Huawei and Italy smartphone sales most heavily hit by COVID-19

The latest numbers from analyst firm Counterpoint reveal the European smartphone market shrank by 7% in Q1 2020, but there was considerable variation between vendors and countries.

Huawei took by far the biggest kicking among the top vendors, but that was probably more due to US sanctions, especially those restricting access to Android. Ironically other Chinese vendors, especially Xiaomi, were the major beneficiaries of Huawei’s struggles.

“Huawei declined a sharp 43% YoY for the quarter as the US trade sanctions continue to bite,” said Abhilash Kumar of Counterpoint. “Xiaomi has been the biggest beneficiary from Huawei’s decline as it grew 145% YoY capturing 11% share in the quarter.”

By far the most heavily hit among the European countries that Counterpoint tracks was Italy, which saw its smartphone market shrink by 21% year-on-year. Italy was the first European country to be heavily hit by the virus and consequently imposed a strict lockdown. The UK didn’t start locking down until the end of Q1 and Russia was hit even later, so it will be interesting to see how this data looks for Q2.

“Q1 is seasonally weak, but the coronavirus outbreak amplified this,” said Peter Richardson of Counterpoint. “The smartphone market decline was primarily due to COVID-19 outbreak across the region in the second half of the quarter. The biggest five markets in Europe entered lockdowns of varying severity at different points in March. Consequently, most of the offline stores were closed, though online remained open throughout. Also, the economic impact of the pandemic has led to lengthening replacement cycles as consumers withhold making discretionary purchases.”

Telecom Italia wrestles with Europe’s biggest COVID-19 dent

Telecom Italia (TIM) has released its latest financial results, revealing painful battle scars as European nations continue to fight the coronavirus pandemic.

While it should come as little surprise when you look at which countries were most severely impacted by COVID-19, the figures have confirmed it. Telecom Italia is still profitable, which is often forgotten when companies miss expectations, but the impact of the coronavirus pandemic has been very notable.

Total revenues for the three-month period to March 31 stood at €3.9 billion, down 11.3% year-on-year, while profits declined 10.8% year-on-year to €1.7 billion.

Financial results for European telcos through to March 31 (Euro (€), thousands)
Telco Revenue Year-on-year Profit Year-on-year
BT (£) 5,632 -4% 2,007 -2%
Telecom Italia 3,964 -11.3% 1,735 -10.8%
Orange 10,394 1% 2,602 0.5%
Telefonica 11,366 -5.1% 3,760 -11.8%
DT 19,943 2.3% 6,940 7.4%

Although it does look like business as usual at Deutsche Telekom, let’s not forget that as well as the country effectively combatting the coronavirus, the Group also contains T-Mobile US, which has been flying over the last few years. Total revenues in the US grew 0.3% to $11.1 billion over the quarter, while profits shot up 11.6% year-on-year to $3.6 billion.

What is worth noting is that it is not all bad news at Telecom Italia. This is a company which is under extraordinary pressure because of a truly unforeseeable event, but previous initiatives to create a healthier and more sustainable business are seemingly working. Improvement in cash generation (14% year-on-year increase) and debt reduction (down €923 million) have continued through the three-month period thanks to strategic initiatives launched in 2019. The underlying business model and strategy is still theoretically sound.

One of these projects, the network sharing agreement with INWIT and Vodafone, and subsequent sale of a stake in the towers joint venture, contributed €650 million to the debt reduction mission. Negotiations with KKR, for the sale of a minority share of the secondary fibre network, are continuing which will also reduce debt. It is not necessarily perfect scenario to be offloading assets, but needs must occasionally when pressure mounts on the spreadsheets.

It might be tempting to look at the surface figures, but it is always important to remember that COVID-19 is creating trading conditions no-one could foresee. TIM is still a business which is under threat from a highly competitive landscape in Italy, but the reaction from the team still looks competent.

Looking at the non-financial performance data, TIM Vision, the content platform saw a 20% increase in active users across the period, though mobile subscriptions dropped 579,000 year-on-year. IOT connections slightly compensated, but not enough. In fixed broadband, net customer losses across both consumer and wholesale totalled 233,000. It is clear the business is still adjusting to the new market dynamic with Iliad on the scene.

Segment Subscriptions Year-on-year
TIM Vision (TV) 1.85 million 21%
Mobile 20.42 million -2.8%
Fixed (retail) 8.98 million -1.5%
Fixed (wholesale) 8.01 million -0.6%

Iliad revenue surges but device sales dampen the party

Disruptive French telco Iliad has reported 6.9% growth in consolidated revenues for the three months to March 31, but depressed device sales took some of the shine off.

