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Applied Value World Trade Center Kungsbron 1 (G2), PO Box 5047 SE-111 22 Stockholm, Sweden Phone: +46 (0)8 562 787 00 Fax: +46 (0)8 562 787 01 www.appliedvaluegroup.com
Financial Performance
& Trends in the
Telecom Industry
Telecom Report
Q3 2016
2 Financial Performance & Trends in the Telecom Industry
Dan Frohm
Telecom Practice Leader (US)
Applied Value (New York)
Phone: +1 646 467 4586
Jonas Båtelson
Telecom Practice Leader (EU)
Applied Value (Stockholm)
Phone: +46 7 255 272 32
Principal Contacts
Introduction.
The purpose of this report is to track the financial performance of
major players in the telecommunications industry, from Operators to
Infrastructure OEMs and Mobile Device Makers.
We hope that you will find this report insightful. Our experienced team
welcomes any feedback or opportunities for further discussion.
3 Financial Performance & Trends in the Telecom Industry
Key Telecom Industry Segments.
Operators Infrastructure OEMs Device OEMs
Operators are communication service providers (CSP) and
provide fixed and mobile telephony and data services to
businesses and consumers
Infrastructure OEMs provide communications technology
including services, software and infrastructure hardware
to telecom operators and others
Device OEMs manufacture mobile devices and consumer electronics to businesses and
consumers
4 Financial Performance & Trends in the Telecom Industry
Financial Trends and Performance
Summary and Key Data
About Applied Value
Operators
Infrastructure OEMs
Device OEMs
1)
2)
3)
5 Financial Performance & Trends in the Telecom Industry
Report Summary.
Current trend Selected key findings
Operators • Even though the margins in the operator
segment fell LTM the ROIC remained
stable because of improved capital
efficiency
• Overall trend is that regions converge in
terms of ROIC performance (levels)
• Slightly declining NOPAT and EBITDA margin trends
LTM, most extensive declines in MEA and CALA
• Overall, CAPEX spend has stagnated, mainly driven by
declines among Global and APAC operators
• The declining trend in Invested Capital Turnover (CTR)
is reversing due to considerable improvements by
CALA and CIS operators
Infrastructure
OEMs • Huawei is the only one of its peers to see
positive ROIC development
• ZTE and Nokia have had significant deterioration to their ROIC in the last couple of years, and for Ericsson specifically in the last quarter
• Majority of OEMs have had limited organic growth over
the past years; as a result companies turn to
acquisitions for growth
• Ericsson’s and Nokia’s LTM trends are flat but
performance in last quarters implies 2016 full-year
margins are assumed to be lower than 2015 actuals
Device OEMs • Apple continues to outperform peers in
terms of ROIC, with Samsung a distant
second
• Apple currently catch >80% of the total
smartphone profits
• Revenues and profits expected to decline in 2016 due
to increased saturation in mature markets
• Revenues remained flat with the exception of HTC,
whose revenues decreased significantly LTM
• Profit margins have stagnated and HTCs NOPAT
margin fell to -22% in the LTM
Note: LTM = Last Twelve Months.
6 Financial Performance & Trends in the Telecom Industry
Metric Industry Group 2012 2013 2014 2015 LTM
Return on
Invested
Capital (ROIC)
Operator 9% 10% 8% 8% 8%
Infrastructure OEMs 8% 15% 20% 22% 19%
Device OEMs 40% 36% 31% 37% 35%
Net Operating
Profit After
Taxes Margin
(NOPAT)
Operator 11% 12% 10% 11% 10%
Infrastructure OEMs 4% 7% 8% 7% 7%
Device OEMs 11% 10% 9% 11% 10%
Invested
Capital
Turnover
(CTR)
Operator 0.8 0.8 0.8 0.7 0.8
Infrastructure OEMs 2.3 2.3 2.5 3.0 2.6
Device OEMs 3.5 3.5 3.3 3.5 3.5
Key Financial Metrics in Report.
Yearly Performance Table
Metric Industry Group Q4 2015 Q1 2016 Q2 2016 Q3 2016
Sales Growth
Q to Q [%]
Operator 5% 4% 3% 1%
Infrastructure OEMs 9% -4% -8% -7%
Device OEMs -8% -5% -6% 0%
NOPAT [%]
Operator 10% 10% 11% 11%
Infrastructure OEMs1 11% 4% 5% 4%
Device OEMs 9% 10% 10% 12%
EBITDA [%]
Operator 29% 31% 32% 33%
Infrastructure OEMs1 18% 12% 12% 11%
Device OEMs 20% 22% 23% 24%
Quarterly Performance Table (excluding selected operators due to lack of quarterly data)
Notes: 1. Huawei quarterly NOPAT and EBITDA data is not available and therefore FY 2015 is used. 2. ZTE are only releasing half year results.
