Telecom Update - July 2011
- 1. GE Capital July 2011 Industry Research Update: Telecommunications 1Explore Financing Solutions at www.gecapital.com/americas © 2011 General Electric Capital Corporation. All Rights Reserved. Telecommunications Industry Research Update • Cable companies performed strongly in 1Q11 given less onerous video subscriber declines, strong telephone additions and impressive broadband gains. Profits grew given a combination of revenue gains and reduced capital intensity. • Wireline businesses continue to face an uphill battle given their consistent 10-11% telephone subscriber losses. Profitability for the major operators has fallen sharply. • US consumers spent $43 billion on mobile telephone services in 1Q11, up 6% YoY. That figure seems modest in light of strong uptake of smartphones and associated data usage. • Tower companies performed well, as evidenced by higher revenues per site and improving profitability. • AT&T signed an agreement to acquire T- Mobile USA from Deutsche Telekom for $39 billion in cash and stock. The deal is pending regulatory approval. Key Developments Overall Spend Consumer Spending on Telecommunications Services (Billions $, SAAR) Annualized consumer spending on telecommunications services was $176 billion in 1Q11, up 2% versus the prior period. Telecom’s share of total consumer spending has remained relatively constant at 1.6-1.7%. 169 168 167 169 169 169 172 176 -2% -1% 0% 1% 2% 3% 162 164 166 168 170 172 174 176 178 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 SeuqentialChange Spend(Billions,SAAR) Consumer Spending On Telecommunications, SAAR Q-o-Q Change Source: Bureauof EconomicAnalysis
- 2. Industry Research Update: Telecommunications 2Explore Financing Solutions at www.gecapital.com/americas © 2011 General Electric Capital Corporation. All Rights Reserved. 569 441 431 422 414 477 458 428 250 377 368 337 82 144 133 242 -440 -472 -548 -279 -710 -741 -514 -204 -1,000 -800 -600 -400 -200 0 200 400 600 800 1,000 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 SubscriberAdditions(Thousands) Cable Satellite Telecom Source: SNL Kagan 99.3 99.6 99.9 100.4 100.1 100.0 100.1 100.6 5 25 45 65 85 105 125 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 VideoSubscribers(Millions) Multichannel Video Subscribers Source: SNL Kagan 17.9 20.6 22.4 24.8 26.9 28.5 30.2 31.8 0% 5% 10% 15% 20% 5 10 15 20 25 30 35 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 YoY%Change Kiosks(Thousands) Kiosks YoY Source: Companyfilings 10.6 11.1 12.3 14.0 15.0 16.8 19.5 22.8 0% 5% 10% 15% 20% 5 7 9 11 13 15 17 19 21 23 25 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 YoY%Change Subscribers(Millions) Subscribers YoY Source: Companyfilings The Pay TV distribution business has remained healthy, with aggregate subscribers and revenues up. That resiliency has occurred despite the rise of lower-priced services such as Netflix and DVD rental kiosks. It seems as though these services represent complements, rather than outright substitutes, for most pay TV subscribers. Pay Television Distribution Netflix Domestic Subscribers Multichannel Video Subscribers Redbox DVD Kiosks Video Subscriber Additions Breakdown • Netflix ended 1Q11 with 22.8 million domestic subscribers, up 17% YoY. Nonetheless, the multichannel video universe modestly grew its subscriber base (currently 100.6 million, equivalent to 87% of occupied housing units. • Cable companies’ monthly video ARPU grew to an estimated $73 per month in 1Q11, up 4.7% YoY. That growth reflects the pass-through of programming expense inflation as well as the upsell of various products (e.g. digital, DVRs). • Telecom companies continued their trend of adding 400-500 thousand video subscribers per quarter. As Verizon’s FiOS and AT&T’s U-Verse video builds are drawing to a close, it seems likely that video subscriber growth will ebb going forward. • DBS providers’ subscriber growth of 242k in 1Q11 reflected a clear deceleration from both 1Q10 (up 337k) and 1Q09 (up 366k). Monthly Video ARPU $68 $67 $68 $70 $71 $71 $72 $73$78 $79 $83 $79 $81 $83 $87 $83 $0 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 MonthlyVideoARPU Cable Satellite Source: Yankee Group's US Consumer Service Provider Monitor, June 2011; GE Capital analyses