While sales of fixed and mobile devices only brought in €45 million across the quarter, a 38.6% decrease in year-on-year sales would have bruised some egos. Reporting a 6.9% increase in consolidated revenues would certainly keep investors happy, but without the dent to device sales, Iliad executives would have been boasting about a 9.1% increase.

Still, few will complain with the performance of the business over the last three months, as share price increased 5.3% (12.30pm, May 12).

“All crises are revealing,” said CEO Thomas Reynaud. “And for our Group, this one has brought out the best in us, clearly showing the agility of our organization and the strength of our fundamentals.

“I have been particularly impressed by the commitment and drive of our employees who are working so hard to keep people connected. The crisis has strengthened the incredible spirit of solidarity which has always characterized Free.”

Iliad Group financial performance for three months to March 31 (Euro (€), millions)
Total Year-on-year
Consolidated revenues 1,382 6.9%
Service revenues 1,339 9.6%
Mobile ARPU 10.6 12.8%
Fixed ARPU 32 1.3%

Source: Iliad Investor Relations

As with many other telcos in Europe, Iliad is now searching for value outside its core competencies. This can be broken down to two main ventures, both of which are looking quite healthy.

Firstly, in pushing into the convergence business model in France with a FTTH proposition, Iliad is evolving to much more than a disruptive nuisance. The broadband network has now passed 15 million homes across France, adding 215,000 subscribers this quarter. The subscriber base now stands at 1.97 million, with the objective to have 4.5 million by the end of 2024.

The second venture is the launch of its own mobile network in Italy. This has proven to be a very successful bet, with Iliad providing plenty of disruption to the status quo. Revenues are growing in tough circumstances, while the team now has 5.8 million subscribers and market share of roughly 7.3%. The network currently has 2,936 active mobile sites, though this should be 5,000 by the end of the year and more than 10,000 by the end of 2024.

Although the COVID-19 pandemic is currently having a limited impact on the financial performance of Iliad, the team has warned of the operational consequence and the knock-on effect this would have. Like most of the telecoms industry, COVID-19 is not having a material impact, but the longer the lockdown persists, the more difficult it becomes to realise new revenues promised by vast expenditure.

Vodafone and TIM both flog a bunch of INWIT shares to pay off debt

Less than a month after completing the merger of their towers businesses, Vodafone and TIM have sold an equal chunk of it each to raise some cash.

The merger was finalised late last month, giving Vodafone and TIM 37.5% of INWIT (Infrastrutture Wireless Italiane) each. They have now both placed 41.7 million shares, which equates to 4.3% of the total, at €9.60 per share. This will raise around €400 million for each telco group, which they are both saying will be used to ‘reduce leverage’ – i.e. pay down some debt.

Each operator group now owns 33.2% of INWIT and the two of them issued almost identical announcements, showing how tightly coordinated this move was. The fact that it comes so soon after the merger itself strongly implies the share placement was all part of the grand plan. Furthermore, at these prices, the tow of them have room to raise a few hundred million more euros if they still feel strapped for cash.

While TIM is still reeling from the cost of the last Italian spectrum auction, the nature of the Indian market means it maybe Vodafone that feels in need of fresh funds the soonest. The company announced yesterday that it has channelled $200 million into Vodafone Idea, despite the amount not being due until September.

“Vodafone Group has accelerated this payment to provide Vodafone Idea with liquidity to manage its operations, and to support the approximately 300 million Indian citizens who are Vodafone Idea customers as well as the thousands of Vodafone Idea employees during this phase of emergency health measures, taken as a result of the COVID-19 pandemic,” said the announcement.

Vodafone Idea owes the Indian government a ton of cash and it remains unclear whether it will be able to pay. In the meantime, thanks to the recent dominance of Reliance Jio, the cashflow situation at Vodafone Idea remains dicey, so Vodafone Group is presumably grateful for any extra cash injections.

Italian networks having a bit of a wobble under the strain

Although Italian networks seem to be holding-up under the increased traffic, data from Opensignal and MedUX suggests there has been material levels of service degradation.

What is worth noting it that while performance is seemingly suffering, there is not a threat of a full internet black-out in the impacted regions. Customers might just have to be a bit sympathetic to the circumstances and wait a bit longer.

Starting with the mobile networks, Opensignal measured the performance of the networks over a six-week period, starting at the beginning of February and finishing towards mid-March. Over the first five weeks, network performance was consistent, though from March 10 onwards, the beginning of the lockdown in the country, there was a very notable decline in 4G download speeds.