7 Financial Performance & Trends in the Telecom Industry
Financial Trends and Performance
Summary and Key Data
About Applied Value
Operators
Infrastructure OEMs
Device OEMs
1)
2)
3)
8 Financial Performance & Trends in the Telecom Industry
We performed a financial benchmark with 49 operators, segmented
by geographical scope.
North America Europe ME & Africa
AT&T BT Etisalat
Verizon KPN MTN
BCE Orange STC
Rogers Swisscom Turkcell
Telus Tele2 Vodacom
Telia Zain
APAC Altice
Axiata Proximus CIS
China Mobile Elisa MTS
China Telecom TDC VimpelCom
China Unicom Rostelecom
Hutchison Global Megafon
KDDI Bharti Airtel
KT Corp Deutsche Telekom Central & Latin America
SingTel NTT America Movil
SK Telecom Ooredoo Millicom
Telstra SoftBank Oi
LG Uplus Telecom Italia
Telkom Indonesia Telefonica
Telenor
Vodafone
Notes: Operators were classified as Global if >20% of revenues came from regions outside of their home region.
9 Financial Performance & Trends in the Telecom Industry
Key Takeaways from Operators segment:
Long-term trend Short-term trend
Ability to Create
Shareholder value
• The overall ROIC for the segment has declined
since 2012 but level has now stabilized
• Overall trend is that regions converge in terms of
ROIC performance (levels)
• Global and CIS operators were the only regions
increasing their ROIC LTM, but region MEA
keeps its position as best in class
• Deep-dive analysis shows large variation in ROIC
performance among peers, with top performers
typically operate in emerging markets.
Margin
Performance
• Operators in MEA have the highest profitability
• The overall segment profitability has declined compared to 2012 levels, with CIS and CALA operators experiencing the largest declines
• Positive profitability trend for EU, CIS and
Global operators during last three quarters, but
LTM levels in EU still below 2015 totals
• CALA, EU and APAC are currently the regions
with lowest profitability
Capital
Efficiency
• Capital turnover has deteriorated across the
industry since 2012, primarily driven by drops for
operators in the MEA region
• Segment capital turnover rebounded during
LTM, primarily driven by CIS and CALA regions,
with CALA currently being best in class
• Other regions keep current levels
Capital
Expenditure
• The increase in CAPEX stagnated after 2014 and
spend has slightly declined during last years
• CAPEX is continuously increasing in the MEA
region
• The CAPEX over sales and EBITDA declined
LTM, primarily driven by Global, APAC and CIS
operators
Notes: 1. Operators in the study are estimated to cover 60-70% of the market by value. 2. LTM is an abbreviation for Last Twelve Months. 3. If no data is available for an operator one quarter an LTM average has been calculated based on the other quarters with data available.
10 Financial Performance & Trends in the Telecom Industry
Recent quarters the CAPEX spend has remained stable and the
margins for Global, EU and APAC operators have increased.
Notes: 1. EBIT & EBITDA are normalized to remove one-time or unusual influences.
2. Q3 2016 data for APAC, CALA and MEA region has been left out since no data is available for a considerable part of the sample companies in these regions.
Source: Capital IQ, Annual & quarterly reports, Applied Value Analysis.
Indexed sales
4%
9%
14%
19%
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
Quarterly NOPAT Margin, (%)
Quarterly EBITDA Margin, (%)
15%
25%
35%
45%
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
APAC EU
MEA NA
CALA
Global
CIS
CAPEX / Sales, (%)
2014 2015 2016
10%
15%
20%
25%
30%
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2014 2015 2016 2014 2015 2016
-10%
-5%
0%
5%
10%
APAC CALA CIS EU Global MEA NA
Q4 14 vs.15
Q2 15 vs.16
Q1 15 vs.16
Q3 15 vs.16
11 Financial Performance & Trends in the Telecom Industry
The Global and CIS region operators were the only ones managing
to improve ROIC LTM.
ROIC Development 2012 - LTM
NOPAT Margin (incl. goodwill)
Notes: Throughout the ROIC calculation, EBIT is normalized to remove one-time or unusual influences.
Source: Capital IQ, Applied Value Analysis.
25%
2012
LTM
LTM
2012
2012
LTM Europe
CALA APAC
Global
15% 30% 20% 10%
North America
MEA
CIS
2012
2012
LTM
LTM
LTM
2012
Cap
ital Tu
rno
ve
r R
ati
o (
CT
R, in
cl.
go
od
wil
l)
5%
2012 LTM
ROIC = Return on Invested Capital (actual return that the company has generated after tax)
Weighted Operator Average
2012
LTM
12 Financial Performance & Trends in the Telecom Industry
Large variation in ROIC performance among peers – top performers
typically operate in emerging markets.
