Sunday, March 28, 2010
Reuse and Capex-to-Revenue Ratios
Sunday mornings are great for catching up on email, and pancakes. Spinning through last week’s headlines I see that China Unicom – among the top 10 largest mobile operators in the world – reported a significant drop in 2009 net profit. All things equal, the company’s bottom line sank a staggering 73% despite moderate revenue growth. In contrast to China Mobile and China Telecom, who both grew profits last year, the company blamed weaknesses in its fixed-line business (what’s new), the cost of rolling out its new 3G network, and the drag of associated Q4 depreciation and amortization charges.
“As revenue grows, we expect things will improve,” the company's CFO told reporters at the press conference. Fair enough. They reportedly aim to add more than 1 million new 3G subscribers a month, maintain current ARPU, and lower capital expenditures by at least 35% in 2010.
According to analyst firm Infonetics, carriers these days strive to maintain capex-to-revenue ratios around 15 percent, and historical data shows this rate of spending is adequate to expand networks while enjoying moderate revenue growth. The exception to this rule, they add, is Asia Pacific where capital has exceeded 20 percent. This week's news could be the tipping point.
Not so handy at ¥ conversion before my second cup of coffee, and doing what I do here at Trade Wings, began to consider the potential impact of reuse strategies on capex-to-revenue ratios for carriers in my own backyard. Having recently read AT&T and Verizon's last couple of annual reports, was able to derive ratios in line with – or better than – the Infonetics estimate.
For one of these carriers, the cost of network inventories for Telecom operations – factored on average original equipment cost – shrank consistently over the past 3 years as revenues grew by 4% per year or more. (As we know, these two highly competitive US carriers spent the last few years upgrading their networks, rolling out great new stuff like the iPhone and FiOS.) Enabling just-in-time inventories and the reuse of equipment not yet at the end of its useful life, inventory carrying costs, expedites and costly maintenance contracts can be effectively lowered. Further reducing spares and other network inventories by half, for example, it’s conceivable that a sound reuse strategy could not only add .01 to the EPS, but probably even get someone promoted...a compelling thought as we head back into the work week.
