Telecommunications Network Operators - 4Q22 Market Review: Revenues Collapse in 4Q22 but Telco Capex for 2022 Exceeds $320B, Capital Intensity Reaches New Peak of 18.1%

This report reviews the growth and development of the telecommunications network operator (TNO, or telco) market. The report tracks a wide range of financial stats for 139 telcos across the globe, from 1Q11 through 4Q22. In 2022, telcos represented $1.78 trillion (T) in revenues (-6% YoY), $257 billion (B) in labor costs (-5% YoY), and $322B in capex (-1% YoY). They employed approximately 4.572 million people as of December 2022, down 2.1% from the prior year.

Telco quarterly topline records steepest falloff across the coverage period

Telco revenues plunged the most in more than a decade by 9.3% on a YoY basis to post $429.6 billion (B) in the latest single quarter ending 4Q22. The quarterly dip was also the fifth consecutive slump. The decline also impacted annual revenues and its growth rate for the year 2022 - they were $1,779.9B, down 5.9% YoY over the previous year.

One factor behind the slump is AT&T's April 2022 spinoff of its WarnerMedia unit which dragged the global telco market. As reported by the company, AT&T's 4Q22 revenues (post spinoff) fell by 44% YoY (28.5% for the full year 2022). If we exclude AT&T from our database, the global market's 4Q22 revenue decline would have been 5.9%, several points better than the actual 9.3% dip. However, there were macro factors that impacted key telcos across regions. The strong dollar impacted the Japanese telcos, which saw revenues for KDDI, Softbank, and NTT plummet by 12.6%, 11.6%, and 11.4% respectively for the full year 2022. Inflationary pressures and the energy crisis also impacted telco giants such as BT (-11% in 2022) and Vodafone (-9.7%).

Among the top 20 companies based on full year 2022 revenues, Airtel saw the strongest growth in revenues, up 13.9%. Airtel was the only telco among the top 20 to post double-digit growth for the year. The growth came on the back of rising ARPU and growing service subscriptions in its domestic market. Other telcos among the top 20 to post revenue growth in 2022 include China Mobile (6.4%), Saudi Telecom (6.3%), China Telecom, Charter Communications (4.5%), China Unicom (4%), and Verizon (2.4%). Growth witnessed by the three Chinese telecom giants was largely due to a surge in their "emerging businesses" revenues. These businesses include cloud computing, big data, internet data centers, and Internet of Things (IoT). Growth witnessed by a few other operators was mostly an outcome of non-service revenues, as these have grown with 5G device sales in many markets. Telcos now hope that the 5G-enabled devices already deployed will help to generate new revenue streams in the forthcoming quarters of 2023 and beyond, but this seems unlikely. The worst annualized telco growth among the top 20 operators for the full year 2022 came from AT&T, down 28.5%, largely due to the WarnerMedia spinoff. However, 12 of the other top 20 operators posted a decline in revenues, without a big asset sale to explain the drop. Apart from the three Japanese telcos mentioned earlier, America Movil (-12.5%), and BT (-11%) were among the top 20 to post a >10% decline in revenues in 2022.

Capital intensity at an all-time high despite spending slump

Telcos turned cautious around spending on capex in the latest quarter amid stalled revenue growth and macro pressures. Telco investments declined for the second straight quarter, falling 5.1% on a YoY basis to post $87.9B in 4Q22. The decline in the latest quarter also knocked down annualized capex to $322.1B in 4Q22, from the peak of $330.0B two quarters ago. Despite the collapse, annualized capital intensity reached a new all-time high of 18.1% in 4Q22. A few countries are just starting to deploy deploy 5G networks, notably India; many more continue to scale up 5G to reach mass market coverage, and deploy fiber to support fixed broadband and to connect all the new radio infra (including small cells) needed for 5G. There is also a growing number of stand-alone 5G core networks, which is helping the cloud providers improve their penetration into the telco sector.

As noted earlier, the market's annualized capital intensity rose to a record high, from 17.3% in 4Q21 to 18.1% in 4Q22. For our 2011 and later timeframe, the previous high of 17.9% was recorded in the previous quarter (3Q22). To find a capital intensity higher than 18.1%, though, the pre-2011 timeframe must be considered; ITU data suggests that telecom capital intensity exceeded 20% in 2001. At the operator level, Rakuten's capital intensity exceeds all other telcos handily with a roughly 145.1% capex/revenue ratio for 4Q22, on an annualized basis. Rakuten's ratio has been declining in recent quarters as its greenfield network rollout is reaching its peak. Globe Telecom's capital intensity for the annualized 4Q22 period stood at 57.8%, the highest among established operators. Globe's figure is due to a network infrastructure buildup that includes 1,080 new cell sites, upgrades to at least 12,900 sites including both 4G LTE and 5G, and installation of over one million fiber-to-the-home lines. Consolidated Communications and Frontier Communications recorded 52% and 47.3%, respectively. PLDT's annualized capital intensity stood at 45.6% in 4Q22, as spending ramped both for meeting connectivity demands and taking on new competition from the new mobile player Dito Telecommunity Corp.

