Are telcos turning the tide on revenue growth?

The latest third quarter results from communications service providers (CSPs) largely reflect the uptick in revenues revealed in our recent benchmark report, Telco revenue growth: Time for operators to place new bets.

Whether the result of economic conditions leading to higher prices for services, improved performance in specific parts of the business such as international operations, or ongoing transformation and headcount reductions, operators have posted some encouraging results this month.

In Europe, Orange Group’s Q3 figures show only a modest 1.8% increase in revenue to €10.99 billion. And revenue in France, its biggest market, dropped slightly by 0.5% due to a 7.4% fall in wholesale service revenues, although 2.1% growth in retail services prevented a bigger loss. However, a closer look reveals areas of rapid growth. Its operations in Africa & Middle East, for example, continued to post very strong growth of 12.2%, with Orange Bank and wholesale services among the top regional performers.

Orange’s enterprise services unit, which is undergoing a transformation that includes voluntary redundancy negotiations, showed an ongoing shift in revenue away from legacy services. Orange’s IT and integration services grew 9.3% year on year in the first quarter to reach €886 million and compensated for the decline in B2B fixed-only services, which fell 7.5% over the same period to €788 million.

Overall, the group was able to confirm objectives for 2023 and said it remains on track to achieve its strategic ambitions for 2025. Outlined in February as the Lead for the Future plan, these include cutting 600 million euros in costs by 2025, in addition to the 700 million euros already saved between 2019 and 2022, all while focusing on its core business of network connectivity. Lower capex will help. Orange said the Group’s investments peaked in 2022 and will fall from 18% of revenues to around 15% from 2023 and for the duration of the plan, and notably in Europe, where it has already made most of its fiber investments. In addition, the group has revamped its wholesale division, as Michaël Trabbia, Executive Vice President, CEO of Orange Wholesale, detailed at the recent Capacity media event. Among the changes is the use of APIs to transform wholesale infrastructure into customer-centric software-based networks. The division will also look to increase the value of its tower subsidiary, TOTEM, partly through raising the rate it charges third-party operators to lease passive infrastructure, but also because it believes TOTEM has “all the strengths needed to be a key player in European consolidation”.

Nordic spring

In Scandinavia, Telenor reported Q3 earnings above expectations, supported by growing mobile service revenues and lower energy prices in the Nordics, which were the largest contributor to its 3.6% organic growth. The company has also been undertaking transformation of networks, and shared IT services in the Nordics region, which includes introducing more than 250 AI use cases, according to Sigve Brekke, in an earnings call.

Telenor also sees cost reduction as key to sound financial health, particularly as it looks to mitigate inflation. The operator expects to reduce its headcount by approximately 10% by the end of 2023. “In Norway, opex was actually down one and a half percent in the quarter despite a 5% to 6% salary inflation,” Brekke said. “We expect salary inflation in the Nordics to come down going into 2024 based on the completed central salary reviews in both Sweden, Finland, and in Denmark.”

This follows last week’s report from regional rival Telia, which also reported Q3 core earnings above expectations and raised its full-year core profit outlook. Telia, which sold its Danish operations, reduced headcount across the board (with the exception of TV) and focused on transformation and connectivity-based services, reported Q3 financial and operational performance across all its telco operations. Mobile service revenue rose 3.8%, while fixed services grew 3.7% and even consumer services were up 1.8%. Enterprise services meanwhile grew 4.7%.

US telcos see cost savings in transformation

On the other side of the Atlantic, both Verizon and T-Mobile US reported better-than-expected results this week with strong growth in mobile phone additions.

Although Verizon saw a 2.6% drop in total operating revenue to $33.3 billion, its mobility business performed well, and the operator raised its fourth quarter financial guidance.

It also reports it is on track to achieve its cost-cutting goals, in part supported by ongoing network and IT transformation. In a results call, Hans Vestberg, Verizon’s Chairman & CEO, pointed to IT transformation: “We're bringing more AI into the network and to customer care. It's a lot of things ongoing. So, I have a high confidence that we are finding along the road that are all the savings we need.”

Although T-Mobile US reported a year-on-year decline in Q3 revenue of 1.2% to $19.25 billion, it added 850,000 postpaid phone customers in the quarter and like Verizon raised its guidance for the remainder of 2023.

A Reuters report said this is the highest among peers, beating FactSet estimates of 773,400 additions. Indeed, Jamie Lumley, Senior Analyst at Third Bridge, told the news agency that T-Mobile “continues to lead the way when it comes to customer growth. Our experts have highlighted that by the end of 2024, there will likely be 8.5 million–nine million connected device adds across the industry and T-Mobile is well positioned to capture the lion’s share of this growth.”

Both operators’ results follow AT&T’s report of a 1% year-on-year rise in total revenue during the third quarter to reach $30.4 billion. However, the company reported that operating expenses climbed to $24.6 billion in the same period, up from $24 billion the previous year, because of higher severance and restructuring charges and inflation.

Like other CSPs, AT&T is counting on technological transformation, including AI, to deliver costs savings alongside headcount reduction, particularly as it streamlines operations around 5G and fiber networks.

“While we're still in the very early stages of generative AI, we're already seeing tangible AI-driven improvements in productivity and cost savings,” said AT&T CEO John Stankey in an earnings call. “Measurable progress has been made with lowering customer support costs, unlocking software development efficiencies and improving our network design effectiveness. We expect these capabilities to play a key role in our continued efforts to achieve our future cost savings objectives.”