Coronavirus: Supply chain leadership could be key

Crucial to the comms industry’s welfare – and for sectors hardest hit by coronavirus – is that the pain inflicted by lock down measures could be partly offset by supply chain leadership, writes Analyst Philip Carse.

It has been largely business as usual for the UK B2B telecoms industry through the Covid-19 crisis. Short-term fillips from supporting working from home have outweighed project delays or cancellations, though travel restrictions are impacting installs. But much tougher home confinements and the closure of all non-essential shops, hotels etc moved the crisis into a more serious phase where temporary or permanent business shutdowns in certain verticals will impact revenues and bad debts of telco service providers.

The message from those CEOs we’ve spoken to is loud and clear – they want to help their end customers by deferring payments for telecoms services, but this can only realistically happen if the same is done further up the supply chain, and notably by BT Openreach. If Openreach deferred all revenue payments for a quarter, that would equate to a very significant £1.3 billion cashflow impact, but if financial assistance was targeted on business customers in the hardest hit sectors (through both BT Enterprise and third party service providers), the cashflow hit would likely be in the tens or at worst low hundreds of millions.

This would arguably be a small price to pay by BT to help keep its business customers in hard hit sectors (and would quickly be recouped if those customers survive), and one can imagine that the UK Government may also consider supporting BT, given how many hundreds of billions it is throwing at the crisis to avoid an economic calamity.

That said, organisations adopting a work from home strategy have been a boon for ICT service providers, triggering demand for conferencing and collaboration services, extra bandwidth, calls, firewalls, VPNs, remote access software licences, strengthened cyber services, mobile dongles, laptops, screens, headsets and cameras etc. The flipside has been delayed or cancelled projects as organisations either look to conserve cash or focus on crisis management.

A taster came from Exponential-e which in early March noted a cancelled NHS order as Trusts started to prepare for the Covid-19 crisis. Other network resellers have told us that more projects are being deferred than cancelled due to the virus, though there is of course a risk that deferred projects become cancelled. They are also seeing a small number of direct debits cancelled, although this may indicate customers wanting to have more control over cashflow than indicating likely bad debt.

As with many of their customers, our discussions with telecoms service providers suggest a desire to not overreact in the hope that restrictions are eased in the next few weeks and life can start its long road back to normal. This means undertaking sensible measures to conserve cash. For example, cancelling some discretionary spend, halting recruitment and avoiding more serious measures such as firing staff.

The working from home boon will likely continue for a while, particularly now as all non-essential travel to work has been mandated. However, the associated closure of all non-essential shops as well as hotels etc will worsen the situation in the already beleaguered retail and hospitality sectors, which will inevitably have a knock-on impact on their telecom service providers. And yet many of these businesses will also hope to ride out the crisis and be ready to re-open when allowed. Government remedial action includes salary support for workers who would otherwise be laid off, while there will be pressure on landlords to defer rental payments.

This brings us back to the telecoms sector. One thing these retailers and hospitality companies (or indeed any other beleaguered sector) will need is to retain telecoms connectivity, if they hope to re-open when restrictions are lifted, and yet it represents another outgoing while no revenues are coming in. Some service providers we have spoken to would like to be in a position to defer payments by customers in these sectors to maximise their chances of weathering the crisis, but this is impractical and difficult financially without a concomitant payment deferral to their network suppliers to help with at least half of the cost (given typical gross margins of circa 50 per cent), and ideally more.

In practice, even if service providers are buying wholesale connectivity products from the likes of Gamma, TalkTalk, Virtual1, BT Wholesale and SSE Telecoms, the majority of network cost of sales ultimately flows back to BT Openreach and, to a much lesser degree, Virgin Media. The simplest answer would therefore be for BT Openreach to take the lead.

Let’s put some numbers around this. BT Openreach generates annual revenues, EBITDA and capex of around £5.1 billion, £2.9 billion and £2 billion respectively, or 22 per cent, 37 per cent and 54 per cent of BT Group, with the much higher EBITDA and capex contribution reflecting the fact that it runs BT’s capital intensive local network. Its implied FCF of around £0.9 billion compares with £1.9 to 2.1 billion guidance for BT Group, so just under half the total. Openreach is in a strong position to facilitate the aforementioned £1.3 billion cashflow impact. 

There are already examples of social thinking by telcos over and above measures such as upgraded speeds/data allowances, payment holidays for consumers. Take Australian incumbent Telstra which halted its ongoing restructuring and redundancy programme for six months; recruited 1,000 call centre staff; brought forward £250 million in capex from the next financial year to increase network capacity and accelerate 5G deployments; suspended late payment fees and disconnections until at least the end of April; and extended sponsorships due to expire within the next 12 months. It is also paying its planned dividend. The measures mean that its fiscal 2020 outlook is now towards the bottom end of guidance for EBITDA and the top end of capex guidance.

In an ideal world, other major providers of core UK telecoms infrastructure as well as Openreach (Vodafone, Virgin Media, O2 and 3UK) would also participate in supply chain leadership. It is worth noting that there is probably very low incremental cost to BT Openreach of keeping circuits live, if they are being largely unused.

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