Telcos: Managing through market disruption and beyond

COVID-19 has caused a rapid, unprecedented impact to the telecommunication industry driven by a dramatic shift in consumption. This has created business continuity uncertainty. As telecommunication carriers look to stabilize and re-emerge, they should use a three phased approach focused on: Resilience, Recovery and the New Reality.

1. Telecom operators have outperformed the S&P 500 since the onset of COVID-19. This was also true during the beginning of the 2008 financial recession, where subscriber growth, ARPU and churn trends actually improved. The recovery time post-recession, however, varied greatly among companies and it took more than 3 years for the most resilient to regain prior valuations
2. Network traffic volume is spiking, with average increases of 20-25%, driven by increased home usage and video consumption. Demand is increasing across the board, during both business and leisure hours, for both voice (e.g., call durations and overall) and data (e.g., VPN, video games, streaming), with significant uplift in customer sentiments for big 4 wireless carriers
3. Sales growth may be challenging, however, given large share of telco retail stores are closed, potential limitations in smartphone supply, and most subscribers being on fixed-price schemes (not charged by volume). In 2008, the lead telecom companies continued to grow through the recession, but at a rate slower than the years prior and past the recession
4. Financially, operators have healthier margins going into 2020 than 2008, but are not as resilient in terms of cash and debt. Spend on both capex and advertising took a quick hit in 2008 (declined 5-15%) but rapidly recovered and then increased every year since. With publicly stated desires to continue to fund network/5G roll-out, there may be pressure to reduce other types of costs
5. Going forward, Telco’s need to focus on ensuring network capacity/stability, while prioritizing capital spend across operational and strategic investments. Operators should continue to monitor cash flow and explore cost reductions, capital project delays, stock buybacks, and dividend policy