An Unhealthy Industry: Telecom reports indicate continued contraction in revenues and growth

Having just analyzed recent reports from telecom companies, we conclude that the telecom recession/ depression continues. Revenues are falling way short of expectation, growth is limited to mobile data, and profits are minuscule with the exception of Verizon (VZ). But even at VZ, the growth seems to be coming almost entirely from new wireless data services for mobile subscribers, while customer installations for FiOS seems to be stalling (despite the huge build-out cost and heavy promotion). Perhaps the most important earnings report tidbit was that VZW (a joint venture between VZ and Vodafone-UK) said its churn rate — the pace at which customers defect to other carriers — fell to 1.1 percent from 1.2 percent in the previous quarter. By comparison, Sprint Nextel has a churn rate of 2.45 percent.

Comment:  With all the consolidation that has taken place in telco land- both in the network operator and equipment spaces- one would expect profit margins to be a lot higher, due to less competition and the power of scale. But they aren’t. The industry seemed to be a lot healthier in the late 1990s when competitive carriers were expanding their business to both enterprise and residential customers. But alas, they were wiped out after the dot com bust and stock market meltdown of 2000-2002. An entire food chain/ ecosystem collapsed shortly thereafter as the innovative new equipment companies had no one to sell to and the software and services companies had no one to support.

Growth engines: Telecom growth today seems to be restricted to developing countries which have little or no fixed line infrastructure. Mobile data continues to grow everywhere with more and more people wanting to access the Internet on the move. Mobile video and multi-media services over broadband wireless networks (e.g. WiMAX, HSPA, LTE) may provide an engine for future growth, but that remains to be seen. We hope telco video (both FiOS-RF and IPTV based delivery of broadcast video) will succeed, as it would provide real competition for the monopolistic cable companies that charge ever higher prices for digital video and provide terrible customer service. However, we are concerned with FiOS apparently stalling as indicated in the VZ report below.

Here’s a roundup of relevant telecom company reports in the past week:

Nortel warns of U.S. market woes, shares fall

Wojtek Dabrowski ,  Reuters  August 01, 2008
TORONTO – Nortel Networks Corp said on Friday its quarterly loss tripled on restructuring charges and currency exchange losses, and its shares fell as the telecom equipment company warned that a tough U.S. market is choking wireless spending by carriers.  The loss widened to $113 million, or 23 cents a share, from $37 million, or 7 cents a share, a year earlier. The latest results included $67 million in restructuring charges and a loss of $21 million, primarily from mark-to-market losses on interest rate swaps.
"The macro environment in the U.S. and the U.S. carrier spend continues to be challenging," Chief Executive Mike Zafirovski told analysts during a conference call. He said this has hurt sales related to CDMA, or Code Division Multiple Access, wireless technology….

Bell Canada to Cut 2,500 Jobs

by the Associated Press July 29, 2008
BCE Inc. said it is cutting about 2,500 positions at Bell Canada, representing about 6% of the unit’s total workforce, as it attempts to streamline its management and lower costs……

SK Telecom Profit Dented By Marketing Costs

WSJ By IN-SOO NAM July 25, 2008

SEOUL — SK Telecom Co. reported a worse-than-expected 26% decline in quarterly net profit, pressured by higher marketing costs and a fall in wireless-data revenue…….

Sprint to Sell Cellphone Towers, Use Money to Pay Down Debt 

WSJ By AMOL SHARMA July 24, 2008

Sprint Nextel Corp. agreed to sell nearly all its cellphone towers to a private-equity-backed firm called TowerCo in a deal that will generate about $670 million in cash for the struggling wireless carrier……

Write to Amol Sharma at

Earnings Rose at AT&T, but Revenue Misses Forecast 


AT&T, the telecommunications company, reported second-quarter results on Wednesday that contained signs that the weak economy was catching up to its previously steady results…………

TV Service Stalls for Verizon, but Increase in Wireless Customers Keeps Earnings Strong 

 The New York Times,  By LAURA M. HOLSON July 29, 2008

Verizon Communications is having a harder time pushing its television service, which competes with the big cable companies, but the company said the slowing economy had not hurt its cellphone business.

Motorola Reorganizes Unit before Earnings Report

Forbes ByElizabeth Woyke, 07.28.08

In an ongoing attempt to revitalize its business, Motorola will restructure one of its largest units into three groups. Analysts, however, are focusing on how the Schaumburg, Ill.-based telecom equipment maker plans to shore up profits……..

