). Rival BT revealed its net promoter score has now improved for 16 consecutive quarters (see Instant Insight: BT Results, Fiscal 1Q20/21). The sector has plenty to do to make up for lost ground, but it’s clearly heading in the right direction, and the pandemic is set to accelerate that trend.
In an important theme, churn across the sector dropped sharply in the second quarter, although this was mostly because of retail store closures that made it harder for people to change network. Notably, however, the Spanish government temporarily banned fixed-line and mobile portability altogether, insisting that operators prioritize enhancing networks and supporting existing customers. It was no surprise, then, that Vodafone Spain recorded a significant fall in annualized mobile contract churn, from 19.7% in the prior quarter to 10.6% (see Instant Insight: Vodafone Results, Fiscal 1Q20/21). But across the sector, Verizon’s retail post-paid phone churn surely stands out the most, at just 0.51% per month (see Instant Insight: Verizon Results, 2Q20).
Of course, low churn isn’t a trend that benefits everyone; smaller players and challenger brands thrive on attracting customers from bigger rivals, so operators like MasMovil, Illiad and Three, may have lost out. Still, retaining existing customers is cheaper than attracting new ones, so this trend, however short-lived it may be, appears a positive one for the sector overall.
Store closures inevitably also knocked sales of mobile devices, even if online channels have made up a sizeable chunk of the shortfall. Orange, for example, reported a 17% fall in equipment revenue in Europe, including a more than 25% plunge in France (see Instant Insight: Orange Results, 2Q20). Verizon saw consumer equipment revenue tumble 18% year-on-year as net post-paid mobile phone additions more than halved.
The pay-as-you-go segment has also taken a hit. With people far less mobile, it would have made financial sense for many to simply switch connectivity to their home Wi-Fi. Vodafone Spain posted a fall of more than 8% in average revenue from prepaid customers compared with the prior quarter, and in the UK O2 reported a fall of more than 600,000 prepaid connections.
Predictably, telecom operators offering packages including live sport lost out from the lack of live action. It was a major drag on BT’s Consumer division, whose revenue sank 7% year-on-year. Still, Marc Allera, CEO of the division, struck an upbeat tone on a call for analysts, pointing to an unusually busy schedule in August, including the final stages of the Champions League, for which BT has sole rights in the UK. This should mitigate some of the burden, but with restrictions on pubs and restaurants — an important channel for BT Sport — likely to remain in place for some time, challenges will remain.
Perhaps the biggest impact from Covid-19 has been on roaming. As international travel ground to a halt, revenue from this segment also quickly dried up. Still, the impact would have been far greater had the pandemic struck before 2017, when roaming charges were abolished within the EU; now, it’s a far less significant revenue stream for most European operators.
Vodafone said that total roaming and visitor revenue in Europe plummeted by about 70% during the quarter, and AT&T revealed it was a leading factor in its 1.1% drop in service revenue at its mobility division (see Instant Insight: AT&T Results, 2Q20). Despite a slight easing in travel restrictions, I expect to see an even greater effect on the results for the third quarter, as this period includes the peak summer holiday season.
The enterprise market is another area that unavoidably weighed on operators’ performance in the quarter, and here the effects could be more long-lasting. BT, for example, suffered a sharp 9% fall at its enterprise unit. I believe this partly prompted BT to announce a new scheme to help the UK’s 5.8 million small businesses return to growth in the aftermath of the crisis. Orange recorded a 3.3% slump in enterprise revenue, bringing an abrupt end to six consecutive quarters of growth. And Vodafone highlighted delays in corporate projects, notably in the UK, Spain, Italy and Ireland, as well as a fall in activity within the automotive sector, which had a knock-on effect on its Internet of things segment.
Overall, network operators had a pretty tough quarter, despite one or two encouraging trends. But this is a sector far more immune to the wider impact of Covid-19 than most others. Orange, for example, talked up the “remarkable resilience” of its results in the face of Covid-19, confidently declaring that it sees no significant deviation from its financial targets. Belgian operator Proximus went further, predicting that earnings before interest, tax, depreciation and amortization minus capital expenditure for the full year will come out at the “high end” of guidance.
Sadly, industries such as aviation, hospitality and tourism will be unable to say the same. In these sectors, the impact will hit much deeper and the effects probably last far longer.
Indeed, telecom operators should be optimistic that many of the headwinds evident in their second-quarter results will be relatively short-lived. And in the long term, this sector could prove one of the few to reap some lasting benefit from such a chastening period. Operators’ reputations among customers appears to be nearing an all-time high; demand for connectivity has never been stronger and appreciation for the sector among governments and regulators is finally on the up. The next few quarters’ disclosures could be just as interesting.
CCS Insight’s quarterly review of telecom operators’ financial and operating results for the second quarter of 2020 will be published in the second half of August. For further information, click here.
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