- 3. Industry Research Update: Telecommunications 3Explore Financing Solutions at www.gecapital.com/americas © 2011 General Electric Capital Corporation. All Rights Reserved. 31% 32% 32% 33% 33% 34% 34% 35% 27% 29% 31% 33% 35% 37% 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 PenetrationofFootprint Source: Yankee Group's US Consumer Services Monitor, June 2011; GE Capital analyses 396 266 367 523 312 339 439 252 682 581 1033 365 616 650 1019 -200 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 SubscriberAdditions(Thousands) Cable Telecom Source: SNL Kagan 74 74 75 77 77 78 79 81 60% 65% 70% 75% 50 55 60 65 70 75 80 85 90 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 PenetrationofOccupiedHousing BroadbandSubscribers(Millions) Broadband Subscribers Penetration of US Occupied Households Source: SNL Kagan Broadband penetration moved 1.5% higher in 1Q11, reflecting a mild acceleration from gains in the three prior periods. Cable companies continued to win market share from the telecom providers. As telecom providers decelerate their fiber builds, the underlying trend of DSL weakness should become more evident. Broadband Broadband Subscribers Verizon’s High Speed Data Additions Broadband Additions Breakdown Cable Companies’ Penetration of Covered Households • In contrast, telecom providers added approximately 440k broadband subscribers, representing approximately 30% of total net additions. • Telcos’ performance has been flattered by the roll-out of FTTH and FTTN builds. Management teams from both Verizon and AT&T have indicated plans to cut back on the pace of their builds. Thus, the underlying trend of weak DSL performance (see Verizon) should become increasingly clear. 289 194 150 180 193 226 197 207 -121 -139 -109 -99 -155 -166 -144 -109 -200 -100 0 100 200 300 400 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 HSDSubscriberAdditions(Thousands) DSL FiOS Source: Companyfilings; GE Capital analyses • According to data from SNL Kagan, 81 million households had a broadband connection in 1Q11. That figure represents 70% of US occupied households, 1.5 percentage points higher than 4Q10. • Cable continued to win the broadband share in 1Q11. Cable companies added over 1 million broadband subscribers in 1Q11, representing approximately 70% of net additions. 1Q11 represented the seventh straight quarter of gains more than 50%.
- 4. Industry Research Update: Telecommunications 4Explore Financing Solutions at www.gecapital.com/americas © 2011 General Electric Capital Corporation. All Rights Reserved. 81 79 77 75 72 70 68 67 21 22 22 23 23 23 24 24 0 20 40 60 80 100 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 Subscribes(Millions) Cable Telecom Source: SNL Kagan 102 100 99 97 96 94 92 91 60% 65% 70% 75% 80% 85% 90% 95% 100% 0 20 40 60 80 100 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 PenetrationofOccupiedHousing LandlinesPhoneSubscribers(Millions) Landline Phone Subscribers Penetration of Occupied Housing Source: SNL Kagan 6% 8% 13% 16% 20% 25% 27% 0% 5% 10% 15% 20% 25% 30% 2004 2005 2006 2007 2008 2009 2010 PercentageofTotalHouseholds Sources: Centersfor Disease Control and Preventionand National Center for Health Statistics Note: 2010 figuresare for January - June timeframe. Landline telephony remains a challenging market for telecommunications providers, given the dual assault a shrinking market (thanks to mobile substitution) and market share losses (toward cable). We do not expect these trends to abate. Landline Telephony Wireless Only Households Phone Subscriber Additions Breakdown Landline Phone Subscribers Phone Subscribers • Telecom companies have 67 million telephone subscribers, representing 73% of total landline subscribers. Cable companies have 24 million subscribers, equivalent to 27% of total. In some instances (e.g., Cablevision), cable companies have been able to gain more than 50% share. -2,087 -2,172 -2,132 -1,935 -2,229 -2,144 -1,883 -1,783 601 612 487 578 406 339 405 515 -2,500 -2,000 -1,500 -1,000 -500 0 500 1,000 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 SubscriberAdditions(Thousands)) Cable Telecom Source: SNL Kagan • According to surveys from the CDC and NCHS, approximately 27% of households are wireless-only. Given the increasing prevalence of wireless-only households, the number of homes with landlines continues to shrink at 6-7% per annum. • Telecom providers continue to lose phone subscribers at about 10-11% per annum. That decline reflects overall shrinking of the landline telephone market and share losses to cable. Cable offers a comparable product at a lower price point.