Chairman Tchuruk, CEO Russo To Step Down From Alcatel-Lucent

PARIS — The architects of the trans-Atlantic merger that created Alcatel-Lucent two years ago are stepping aside, leaving a telecommunications-equipment firm still struggling to figure out how to survive in an industry plagued by increasingly brutal competition and eroding profits……
Comment:  The founders of the French-US telecom equipment maker are finally leaving the company created by the merger from hell. Their departure should help end the group’s nationalist paralysis. But the timing is awful.  No successor has been named for either post. Without a succession plan Alcatel-Lucent looks as lost as ever.  The outlook doesn’t look much brighter for the rest of the year, as economic woes make telecom operators reluctant to spend to upgrade their networks.  Alcatel-Lucent still expects the overall telecom equipment and services market to remain flat in 2008.   However, their share will likely decline.
"I don’t think it should be seen as good news," said WestLB analyst Thomas Langer. "What you need in such difficult times is true leadership." Mr. Langer, who has a "sell" rating on Alcatel-Lucent stock.
Addendum:  Unfortunately, More of the Same —— August 7, 2008
Deutsche Telekom Net Profits Slump
By Rhonda Wickham  WirelessWeek – August 7, 2008
Deutsche Telekom AG reported that its Q2 net profit fell 35% due to economic and business effects such as 1-time charges, a stronger euro and higher interest payments.
The operator posted net profits for the period ended June 30 of $607.2 million, down from $929.7 million a year earlier, when the company booked a gain from the sale of T-Online France.
Deutsche Telekom, parent company of T-Mobile USA, saw revenue fall 2.9%, due to the strong euro against the dollar and pound.  DT also saw a 7.1% decline in its German fixed-line customers to 29.82 million from 32.09 million. Its retail broadband customers grew 23.5% to 9.9 million. Total mobile customers increased 8.7% to 125 million, with the U.S. customer base rising 12.3% and Europe increasing 7.5%.
Sprint customers continue to flee, base drops to 51.9M
 By Sue Marek  Fierce Wireless-  August 6, 2008
Sprint Nextel disappointed investors once again with some less-than-stellar second quarter results. In particular, the company continues to lose customers at a rapid rate–it lost 901,000 customers in second quarter, giving it a total of 51.9 million customers, compared with 54 million the end of the same quarter last year. On the revenue front, the operator had a second-quarter net loss of $344 million, compared with a year-earlier profit of $19 million. Revenue fell 11 percent to $9.06 billion. Wireless revenue was $7 billion, also a decline of 11 percent year over year.
In a call with financial analysts and investors this morning, Sprint executives tried to mitigate the damages by singing the praises of the company’s "Simply Everything" unlimited voice and data plan and the introduction of Samsung’s Instinct smart phone. CEO Dan Hesse repeatedly talked about how Simply Everything is encouraging stabilization among its customer base and has performed better than expected. In addition, he talked at length about how the Samsung Instinct is driving more data usage among customers.
Sprint also said it plans to make an offering of $3 billion in cumulative perpetual convertible preferred stock but executives wouldn’t go into any details on that offering. Last month Sprint agreed to sell almost all of its towers to private tower company TowerCo for about $670 million in cash. The company planned to use the proceeds to pay off debt.
Qwest Q2 profit heads south, along with outlook

By Dan O’Shea  Fierce Telecom- August 6, 2008
On the heels of having its four-market forbearance petition rejected, Qwest Communications reported a 24 percent decline in profit to $188 million as part of its second quarter earnings summation. Revenue was down about 2 percent overall to $3.38 billion, and because the Federal Communications Commission rejected Qwest’s request for forbearance from access charge regulation, the telco will not be able to realize more revenue through higher wholesale pricing.
The telco adjusted its outlook lower for the rest of the year, saying that revenue growth will be only about 2.5 percent. Qwest also reported that access lines declined about 8 percent to 12.2 million. Positive news included an addition of 32,000 satellite TV subscribers via Qwest’s partnership with DirecTV, growth of about 9 percent in Internet and video revenue, and a rise of about 14 percent overall in broadband subscribers.   All in all, this particular earnings report could not have been how Qwest CEO Edward Mueller had hoped to celebrate his first anniversary as chief. Looking back at the past year, Mueller has made a few changes here and there, and a couple of major decisions–most notably Qwest’s icing of Sprint as its wireless partner (though that wasn’t really a hard decision), and the company’s $300 million commitment to FTTN, but not for video. Is the company any better off than it was one year ago?
Qwest Posts 24% Profit Drop, Cuts Outlook for Year
By ANDREW LAVALLEE   WSJ   August 7, 2008
Qwest Communications International Inc. reported a 24% drop in second-quarter profit and lowered its outlook for the year, as land-line losses and market-share declines in its broadband unit continued to drag down the company’s results.
Revenue fell 2.3% to $3.38 billion.  Qwest ended the quarter with 12.2 million access lines, down 8.2% from the year-ago quarter, following similar land-line losses from AT&T Inc. and Verizon Communications Inc. Qwest is feeling the strains of the weak economy, particularly in states like Arizona and Iowa, where the real-estate market has been hard-hit.
MetroPCS’s Net Slips Amid Rising Costs, Lower Per-User Revenue
By DAVID BENOIT  WSJ- August 7, 2008
MetroPCS Communications Inc. posted a 13% decrease in second-quarter net income as falling revenue per user and rising costs offset continued subscriber gains. The wireless provider recorded net income of $50.5 million, or 14 cents a share, compared with $58.1 million, or 17 cents a share, a year earlier. The latest results included a three-cent charge on the firm’s investment in auction-rate securities.  Revenue rose 23% to $678.8 million from $551.2 million. The mean estimates of analysts according to Thomson Reuters were for earnings of 17 cents a share on revenue of $679.1 million.
Average revenue per subscriber was down 3.3% and the cost per user rose slightly. But total operating costs surged 30%.
Vonage Narrows Loss, But Turnover Remains High
By ANDREW LAVALLEE  WSJ  August 8, 2008
Vonage Holdings Corp. narrowed its second-quarter loss but added far fewer customers, in part because it cut back on advertising. The Internet-phone company, based in Holmdel, N.J., reported a loss of $6.9 million, or four cents a share, compared with a year-ago loss of $23.2 million, or 15 cents a share. Revenue climbed 11% to $227.5 million.
The rate of customer defections, or churn, fell to 3% from 3.3% in the previous quarter. Vonage — which provides phone service to households through Internet access lines — has struggled to reduce turnover in a saturated and competitive telecommunications industry. Total wireless churn at competitors such as AT&T Inc. and Verizon Wireless, Verizon Communications Inc. and Vodafone Group PLC’s joint venture, was 1.6% and 1.1%, respectively.

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