ROIC Average 2015 - LTM
NOPAT Margin (incl. goodwill)
Notes: Throughout the ROIC calculation, EBIT is normalized to remove one-time or unusual influences.
Source: Capital IQ, Annual & quarterly reports, Applied Value Analysis.
25% 15% 30% 20% 10%
Cap
ital Tu
rno
ve
r R
ati
o (
CT
R, in
cl.
go
od
wil
l)
ROIC = Return on Invested Capital (actual return that the company has generated after tax)
35% 40% 5% 2%
Vodacom
Telekom Indonesia
China Mobile
MTN STC
Megafon Telenor
Elisa Telstra
BT
Turkcell
KDDI
NTT
America Movil
Millicom
Zain
Swisscom
Proximus
SingTel
BCE
Etisalat
Altice
Oi
Telefonica
Vodafone
China Unicom
Top performers
8% 12%
LG Uplus
KT Corp
Hutchison
SK Telecom
Tele 2
China Telecom
SoftBank
Deutsche Telekom
Orange
KPN
VimpelCom Rostelecom
Axiata
Bharti Aitel
Ooredoo
Telia
Verizon Rogers
Telus
TDC
Telekom Italia
AT&T
APAC EU
MEA NA
CALA
Global
CIS
13 Financial Performance & Trends in the Telecom Industry
1. VimpelCom Improving from very low NOPAT % in
2015
2. China Mobile Increased ROIC by major improvements
NOPAT % and CTR
3. Millicom Increased ROIC by major improvements
in CTR
4. Telkom Indonesia Increased ROIC by major improvements
in NOPAT % (+~2pp. 2015 – LTM)
5. Elisa Increased ROIC by major improvements
NOPAT % and CTR
45.America Movil NOPAT % decreased by ~2pp.
2015 – LTM
46.MTN NOPAT % decrease combined with
minor decline in capital efficiency
47.Telstra Substantial NOPAT % decrease
combined with slight decline in CTR
48.Turkcell Substaintail declines in both NOPAT %
and capital efficiency
49.Megafon NOPAT % decreased by ~4pp
combined with slight decline in CTR
Operators in emerging markets also experience largest shifts 2015
vs. LTM, due to both changing NOPAT and CTR.
Note: Throughout the ROIC calculation, EBIT is normalized to remove one-time or unusual influences.
Source: Capital IQ, Annual & quarterly reports, Applied Value Analysis.
Operator ROIC LTM ROIC ∆ 2015 – LTM Comment
17%
30%
16%
31%
14%
Top ROIC gainers
2pp.
4pp.
6pp.
10pp.
12pp.
19%
11%
14%
23%
11%
Top ROIC losers
-6pp.
-5pp.
-4pp.
-3pp.
-3pp.
14 Financial Performance & Trends in the Telecom Industry
Industry NOPAT has decreased LTM; the Global, APAC and CIS
operators managed to stop their negative trends.
5%
8%
11%
14%
17%
20%
2012 2013 2014 2015 LTM
APAC
CALA
CIS
EU
Global
MEA
NA
8%
9%
10%
11%
12%
13%
14%
2012 2013 2014 2015 LTM
NOPAT Margin, weighted for all companies 2012-LTM
Note: 1. Throughout the ROIC calculation, EBIT is normalized to remove one-time or unusual influences.
2. The CALA regions poor performance LTM mainly depends on Oi.
Source: Capital IQ, Annual & quarterly reports, Applied Value Analysis.
NOPAT Margin, arithmetic average per region 2012-LTM
15 Financial Performance & Trends in the Telecom Industry
The industry EBITDA margin is slightly declining, since 2012 the
CIS operators have experienced the most comprehensive decline.
26%
29%
32%
35%
38%
41%
44%
2012 2013 2014 2015 LTM
APAC
CALA
CIS
EU
Global
MEA
NA
28%
29%
30%
31%
32%
33%
34%
2012 2013 2014 2015 LTM
EBITDA Margin, weighted for all companies 2012-LTM
Note: Throughout the ROIC calculation, EBIT is normalized to remove one-time or unusual influences.
Source: Capital IQ, Annual & quarterly reports, Applied Value Analysis.
EBITDA Margin, arithmetic average per region 2012-LTM
16 Financial Performance & Trends in the Telecom Industry
The industry invested capital turnover increased LTM for the first
time since 2012, primarily driven by CALA and CIS operators.
50%
70%
90%
110%
130%
150%
2012 2013 2014 2015 LTM
APAC
CALA
CIS
EU
Global
MEA
NA
65%
70%
75%
80%
85%
90%
2012 2013 2014 2015 LTM
Invested Capital Turnover, weighted for all companies 2012-LTM
Note: 1. Throughout the ROIC calculation, EBIT is normalized to remove one-time or unusual influences.