- 5. Industry Research Update: Telecommunications 5Explore Financing Solutions at www.gecapital.com/americas © 2011 General Electric Capital Corporation. All Rights Reserved. 10.4 10.2 10.1 9.9 9.9 10.0 9.8 9.9 10% 11% 12% 13% 14% 8.0 8.5 9.0 9.5 10.0 10.5 11.0 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 %ofSales LTMCapitalExpenditures(Billions) LTM Capex % of Sales Source: Companyfilings for Cablevision, Charter Communications, Comcast and Time Warner Cable; GE Capital analyses 24.4 24.7 24.8 25.1 25.5 25.9 26.3 26.7 30.0% 30.5% 31.0% 31.5% 32.0% 20 22 24 26 28 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 Margin LTMEBITDA(Billions) LTM EBITDA Margin Source: Companyfilings for Cablevision, Charter Communications, Comcast and Time Warner Cable; GE Capital analyses Cable Profits Steadily Improve Based on our analyses of public cable companies’ financial filings, LTM EBITDA has grown modestly. Margins have remained flattish at approximately 31-32%. In the context of increased revenues, capital expenditures for public cable companies have remained flattish. Put differently, capital intensity continues to move lower. Given the aforementioned dynamics, EBITDA – capital expenditures (our proxy measure for untaxed and unlevered FCF) continues to grow. Cable Capital Expenditures Cable EBITDA Cable EBITDA – Capital Expenditures 14.0 14.5 14.7 15.3 15.6 15.9 16.5 16.8 17% 19% 21% 10 11 12 13 14 15 16 17 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 Margin LTMEBITDA-CAPEX(Billions) LTM EBITDA - CAPEX Margin Source: Companyfilings for Cablevision, Charter Communications, Comcast and Time Warner Cable; GE Capital analyses
- 6. Industry Research Update: Telecommunications 6Explore Financing Solutions at www.gecapital.com/americas © 2011 General Electric Capital Corporation. All Rights Reserved. 33.5 31.0 31.4 30.6 29.9 30.2 30.2 30.5 27% 29% 31% 33% 20 22 24 26 28 30 32 34 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 Margin LTMEBITDA(Billions) LTM EBITDA Margin Source: Companyfilings for AT&T, Frontier and Verizon Wireline Profits Decline Based on our analyses of public financial filings, wireline companies’ EBITDA has been flattish over the past couple of years. Margins have held steady. While wireline EBITDA has remained flattish, capital expenditures have crested higher. For reference, wireline-associated capital expenditures for AT&T, Frontier and Verizon were $28.4 million over the past year, equivalent to a substantial 27% of sales. As a caveat, a portion of this capex likely reflects the build-out of their networks (e.g. FiOS, U- Verse). Given the aforementioned dynamics, EBITDA – capital expenditures (our proxy measure for untaxed and unlevered FCF) has shrunk considerably. Estimated EBITDA – capital expenditure margins are now less than 2%. EBITDA – capex is now less than 40% of levels achieved in 2009. Wireline Capital Expenditures Wireline EBITDA 27.8 25.9 25.9 25.5 25.8 26.7 27.6 28.4 15% 17% 19% 21% 23% 25% 27% 29% 20 21 22 23 24 25 26 27 28 29 30 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 %ofSales LTMCapitalExpenditures(Billions) LTM Capex % of Sales Source: Companyfilings for AT&T, Frontier and Verizon. Wireline EBITDA – Capital Expenditures 5.7 5.1 5.5 5.1 4.1 3.5 2.6 2.1 0% 2% 4% 6% 0 1 2 3 4 5 6 7 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 Margin LTMEBITDA-CAPEX(Billions) LTM EBITDA - CAPEX Margin Source: Companyfilings for AT&T, Frontier and Verizon
