Solid 1H08 Telco Results in the Asia-Pacific May Help Offset Tough Times on Horizon

(Business News & Technology News, 30 Sep 2008)

Analyst and consulting firm Ovum recently posted its analysis of 1H08 financial results for 49 telcos based in the Asia-Pacific (AP) region. According to Matt Walker, Ovum principal analyst, the power shift within AP towards emerging markets continued in the first half of 2008. "Developed Asia contains pockets of technology leadership and financial bulk, but the historical trends favor China and India to overwhelm the rest of the region in telecom heft over the next few years," Walker adds.

For the group of 49, in U.S. dollars, 1H08 revenues climbed 16 percent to $205.3 billion, slightly ahead of the 15.5 percent growth in core opex (excluding depreciation). Strong capex growth of 24.9 percent pushed the region's capital intensity to 21.2 percent, up from 19.7 percent in 1H07. Profits were mixed: average net margins for 1H08 improved slightly from 1H07 to 12.4 percent. However, operating cash flow (EBITDA less capex, or OCF) as a percentage of revenues slipped to 15.2 percent from 16.5 percent in 1H07.

"Japan remained AP's revenue powerhouse, with 38 percent of the 1H08 total, and it accounted for roughly one-third of capex," says Walker. Carriers there, though, struggle with revenue growth and profitability amidst a difficult economic and regulatory environment, and this has also kept capex growth minimal. More vigorous growth in both capex and revenues was seen in China (26 percent of 1H08 revenues and nearly one-third of capex), South Asia (over 11 percent of capex though less than 5 percent of revenues), and Southeast Asia; revenue growth in both Thailand and the Philippines, for instance, approached 30 percent in 1H08. Taiwan, Japan, and Korea all lost revenue share in 1H08, due to 2G mobile saturation, fixed-mobile substitution, and broadband competition.

Currency rate fluctuations affect all of these comparisons but are generally small relative to other factors.

"Despite a solid base and strong drivers for investment, we expect AP's telcos to be cautious about major capex projects over the coming quarters," says Walker. On the one hand, he noted, there are positive signs that capex growth is ahead in the coming quarters as profits stabilize, carriers see the need to roll out new services, and carriers compete vigorously while managing opex at sustainable levels. Yet carriers and their vendors continue to cite a tough economic environment and costly credit as issues impacting spending. Carriers finding it hard to cut operating costs may cut back on capex as a quick fix—even if it has serious medium-term consequences to network quality and service capabilities.

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