2. The CALA regions poor performance LTM mainly depends on Oi.
Source: Capital IQ, Annual & quarterly reports, Applied Value Analysis.
Invested Capital Turnover, arithmetic average per region 2012-LTM
17 Financial Performance & Trends in the Telecom Industry
CAPEX spend in relation to sales declined LTM, driven by CIS, APAC
and Global operators.
12%
15%
18%
21%
24%
2012 2013 2014 2015 LTM
APAC
CALA
CIS
EU
Global
MEA
NA
14%
15%
16%
17%
18%
2012 2013 2014 2015 LTM
CAPEX / Sales, weighted for all companies 2012-LTM
Note: Throughout the ROIC calculation, EBIT is normalized to remove one-time or unusual influences.
Source: Capital IQ, Annual & quarterly reports, Applied Value Analysis.
CAPEX / Sales, arithmetic average per region 2012-LTM
18 Financial Performance & Trends in the Telecom Industry
Cash generation is improving driven by APAC, Global and CIS
operators.
30%
40%
50%
60%
70%
2012 2013 2014 2015 LTM
APAC
CALA
CIS
EU
Global
MEA
NA
44%
48%
52%
56%
60%
2012 2013 2014 2015 LTM
CAPEX / EBITDA, weighted for all companies 2012-LTM
Note: Throughout the ROIC calculation, EBIT is normalized to remove one-time or unusual influences.
Source: Capital IQ, Annual & quarterly reports, Applied Value Analysis.
CAPEX / EBITDA, arithmetic average per region 2012-LTM
19 Financial Performance & Trends in the Telecom Industry
Financial Trends and Performance
Summary and Key Data
About Applied Value
Operators
Infrastructure OEMs
Device OEMs
1)
2)
3)
20 Financial Performance & Trends in the Telecom Industry
Huawei Technologies is a Chinese multinational networking and telecommunications equipment and services company headquartered in Shenzhen, China
Ericsson is a multinational provider of communications technology that offers services, software and infrastructure hardware
Nokia is an international provider of fixed and mobile network infrastructure, location-based technologies and advanced technologies
ZTE Corporation is a Chinese multinational telecommunications equipment and systems company headquartered in Shenzhen, China
Revenues 2015, BUSD
We performed a financial benchmarking analysis comparing Huawei,
Ericsson, Nokia Networks, and ZTE.
15
23
27
59
Company Group
Notes: (1) Nokia data is LTM to highlight revenues from Alcatel acquisition.
Source: Annual & quarterly reports, Applied Value Analysis.
21 Financial Performance & Trends in the Telecom Industry
Huawei and ZTE have significant mobile device segments while
their peers all focus on telecom infrastructure.
Company
• Carrier Network Business: Wireless/Fixed/Core Networks, Carrier SW
• Consumer Business: Mobile Broadband/Home Devices, Smartphones
• Enterprise Business: ICT Products
• Network Products, Network Services: 4G and 5G development,
Radio and Transport, Managed Services and Customer Support
• Cloud & IT Products & Services: Software, Systems Integration
• Media: Broadcast systems, TV/Media
• Available financials stated with pre-reorganization segmenting
• Nokia Networks: Network Infrastructure Business
• Nokia Technologies: Technology Development and IPR Activities
• Networks: Wireless communications, wireline switch and access and
optical and data communications
• Handset terminals: Manufacture and sale of mobile phone handsets
and data card products
• Telecommunications software systems, services and other
products: Telecommunications software systems and fee-based
services
Business Segments Description
50% 44%
6% Networks
Global Services
Support Solutions
60%
33%
6%
Carrier Network Business
Consumer Business
Enterprise Business
57%
28%
14% Network
Handset Terminals
Telecom. Software systems,services and other products
96%
4%
Nokia Networks
Nokia Technologies
Note: ZTE Corp. data is form 2014.
Source: Annual & quarterly reports, Applied Value Analysis.
22 Financial Performance & Trends in the Telecom Industry
Key Takeaways from Infrastructure OEM segment.