The biggest capex spender in 2022 was China Mobile ($27.5B), but this was down 3.3% from 2021 due to the telco's efforts to share costs on the network side enabled by partnership with China Broadcasting Network. Eight out of the top 20 operators by 2022 capex spend posted double-digit growth rates for the full year 2022. Some of these include: MTN Group (24% YoY vs. 2021), Charter Communications (22.8%), BT (16.7%), Verizon (13.8%), and AT&T (12.4%). AT&T's 12.4% YoY bump is significant, as it pushed the company's capital intensity up from 13% in 2021 to 20% in 2022, post-spinoff.

Profitability focus remains key amid declining telco top-line

Telcos have historically maintained stable profitability margins - EBIT margins have been in the range of 13-18% while EBITDA margins have never gone down below 30% since 2011. This continues to stretch out into 2022 despite the immense burden of investments, stagnating revenues, and macro pressures in the past several quarters. EBITDA margin for the industry was 34% in 2022, while EBIT (operating) margin ended 2022 at 14.6%. Within the overall telco opex budget, telcos are having success in cutting their sales & marketing and G&A spending, as telcos adjust to working from home and accelerate the migration of sales & support to digital platforms. These efforts accelerated in 2020, as COVID-19 spread and telcos were forced to do business with minimal human intervention, but continued in 2021-22. MTN Consulting expects telcos to continue reducing their headcount by revamping their processes, investing in digital transformation, and adopting automation. These investments will cause labor's share of opex ex-D&A to fall, reaching around 21% by 2027. Meanwhile, many telcos are reporting that network operations is taking up a larger portion of the opex pie. To drive sweeping changes going forward, telcos will have to implement dramatic, strategic measures to optimize their cost structure in order to increase and sustain profitability. These strategic measures will be a mix of technology-enabled solutions and collaborations, some of which will transform the telco business model. While automation will continue to be a key enabler, other key strategic cost optimization measures that telcos will pursue over the next 2-3 years include core network sharing, network slicing, and partnerships with webscale cloud providers, each of which has the potential to hit multiple cost bases.

Telco headcount reduction efforts continue; labor costs come down

Telco industry headcount was 4.57 million in 4Q22, down from 4.67 million a year ago. MTN Consulting expects headcount reductions to continue via attrition and voluntary retirement schemes, heading towards 4.122 million by 2027. Spending on employees (labor costs) on a per-person basis has fallen slightly from $57.1K in the annualized 1Q22 period to $55.6K in 4Q22 annualized. Our forecast calls for the opposite: steady increase in per-employee labor costs. Exchange rate volatility is the main factor here, as without US dollar appreciation in 2022 labor costs per employee would have risen. Also, big tech companies slowed hiring and/or engaged in layoffs in 2H22, which expanded the labor pool available to telcos and may have slowed salary growth. However, MTN Consulting expects the average telco employee salary to continue rising, reaching just above US$69.2K by 2027. Even as telcos cut headcount, they recognize how key their workforce is central to success. As such they are investing in training programs, and hiring a new generation of highly-skilled employees able to function in the telco of the future.

The Americas region takes lead by both revenues and capex

Picking up from where it left in the last quarter, the Americas region continued its dominance in 4Q22 to emerge as the single largest region by revenues in 2022. In terms of growth, all regions registered revenue declines in 4Q22 with Europe declining the most by 12.1%. On a capex basis, the Americas region outspent the Asia region in 2022, the first time in many years; Charter Communications, Verizon, AT&T, and America Movil are responsible for most of this growth. The Americas region was also the only one to register growth in capex, as other regions experienced spending slumps. Asia registered a steep YoY decline in capex spend of 10.4% in 4Q22 thanks to reduced spending by the three Chinese telcos - China Mobile, China Telecom, and China Unicom. Chinese 5G capex is waning and there is a greater focus on network sharing. Europe continued its lead into the latest quarter for having the highest regional capital intensity on an annualized basis, with 19.3% in 4Q22. This surge was a direct result of 5G buildouts, many of which were delayed from 2020-21 due to COVID shutdowns and spectrum auction delays.