Archive for January 13th, 2009
Size matters in telecom. 2008 Telecom EBITDA benchmark.
Starting the new year, I wanted to look back to my clients’ performance during 2008. As posted before, the financial markets took the telecom markets on a wild ride in the last quarter of 2008 and that clearly affected some of the operators’ performance for which we actually work.
It is hard to avoid the conclusion that size matters in telecom. It is an expensive business (specially in emerging regions such as Africa, Middle east or Asia Pacific); contenders need to be large enough and produce sufficient cash flow to absorb the costs of expanding networks and services that become obsolete seemingly overnight. Transmission systems need to be replaced as frequently as every two years. Big companies that own extensive networks are less reliant on interconnecting with other companies to get calls and data to their final destinations. By contrast, smaller players must pay for interconnection more often in order to finish the job. For little operators hoping to grow big some day, the financial challenges of keeping up with rapid technological change and depreciation can be monumental.
Earnings can be a tricky issue when analyzing telecom companies. Many companies have little or no earnings to speak of. Analysts, as a result, are often forced to turn to measures besides price-earnings ratio to gauge valuation.
Price-to-sales ratio (price/sales) is the probably simplest of the valuation approaches: take the market capitalization of a company and divide it by sales over the past 12 months. No estimates are involved. The lower the ratio, the better. Price/sales is a reasonably effective alternative when evaluating telecom companies that have no earnings; it is also useful in evaluating mature companies.
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