Capital expenditure (capex) in the telecommunications sector experienced a notable decline during the 2Q23 period spanning April to June 2023 following a modest recovery in 1Q23.
Major telcos in the US, China, and Europe are strategically readjusting their 5G capital investments, aiming to fortify their financial positions amidst decreasing top-line figures, macroeconomic pressures, and concerns about economic slowdown, according to MTN Consulting.
Comparing year-on-year data, capex saw a sharp decline of 5.8 percent, marking the steepest fall since 2Q20, reaching $76.0 billion in 2Q23. Moreover, the annualized capex decreased by 2.0 percent YoY, amounting to $324.9 billion in the same quarter. This decrease had an impact on the annualized capital intensity, dropping from 18.7 percent in 1Q23 to 18.5 percent in 2Q23, although it remains relatively high within the industry.
Factors contributing to this trend include the increased deployment of fiber and upgrades to support fixed broadband and necessary infrastructure for 5G, especially in markets like India. These endeavors have helped maintain the annualized capital intensity at record-high levels.
On a company level, Rakuten displayed the highest capital intensity, with a capex-to-revenue ratio of approximately 159.3 percent for 2Q23 on an annualized basis. India’s state-owned telco, BSNL, prepared for the phased rollout of 4G and 5G services, boasting a capital intensity of 75.5 percent for the annualized 2Q23 period. Frontier Communications and Reliance Jio also reported notable capital intensity, standing at 66.9 percent and 63.3 percent, respectively.
China Mobile emerged as the leading capex spender for the annualized 2Q23 period, investing $25.1 billion, albeit showing a 14.3 percent reduction compared to the same period in the previous year. Notably, four out of the top 20 operators demonstrated double-digit growth rates for the same period, including Reliance Jio, Airtel, Charter Communications, and Comcast.
Despite declining revenues and macroeconomic challenges, telcos have maintained stable profitability margins by effectively managing costs. EBITDA margins stood at 34.8 percent, and EBIT (operating) margin at 15.6 percent in the annualized 2Q23 period, surpassing figures from two quarters ago. Telcos are strategically reducing sales & marketing and G&A spending by embracing digital platforms and automation, foreseeing a continued reduction in the workforce through modernization and automation.
Looking ahead, telcos are expected to optimize their cost structures through technology-enabled solutions and collaborations. Initiatives such as core network sharing, network slicing, and partnerships with cloud providers are anticipated to reduce costs and transform the telco business model.
In terms of workforce, the industry witnessed a slight decline, but major telcos in China and India experienced an increase. With a continued focus on automation and optimizing labor costs, the average cost per employee is expected to rise, hitting $66.0K per year in 2027.
In the global scenario, Asia retained its lead in market revenues, capturing 37.4 percent of the total share, narrowly surpassing the Americas region at 37.0 percent. However, the Americas region maintained its position as the highest spender in capex, primarily driven by major US-based telcos like Comcast, Charter Communications, and Frontier Communications. Despite a YoY decline in capex spend in Asia, Europe continued to lead in regional capital intensity, followed closely by the Americas.
Meanwhile, telecommunication operator revenues experienced a decline of 1.3 percent on a year-on-year basis, amounting to $443.6 billion during the 2Q23 period spanning April to June 2023. This downturn marked the seventh consecutive quarterly slump, although the pace of decline notably slowed. In the preceding three quarters, revenues plummeted by 6.3 percent, 9.3 percent, and 3.5 percent in 3Q22, 4Q22, and 1Q23, respectively. The market decline’s deceleration was attributed to the diminishing impact of AT&T’s spinoff of its WarnerMedia unit and an upswing in service revenue growth for numerous mobile operators.
Nonetheless, the sharp declines observed in the latter half of the previous year and the initial half of this year significantly affected the revenues and their growth rate for the annualized 2Q23 period, amounting to $1,757.9 billion. This showcased a 5.1 percent downturn compared to the previous year. Currency fluctuations played a substantial role, particularly in regions like Japan, where revenues for KDDI, Softbank, and NTT plunged by 12.4 percent, 10.6 percent, and 8.8 percent YoY, respectively. Furthermore, inflationary pressures and the energy crisis left a mark on European telecom giants like BT (-10.5 percent) and Vodafone (-8.4 percent).
In a closer look at the top 20 companies based on annualized 2Q23 revenues, Airtel demonstrated the most robust revenue growth, boasting an increase of 8.3 percent. This growth was fueled by escalating ARPU (Average Revenue Per User) and a surge in service subscriptions in the domestic market, coinciding with the onset of the 5G shift. Other telcos within the top 20 that witnessed revenue growth in the annualized 2Q23 period included Saudi Telecom (6.5 percent), Charter Communications (2.6 percent), China Unicom (1.2 percent), Verizon (0.5 percent), China Telecom (0.3 percent), and China Mobile (0.2 percent). Notably, two of the major Chinese telcos, China Mobile and China Telecom, experienced revenue declines in the single quarter of 2Q23, following a recovery in 1Q23. Although they attributed growth in the annualized period to surging “emerging businesses” revenues, certain operators in less mature 5G markets credited their growth to 5G-related equipment revenues.
Looking forward, telcos are pinning their hopes on 5G-enabled devices already deployed to potentially generate new revenue streams in the remainder of 2023 and beyond. However, this prospect appears uncertain, prompting expectations for major strategic changes and cost transformation programs in the near future. Recent successes in operational expenditure (opex) reductions contributing to profit growth are anticipated to embolden numerous telcos.
Among the top 20 operators, AT&T endured the most substantial decline in annualized telco growth for the 2Q23 period, with a stark drop of 23.9 percent. This was primarily attributed to the spinoff of WarnerMedia in early 2022. Besides AT&T, 12 other top 20 operators witnessed a decline in revenues during the annualized 2Q23 period, with no significant asset sales accounting for the drop. Notably, KDDI and Softbank, mentioned earlier, along with BT, also showcased revenue declines exceeding 10 percent during this period.