- 7. Industry Research Update: Telecommunications 7Explore Financing Solutions at www.gecapital.com/americas © 2011 General Electric Capital Corporation. All Rights Reserved. 18% 17% 17% 18% 18% 18% 17% 17% 10% 8% 5% 6% 3% 7% 7% 5% 0% 4% 8% 12% 16% 20% 24% 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 YoyChange Subscribers ARPU Source: Yankee Group's NorthAmericaMobile Carrier Monitor, June 2011; GE Capital analyses 4% 4% 5% 6% 7% 7% 7% 7% -3% -3% -4% -1% -2% -1% 0% -1% -6% -4% -2% 0% 2% 4% 6% 8% 10% 12% 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 YoyChange Subscribers ARPU Source: Yankee Group,'sNorth AmericaMobile Carrier Monitor, June 2011; GE Capital analyses 5% 4% 4% 5% 6% 7% 7% 7% -10% -10% -10% -11% -8% -7% -8% -8% -14% -9% -4% 1% 6% 11% 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 YoyChange Subscribers ARPU Source: Yankee Group's NorthAmericaMobile Carrier Monitor, June 2011; GE Capital analyses 38.8 39.4 39.4 40.1 40.9 41.7 42.0 42.6 0% 1% 2% 3% 4% 5% 6% 7% 8% 30 32 34 36 38 40 42 44 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 YoYGrowth Revenues(Billions) QuarterlyService Revenues YoY Growth Source: Yankee Group's NorthAmerica Mobile Carrier Monitor, June 2011 The economics of the wireless industry remained challenging. Specifically, despite the strong uptake of smartphones (and associated costs for providers), pricing power remained elusive (ARPU down 1%). Further, industry profits have become increasingly skewed toward the two largest operators. Wireless Service Revenues Decomposition of Voice Revenue Growth Decomposition of Overall Revenue Growth Decomposition of Data Revenue Growth • Voice revenues declined because of continued APRU weakness (down 8%). Voice revenues represent nearly 2/3 of total quarterly service revenues. Thus, their decline continues to materially dampen overall revenue growth. • Data revenues grew 22% in 1Q11 given the dual benefit of modestly higher monthly ARPU (up 5%) and increased subscriber uptake (up 17%). For perspective, an estimated 75% of total phone subscribers now receive data plans. • According to Yankee Group, quarterly service revenues were $43 billion in 1Q11, up 6% YoY. • Despite the cost pressures associated with increased smartphone uptake (e.g. subsidies, investment in infrastructure), the wireless service providers have not demonstrated pricing power. In fact, total monthly ARPU declined 1% during 1Q11 (to $46.43). In fact, 1Q11 represented the 14th straight quarter of ARPU declines.
- 8. Industry Research Update: Telecommunications 8Explore Financing Solutions at www.gecapital.com/americas © 2011 General Electric Capital Corporation. All Rights Reserved. 37% 37% 37% 38% 39% 39% 39% 38% 24% 23% 22% 22% 22% 21% 20% 20% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 EBITDAMargin Big 2 Operators Other Operators Source: Yankee Group's NorthAmericaMobile Carrier Monitor, June 2011; companyfilings for AT&T, Leap, MetroPCS, Sprint, T-Mobile, US Cellular and Verizon; GE Capital analyses Wireless Profits Increasingly Skewed EBITDA margins for the two largest wireless providers (Verizon Wireless and AT&T) were a healthy 38% in 1Q011. In contrast, the consolidated EBITDA margins for smaller tracked players (Sprint, T-Mobile, US Cellular, MetroPCS and Leap) were a materially lower 20%. Their margins have moved modestly lower over the past two years. Similarly, aggregate profits (measured as EBITDA less capital expenditures) has become increasingly skewed toward the two largest wireless operators. In the year through 1Q11, Verizon Wireless and AT&T drove $28.4 billion of profits. That figure now represents 78% of total tracked profits, up from 73% two years ago. Wireless EBITDA – Capital Expenditures Wireless EBITDA Margins 25.3 27.4 28.3 29.2 29.9 29.8 30.1 28.4 9.2 8.9 8.5 8.6 8.6 8.4 8.1 7.8 0 5 10 15 20 25 30 35 40 45 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 LTMEBITDA-CAPEX(Billions) Other Operators Big 2 Operators Source: Yankee Group's NorthAmericaMobile Carrier Monitor, June 2011; companyfilings for AT&T, Leap, MetroPCS, Sprint, T-Mobile, US Cellular and Verizon; GE Capital analyses
