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.

Another popular performance yardstick is EBITDA. EBITDA provides a way for investors to gauge the profit performance and operating results of telecom companies with large capital expenses. Companies that have spent heavily on infrastructure will generally report large losses in their earnings statements. EBITDA helps determine whether that new multimillion euro 3.5G network, for instance, is making money each month, or losing even more. By stripping away interest, taxes and capital expenses, it allows investors to analyze whether the baseline business is profitable on a regular basis.

In my opinion, 2009 should be the year where telecom executives should be mindful of cash flow. EBITDA gives an indication of profitability, whereas cash flow measures how much money is actually flowing through the telecom operator at any given period of time. Is the company making enough to repay its loans and cover working capital? A telecom company can be recording rising profits year-by-year while its cash flow is ebbing away. Cash flow is the sum of new borrowings plus money from any share issues, plus trading profit, plus any depreciation.

If you are interested in understanding the performance levels of telecom operators across different regions, take a look at the next 2 slides, showing EBITDA and OPEX levels for a predefined set of operators (some of them clients). Enjoy the reading.


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