Long-term trend Short-term trend
Ability to Create
Shareholder value
• All peers have improved ROIC since 2012
• Majority of peers have continuously delivered
ROICs above WACC, thereby increasing
shareholder value
• Nokia, Ericsson and ZTE have deteriorating
ROICs LTM
• Huawei keeps its position as best in class
Revenue • Aside from Huawei and ZTE, organic growth
among peers has been low over the period
• Huawei and ZTE are the only peers with
increasing revenues (Nokia’s increasing
revenues is driven from Alcatel acquisition)
• Most recent acquisitions driven by ambition to
improve selected competence areas
Margin
Performance
• All peers have improved profitability since 2012
but trend in last years is flat
• Nokia and Huawei have best in class margins
• Ericsson’s and Nokia’s LTM trends are flat but
performance in last quarters implies 2016 full-
year margins are assumed to be lower than
2015 actuals
• Declining profitability for all peers compared to
historical levels
• Ericsson’s margin deterioration is accelerating
with a significant drop in Q3
• Nokia’s NOPAT margin is hurt by acquisition of
Alcatel-Lucent
Capital
Efficiency
• Huawei has continuously higher CTR than peers
(2x) as a result of increased focus on services,
hence higher fixed asset turnover
• Other peers are on par and have delivered stable
capital turnover ratios over the period
• Nokia, Ericsson and ZTE have increased
inventory levels LTM, leading to lower CTR
• Days of sales receivables and payables are
stable, but all peers still pay suppliers quicker
than collecting cash from customers
23 Financial Performance & Trends in the Telecom Industry
ROIC = Return on Invested Capital (actual return that the company has generated after tax)
WACC = Weighted Average Cost of Capital (the required return that the company must generate in order create value, i.e. a ROIC>WACC creates shareholder value)
Cap
ital Tu
rno
ve
r R
ati
o (
CT
R, in
cl.
go
od
wil
l)
NOPAT Margin (incl. goodwill)
ZTE
Huawei
20%
2012
Peer Group ROIC Development 2012-LTM
LTM
40%
Ericsson LTM
2015
8%
2012
2012
Nokia LTM
2012
60%
Huawei has higher CTR than peers as a result of increased focus on
services – all peers has improved NOPAT since 2012.
10%
5% 2%
Notes: NOPAT is normalized to remove one-time or unusual influences.
Huawei does not publish quarterly reports. ZTE only publish half year reports.
Nokia 2012 excludes device business, Nokia LTM includes Alcatel-Lucent on a consolidated basis.
Source: Annual & quarterly reports, Applied Value Analysis.
24 Financial Performance & Trends in the Telecom Industry
0%
10%
20%
30%
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
Nokia’s margin is recovering while Ericsson’s deteriorating shows a
rapid acceleration in Q3 – ZTE is gaining market share during 2016.
CAPEX / Sales, (%)
-20%
-10%
0%
10%
20%
30%
Nokia ZTE Ericsson
Sales, Quarter-to-Quarter development % Quarterly NOPAT Margin, (%)
Quarterly EBITDA Margin, (%)
0%
10%
20%
30%
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2014 2015 2016
Q4 14 vs.15 Ericsson
Q1 15 vs.16
Q2 15 vs.16
Q3 15 vs.16 Nokia
ZTE
2014 2015 2016
Notes: NOPAT is normalized to remove one-time or unusual influences.
Huawei does not publish quarterly reports. ZTE only publish half year reports.
Source: Annual & quarterly reports, Applied Value Analysis.
0%
1%
2%
3%
4%
5%
6%
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2014 2015 2016
25 Financial Performance & Trends in the Telecom Industry
60
80
100
120
140
160
180
200
220
2012 2013 2014 2015 LTM
Huawei Nokia ZTE Ericsson
+20.5%
+4.9%
+0.3%
+7.9%
Index 100=2012 CAGR 2012 - LTM
Indexed Revenue Development 2012 – Last Twelve Months
M&A Activity 2015 – 2016
Aside from Huawei and ZTE, organic growth among peers is low,
with sales either flat or increasing due to acquisitions.
• Huawei’s CAGR of 20.5% from 2012 leads the group. Huawei’s carrier and consumer businesses have driven the upward trend (a 21.4% and 72.9% increase, respectively, from 2014 to 2015)
• Nokia’s increased revenue over the past year is driven by the Alcatel acquisition, which closed in January
Oct-2016 Nokia acquires Eta Devices, start-up specializing
in power efficiency solutions for base stations
Aug-2016 Nokia acquisition of Gainspeed, pioneer of DAA
cable, to close Q3’16
Apr-2016
Ericsson acquires Ericpol, a software
development company specialized in
telecommunications and IT
Jan-2016 Nokia secures 17 BUSD takeover of Alcatel-
Lucent via tender offer
Jan-2016 Nokia acquires French internet and software
company Withings SAS for 192 MUSD
Dec-2015 Nokia completes the sale of its HERE business to
Audi, BMW and Daimler for 2.8 BEUR
Oct-2015 Ericsson completed the acquisition of Envivio by
means of a tender offer for approx. 125 MUSD
Jul-2015 Huawei acquired its SDN software technology
from Amartus
Notes: Huawei does not publish quarterly reports. ZTE only publish half year reports.
Nokia 2012 excludes device business, Nokia LTM includes Alcatel-Lucent on a consolidated basis.