- 9. Industry Research Update: Telecommunications 9Explore Financing Solutions at www.gecapital.com/americas © 2011 General Electric Capital Corporation. All Rights Reserved. 16 17 17 18 18 19 19 20 16 16 16 16 16 16 17 16 0 5 10 15 20 25 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 RevenuesperSite(Thousands) Domestic Sites All Sites Source: Compnyfilings for American Tower, CrownCastle and SBA Communications; GE Capital analyses 7.6 8.0 8.6 8.8 9.2 14.3 15.7 18.0 50.2 50.4 50.8 51.1 51.3 51.6 52.3 52.4 0 10 20 30 40 50 60 70 80 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 TowerCount(Thousands) International Sites US Sites Source: Companyfilings for AmericanTower, CrownCastle and SBA Communications; GE Capital analyses 950 1,000 1,050 1,100 1,150 1,200 1,250 2004 2005 2006 2007 2008 2009 2010 ConnectionsperCellSite Connections / Cell Site Source: CTIA-The WirelessAssociation 175.7 183.7 195.6 213.3 242.1 247.1 253.1 0% 2% 4% 6% 8% 10% 12% 14% 16% 0 50 100 150 200 250 300 2004 2005 2006 2007 2008 2009 2010 YoYGrowth CellSites(Thousands) Cell Sites YoY Growth Source: CTIA-The WirelessAssociation Tower companies continued to perform well, as evidenced by higher revenues per site and increased profits. Interestingly, the industry does not seem to be growing its domestic footprint ahead of an expected mobile data deluge. Towers Cell Sites Major Operators More Focused on International Expansion Connections per Cell Site Revenues per Site • The large US-listed operators have not appreciably grown their domestic site count. Operators have added to their international footprints, with American Tower being the most aggressive. International now represents 26% of their collective site count. • Rental and management revenues per US site continues to crest higher, up 11% YoY in 1Q11. Continued growth of International sites has depressed aggregate figures (which were flattish versus last year’s figure). • According to data from the CTIA, the number of cell sites in the United States has grown just 4.5% since year-end 2008. That growth is quite modest in light of a likely surge in mobile data demand. For perspective, Cisco Systems estimates that North American mobile data and Internet traffic in 2015 will be approximately 20x 2010 levels. • The number of average connections per cell site has approached 1,200 – up from approximately 1,100 two years ago.
- 10. Industry Research Update: Telecommunications 10Explore Financing Solutions at www.gecapital.com/americas © 2011 General Electric Capital Corporation. All Rights Reserved. 2.2 2.3 2.4 2.5 2.6 2.7 2.7 2.9 55% 57% 59% 61% 63% 65% 0 1 2 3 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 Margin LTMEBITDA(Billions) LTM EBITDA Margin Source: Companyfilings for AmercianTower, CrownCastle and SBA Communications; GE Capital analyses Tower Profits Move Modestly Higher Aggregate EBITDA continues to move higher and margins remain in the 60-62% range. LTM EBITDA less capital expenditures (our proxy for untaxed and unlevered FCF) for the publicly traded US operators was $2.2 billion in the most recent period., up 2.6%. Tower EBITDA – Capital Expenditures Tower EBITDA 1.7 1.9 2.0 2.1 2.1 2.1 2.1 2.2 40% 45% 50% 55% 60% 0.0 0.5 1.0 1.5 2.0 2.5 3.0 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 Margin LTMEBITDA-CAPEX(Billions) LTM EBITDA - CAPEX Margin Source: Companyfilings for AmericanTower, CrownCastle and SBA Communications; GE Capital analyses Scott J. Cohen, CFA Telecommunications & Media Consumer Scott.Cohen@ge.com 646-428-7242 GE Capital, Americas Strategic Marketing, Industry Research Contact Disclaimer: Although General Electric Capital Corporation (“GE”) believes that the information contained in this newsletter has been obtained from and is based upon sources GE believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. GE makes no representation or warranties of any kind whatsoever in respect of such information. GE accepts no liability of any kind for loss arising from the use of the material presented in this newsletter. This newsletter is not to be relied upon in substitution for the exercise of your independent judgment or legal advice.