The telecoms service space continues to show resilient trading supported by in demand services, contracted revenue, inflation busting price rises and ongoing, but slowing, M&A, writes Philip Carse, Analyst at Megabuyte.com.
Meanwhile, pressure on FTTP altnets continues to mount.
As in recent quarters, telecoms services trading remains relatively robust and resilient to broader macro issues, buoyed by mission critical and consumer must have services, contracted revenues and inflation-beating price rises by the incumbents. This is in contrast to longer sales cycles, more price sensitivity in IT Managed Services (which of course many comms resellers are also exposed to) and project delays or cancellations for some IT consultancies.
Aggregators Gamma and Giacom show similar resilience among resellers, broadly hiding under cover of incumbent price rises. For its first half to June 2023, Gamma noted trading in-line with market expectations for EBITDA of £110.4-117.2m, representing growth of 5-11.5% driven by its UK indirect (renamed Business) and direct (now Enterprise) and continental European operations. Alongside its rebranding and a new portal, Giacom revealed current revenue run rates of £390m (estimated EBITDA of £75-80m), growing at 13% organically.
Pressures on FTTP altnets triggered by interest rate rises, a reduced investor funding appetite and growing competition from BT and VMO2 are increasingly sorting the wheat from the chaff
This picture of resilient telecoms trading has also featured in recent management updates with the likes of Wireless Logic, Exponential-e, SCG, Babble, Wifinity, Opus Technology, Wavenet and IP Integration, while recently under-performing Maintel has benefited from improving equipment supply chains (and internal measures). Of course, there will always be companies going in the opposite direction, with headwinds for those with particular vertical exposure (such as retail and hospitality) or commoditised connectivity, while the BT Openreach stop sell of analogue services such as WLR and ISDN will expose those resellers who have not prepared for an all IP world.
M&A remains subdued
Aside from one very large deal being announced (Vodafone UK and Three UK), telecoms M&A remains subdued, impacted by higher interest rates, lower debt availability and buyer caution. From an average of ten-plus comms reseller deals a month in 2022, volumes have dipped to mid-to-high single digits in recent months, and most have been small with the few deals at published or estimated >£10m valuations including Focus/Zest4, Wavenet/Adept, BCM/Pure, Babble/Techquarters and Wireless Logic/Webbing.
Recent buyers include the usual buy and build suspects – 4Com, Babble, Croft, InTEC, SCG, as well as BDR, Redsquid and, launching its new buy and build, CloudClevr.
Pressures on FTTP altnets triggered by interest rate rises, reduced investor funding appetite and growing competition from BT and VMO2 are increasingly sorting the wheat from the chaff. Last quarter saw the first sale of a fairly well established player due to not being able to raise funding (Trooli), while this quarter has seen the first failure of a supposedly well funded altnet, with rural Wales and Scotland-focused Broadway Partners backer Downing LLP throwing in the towel after spending £29m of a £145m facility (in the process passing just 10k premises).
We are also seeing consolidation and change among backers (for example, abrdn buying out Amber/NDIF from Airband, ditto Kompass Kapital/Atmosclear Investments Group in Lightspeed Group, Ares replacing Sequioa as toob’s debt provider), while Gigaclear had to bring in a new equity backer for further funding (Equitix).
Even relatively well funded altnets are adapting their business plans to conserve cash (and achieve profitability sooner to unlock new funding), with existing funding now diluted by higher interest rates and cost inflation. Updates with CityFibre, Community Fibre, Netomnia and Zzoomm show that all are stabilising rather than accelerating network build, while seeking efficiencies, with CityFibre now targeting EBITDA breakeven in early 2024 (no mean feat versus 2022 losses of £68.6m on underlying revenues of £80.8m).
We are also seeing consolidation and change among altnet backers
The net effect is that the combined build from circa 100 FTTP altnets is probably no more than that of the incumbents BT Openreach and VMO2 combined, while BT’s customer take up of 32% of the 11m FTTP premises passed (equally split between BT retail and third party ISPs) is 2-3x higher than that of most altnets who are having to attract new customers rather than upgrade existing ones.
Broadly speaking, the major network players are eking out single digit EBITDA growth on no/low revenue growth, as highlighted in recent June 2023 quarter updates, with general trends of mobile holding up better to price rises than fixed services, and B2B better than consumer. BT’s pro forma adjusted EBITDA rose 5% to £2.0bn on revenues up 4% to £5.2bn (excludes disposed BT Sport). CPI-linked price rises continued to drive top and bottom line improvements in Consumer and Openreach, though Business profitability (-11%) was impacted by higher cost inputs and legacy support contact run-off.
BT, which subsequently announced current BT NED and Telia CEO Alison Kirkby as CEO Philip Jansen’s (continuity) successor, reaffirmed its FY24 outlook for revenue and EBITDA growth (undisclosed, analysts currently calling for +1% and +2% growth respectively), capex of £5-5.1bn and FCF of £1-1.2bn.
Virgin Media O2 (VMO2) reported revenues up 6% to £2,713m, but up only 1% excluding the impact of the nexfibre construction (FTTP 5m premises build on behalf of the parents and InfraVia), and supported by double digit price rises through the quarter. EBITDA grew by 5% to £1,017m due to price rises, partially offset by increased energy costs. Mobile grew 5% but fixed line (TV, phone and broadband) fell 4% due to ‘household spend optimisation’. VMO2 reiterated 2023 guidance (excluding nexfibre) of revenue growth, mid-single digit EBITDA growth (implying circa £4.1bn), and capex of £2bn (-7.5%), releasing £1.8-2bn to the parents Telefonica and Liberty Global.
Vodafone UK continued to be the standout performer among Vodafone’s European operations with revenue up 5.7% to 1,684m euros, an acceleration from the prior quarter’s 3.8%, supported by inflation-linked price increases, a growing fixed-line customer base and good growth in business. There were no profit numbers in this update, but EBITDA has been tracking revenue growth in the UK. Group guidance is for ‘broadly flat’ EBITDA and FCF.