Source: Annual & quarterly reports, Applied Value Analysis.
26 Financial Performance & Trends in the Telecom Industry
Declining profitability for all peers - Ericsson’s poor performance
during 2016 is offset by strong Q4 2015 resulting in flat trend.
+
+
+
=
COGS (over sales)
SG&A (over sales)
R&D (over sales)
-5%
0%
5%
10%
15%
2012 2013 2014 2015 LTM
Huawei Nokia ZTE Ericsson
Notes: NOPAT is normalized to remove one-time or unusual influences.
Huawei does not publish quarterly reports. ZTE only publish half year reports.
Nokia 2012 excludes device business, Nokia LTM includes Alcatel-Lucent on a consolidated basis.
Source: Annual & quarterly reports, Applied Value Analysis.
5%
10%
15%
20%
2012 2013 2014 2015 LTM
20%
30%
40%
50%
2012 2013 2014 2015 LTM
5%
10%
15%
20%
25%
2012 2013 2014 2015 LTM
Net Operating Margin After Tax, %
27 Financial Performance & Trends in the Telecom Industry
Increasing inventory levels and overall poor cash management – all
peers pay suppliers quicker than collecting cash from customers.
Capital Turnover Ratio
-
+
+
+
≈
Inventory (days of sales)
Fixed Assets
Turnover
Receiv-ables
(days of sales)
Payables (days of sales)
0
2
4
6
2012 2013 2014 2015 LTM
Huawei Nokia ZTE Ericsson
40
80
120
160
200
2012 2013 2014 2015 LTM
0
50
100
2012 2013 2014 2015 LTM
20
70
120
170
2012 2013 2014 2015 LTM
0
5
10
15
2012 2013 2014 2015 LTM
Notes: Huawei does not publish quarterly reports. ZTE only publish half year reports.
Nokia 2012 excludes device business, Nokia LTM includes Alcatel-Lucent on a consolidated basis.
Source: Annual & quarterly reports, Applied Value Analysis.
28 Financial Performance & Trends in the Telecom Industry
Financial Trends and Performance
Summary and Key Data
About Applied Value
Operators
Infrastructure OEMs
Device OEMs
1)
2)
3)
29 Financial Performance & Trends in the Telecom Industry
Apple Inc. (Apple) designs, manufactures and markets
mobile communication and media devices, personal
computers, and portable digital music players
Samsung Electronics is mainly engaged in the
production of consumer electronic products. It operates
in two divisions: DMC and DS
Sony principally manufactures imaging products and
solutions, game and mobile products, communication,
home entertainment, and sound products, among other
products
LG Electronics is a manufacturer of various electronic
goods such as LCD TVs, mobile communication
devices, and home appliances, among other products
Lenovo is personal technology company that manufactures PCs under Think and Idea brands as well as servers, workstations and a family of mobile devices
HTC Corporation is principally engaged in the research, development and manufacturing of smart handheld devices
Revenues 2015, BUSD
We performed a financial benchmarking analysis comparing Apple,
Samsung Electronics, Sony, LG Electronics, Lenovo and HTC.
4
47
51
75
181
234
Company Group
Notes: Samsung, Apple, Sony, Lenovo and LG’s financials include revenue of other business in addition to mobile devices.
Source: Thomson Reuters, Annual Reports.
30 Financial Performance & Trends in the Telecom Industry
Company Business Segments Description
• iPhone: Mobile Phones
• iPad: Tablets
• Mac: Laptops & Personal Computers
• Services: iTunes Store, iCloud, Apple Pay, other services
• Other products: Apple Watch, Beats products and Apple branded accessories for iPhone, iPad, Mac, & iPod
• Information Technology & Mobile Communications: Mobile Phones, Communication
systems and computers
• Device Solutions: Semiconductor Business, LCD and OLED panels
• Consumer Electronics: TVs, monitors, printers, air conditioners and refrigerators
• Game and Network Services: Computer entertainment and network usage
• Home Entertainment & Sound: LCD TVs, Home/Portable Audio, Blu-Ray
• Mobile Communication: Mobile Phones
• Financial Services: Banking and Insurances
• Pictures: Motion Pictures, TV Production, Operation of TV & Digital Networks
• Devices: Semiconductors & Components
• Imaging Products & Solutions: Digital/Video cameras, Broadcast products
• Music: Recorded Music, Music Publishing, Visual Media & Platform
• Home Entertainment: TV, Monitors, PCs, Security Devices, Audio/Video
• Mobile Communications: Mobile communications, handsets
• Home Appliance & AC: Fridges, Washing Machines, Microwaves, Vacuums, residential/commercial air conditioners
• Innotek: LED, Display & Network, Substrate & Material, Optics Solution
• PC: Commercial and Consumer Computer
• Mobile: Mobile devices, Smartphone, Tablet
• Enterprise: Server Business, System X
• Other: Eco-system, Cloud Services, App Stores
• Mobile: Research, design, manufacture, and sale of smart mobile devices
19%
14%
14% 13%
12%
12%
8% 8% G&NS
HE&SMobile Comm.Financial ServicesPicturesDevicesIP&SMusic
66% 10%
11%
9% iPhone
iPad
Mac
iTunes, SW, & Services
Other Products
All peers except HTC are diversified technology companies.
Source: Annual Reports, Investor Presentations.
31%
29%
25%
11% Home Entertainment
Home Appliance
Mobile Comm.
Innotek
Other
Mobile
72%
20%
6% PC
Mobile
Enterprise
other
49%
29%
22% IM
DS
CE
Company Business Segments Description
31 Financial Performance & Trends in the Telecom Industry
Key Takeaways from Device OEM segment.
Long-term trend Short-term trend
Ability to Create
Shareholder value
• Samsung and Apple are performing a ROIC
above WACC but other peers are struggling
around or below WACC
• Apple’s significant cash assets has a positive
impact on CTR and ROIC which separates them
from peers
• Major change in ROIC performance for; Lenovo
due to Motorola acquisition; HTC due to falling
margins; for Apple because of improved capital
efficiency
Revenue
• Apple and Lenovo have the highest revenue growth among Device OEMs since 2012
• HTCs revenues have declined more than 70% since 2012
• Declining revenue during 2016 for all peer
companies
• Smartphone revenues are expected to continue
to decline in 2016 due to increased saturation in
mature mobile device markets.
Margin
Performance
• All peers except HTC deliver stable margins
• Apple (17%) and Samsung (10%) outperform
other peers (0-3%) in terms of NOPAT margin
• Apple currently catch >80% of the total
smartphone profits
• NOPAT margins have been stable for all peers
except for HTC during last eight quarters
• HTC’s NOPAT margin fell to -22% over the past
year, mainly due to unsuccessful launches of new
devices
Capital
Efficiency
• Overall stable invested CTR among peers except
for Apple that has seen performance
improvement since 2014
• Last two years capital turnover has been either
flat or increasing for peer companies
• Apple’s significant cash resources give them
outstanding invested CTR (12x) compared to
peers (4x)
32 Financial Performance & Trends in the Telecom Industry
Smartphone revenues and profits are expected to decline in 2016
due to increasing penetration maturity in major markets.
Notes: Smartphone device results are shown here as more than 80% of the mobile volumes come from smartphones in 2015. “Others” category include Sony, TCL, Coolpad but due to incomplete data, they have not been broken out. Totals for EBIT are not industry totals but totals of companies listed. Several companies (Huawei, Xiaomi, ZTE) did not report smartphone business EBIT results.
Source: UBS Evidence Lab, Company data.
HTC Microsoft ZTE LG Lenovo-Motorola Xiaomi Huawei Samsung Apple Other Huawei, Xiaomi, and ZTE have been excluded
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2013 2014 2015 2016e 2017e
Smartphone Device Volume by Vendor M-units sold
993 1212 1285 1323 1376
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2013 2014 2015 2016e 2017e
Smartphone Device Revenue by Vendor BUSD revenue
263 304 319 306 321
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2013 2014 2015 2016e 2017e
Smartphone Device EBIT by Top Vendor BUSD EBIT
54 53 62 51 54 TOTAL
33 Financial Performance & Trends in the Telecom Industry
ROIC = Return on Invested Capital (actual return that the company has generated after tax)
WACC = Weighted Average Cost of Capital (the required return that the company must generate in order create value, i.e. a ROIC>WACC creates shareholder value)
Source: Thomson One, Annual reports, Applied Value Analysis.
Cap
ital Tu
rno
ve
r R
ati
o (
CT
R, in
cl.
go
od
wil
l)
NOPAT Margin (incl. goodwill)
Samsung
Lenovo
HTC
2012
Peer Group ROIC Development 2012-LTM
LTM
Apple
Sony
2012
2012
2012
LTM
2012
LTM
2012
LTM
LG
8%
Apple continues to outperform peers in terms of ROIC while its
peers struggle with low or even negative ROIC.
200% 150% 100% 80% 60% 40%
LTM
2015 = -42% LTM = -80%
HTC ROIC:
20% 250%
34 Financial Performance & Trends in the Telecom Industry
-30%
-20%
-10%
0%
10%
20%
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
All peers except HTC manage to deliver stable margins despite
declining sales.
Notes: EBIT & EBITDA are normalized to remove one-time or unusual influences.
Source: Thomson, Applied Value Analysis.
-70%
-50%
-30%
-10%
10%
30%
Samsung Apple Sony Lenovo LG HTC
Change to quarterly
EBITDA (line)
Sales, Quarter-to-Quarter development (%) Quarterly NOPAT Margin, (%)
CAPEX / Sales, Quarter-to-Quarter development (%) Quarterly EBITDA Margin, (%)
-30%
-10%
10%
30%
50%
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
Sony Samsung Q4 14 vs.15
Lenovo
LG
Apple HTC Q2 15 vs.16
Q1 15 vs.16
Q3 15 vs.16
0%
2%
4%
6%
8%
10%
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2014 2015 2016
2014 2015 2016 2014 2015 2016
35 Financial Performance & Trends in the Telecom Industry
None of the peers have managed to significantly grow their
revenues LTM – HTC’s revenue has declined rapidly since 2012.
Source: Annual Reports, IDC, UBS, Applied Value Analysis.
Oct-2016 Samsung acquired artificial intelligence company
Viv
Aug-2016 Sony acquires Ten Sports, an Indian television
company, for 385 MUSD
Aug-2016 Apple acquires machine learning company Turi for
200 MUSD
Jan-2016 Sony acquires Altair Semiconductor, an electronics
company, for 212 MUSD
Sep-2015 Apple acquires map visualization software
Mapsense ~30 MUSD
Feb-2015 Samsung buys LoopPay as Digital Wallet Platform
for 250 MUSD
Jan-2015 Apple acquires music analytics software Semetric
for 50 MUSD
Oct-2014 Lenovo acquired IBM’s x86 Server business for 2.1
BUSD
Oct-2014 Lenovo acquires Motorola Mobility from Google for
2.9 BUSD
May-2014 Apple acquires Beats Music and Beats Electronics
for 3 BUSD
Index 100=2012
+8.3% +6.4% +3.2%
-27.3%
CAGR 2012 - LTM
+0.1%
0
50
100
150
2012 2013 2014 2015 LTM
Samsung Apple Sony Lenovo LG HTC
+0.0%
Indexed Revenue Development 2012 – LTM
M&A Activity 2012 – 2016
36 Financial Performance & Trends in the Telecom Industry
-30%
-20%
-10%
0%
10%
20%
30%
2012 2013 2014 2015 LTM
Samsung Apple SonyLenovo LG HTC
5%
10%
15%
20%
25%
2012 2013 2014 2015 LTM
0%
3%
6%
9%
12%
15%
2012 2013 2014 2015 LTM
10%
20%
30%
40%
50%
2012 2013 2014 2015 LTM
Source: Annual Reports, Applied Value Analysis.
Samsung’s and Apple’s NOPAT margins are stable and consistently
higher than other peers.
+
+
+
=
COGS (over sales)
SG&A (over sales)
R&D (over sales)
Net Operating Margin After Tax, %
37 Financial Performance & Trends in the Telecom Industry
Apple has improved its CTR, but both Lenovo and HTC have had
significant declines due to decreased FAT and increased inventory.
Notes: Lenovo acquired Motorola Mobility in 2014 which increased their invested capital and lowered their Fixed Asset Turnover ratio
Source: Annual Reports, Applied Value analysis.
0
2
4
6
8
10
12
14
2012 2013 2014 2015 LTM
Samsung Apple SonyLenovo LG HTC
0
2
4
6
8
10
2012 2013 2014 2015 LTM
0
20
40
60
80
2012 2013 2014 2015 LTM
0
20
40
60
2012 2013 2014 2015 LTM
0
25
50
75
100
125
2012 2013 2014 2015 LTM
-
+
+
+
≈
Inventory (days of sales)
Fixed Assets
Turnover
Receiv-ables
(days of sales)
Payables (days of sales)
-
+
+
+
≈ Capital Turnover Ratio
38 Financial Performance & Trends in the Telecom Industry
Financial Trends and Performance
Summary and Key Data
About Applied Value
Operators
Infrastructure OEMs
Device OEMs
1)
2)
3)
39 Financial Performance & Trends in the Telecom Industry Applied Value Applied Value is a boutique management consultancy advising
clients on hands-on business improvement initiatives.
Who We Are
Management consultancy founded in 1999 by:
Late Jan Stenbeck, former Chairman of the Board of Kinnevik
Bruce Grant, former Managing Director of Arthur D. Little North America
Office in the U.S., Sweden, and China
The Applied Value Way
Global perspective and resources, but with a personal and value oriented approach
ROI driven – Focus on tangible results
Practical over theoretical – In order to create real value, real fast
The work is done when the implementation is complete, not when the recommendation is made
Our Business Philosophy – Lean Growth
Our Offerings – Hands-on Business Improvements
40 Financial Performance & Trends in the Telecom Industry
Our organization supports clients globally from 3 offices.
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