Although these numbers are still at speeds which might be tolerable, the longer the lockdown continues, the more people will be working from home, the greater the strain will be. This is far from a threat of the networks shutting down due to increased traffic, but it is a degradation which people will have to be aware of.

At the time of writing, the Italian Government has warned that while the COVID-19 impact was stabilising in the Northern regions, there were signs of increased effects in the Southern regions. Should there be a significant flare-up in the South, it would suggest the lockdown would continue across the country, instead of drawing to the end as some had been hoping.

Looking at fixed broadband networks, MedUX has done some analysis on the performance of Telecom Italia, Fastweb, Vodafone and Wind. Once again, the networks are holding pretty steadily, but performance has been impacted.

While there has been an impact on networks throughout the country, Piemonte, Lombardia, Toscana, Emilia-Romagna, Campania, and Sicilia have had a more material impact.

During the week beginning March 9, MedUX notes there has been up to a 50% increase in latency for FTTH during morning hours and up to 150% increase during afternoon hours. For FTTH and VDSL services, there was also a 15% decrease in compliance with contracted download speeds. The team also noted a 15% increase in web loading time and a 10–15% increase in the start-up and loading time of videos during the afternoon on the worst effected days.

Although these statistics are a slight dampener, the networks are still continuing to perform their duties. It might not be the lightening speeds which are promised in adverts, but these are extraordinary times where consumers might have to offer some flexibility to the telcos.

Vodafone’s M&A team has a very positive day

The towers transaction in between Telecom Italia and Vodafone has negotiated all the regulatory hurdles, while the Vodafone and TPG merger down under has gotten the US greenlight.

Starting in Italy, the merger between INWIT, Telecom Italia’s tower business, and Vodafone Towers has been approved, and the deed of merger will be effective as of 31 March 2020. The combined tower business will add significant benefits for the development of new 5G networks for both telcos, while the overarching European Vodafone business will receive 360,200,000 shares in the INWIT company.

As a result of the merger, both Vodafone Europe and Telecom Italia will have a 37.5% stake, though the efficiencies which can be realised in developing new network infrastructure in Italy will benefit both parties substantially. A new passive infrastructure sharing agreement will be in-effect once the merger has been completed at the end of the month.

Down in Australia, the Vodafone business has also received regulatory approvals from the from the Committee on Foreign Investment in the United States (CFIUS) and the United States Federal Communications Commission (FCC), to merge with TPG in a deal valued at AUS$15 billion.

“Our teams are prioritising support for our customers through the impacts of COVID-19, but we remain focused on progressing the merger,” said Iñaki Berroeta, CEO of the Australian business unit. “This unprecedented situation highlights the need for strong and resilient telecommunications companies to provide the services that Australians rely on.”

After a prolonged, and successful, legal battle with the Australian Competition and Consumer Commission (ACCC) who opposed the merger on the grounds of decreased competition in both mobile and broadband, it might sound unusual the team had to seek approval from US authorities.

Thanks to a TPG-owned submarine cable between Sydney and Guam, a US territory, the team was compelled to seek permission to merge from US authorities, though this was a much painless process than the 10-month legal battle with the ACCC. Everything might seem like downhill momentum in comparison now.

Italy proves problem child for Three Europe with 12% subs decline

Aside from Italy, subscriptions grew slightly across the Three European footprint, though a 17% increase in total revenues should be taken with a pinch of salt.

Any increase in revenues should not be snubbed of course, but what is worth noting is 2019 was the first year Three Europe felt the benefits from the additional 50% share in Wind Tre which reported solid results in the second half of 2019. The pre-existing businesses seemingly had somewhat of a difficult year.

UK Italy Sweden Denmark Austria Ireland
Revenue £2.4bn €4.9bn SEK6.6bn DKK2.2bn €867mn €603mn
Year-on-year -2% -1% -5% 0% -2% +2%
Margin £1.4bn €3.5bn SEK3.9bn DKK1.7bn €622mn €454mn
Year-on-year -3% -3% -4% +1% 0% +3%
Customers 13.7mn 23.8mn 2.1mn 1.5mn 3.7mn 3.9mn
Year-on-year +3.7% -12.2% +5% +7% 0% +8.3%
ARPU £17.79 €10.72 SEK283.22 DKK124.43 €20.62 €19.28
Year-on-year -2% -6% -6% -3% -2% -4%

Across the European footprint, total revenues increased to roughly €10.4 billion, though this is largely down to the increase stake in the Italian business. As you can see from the table above, 2019 proved to be a mixed bag for Three.

The active customer base, as of December 31, stood at 40.6 million, a 5% decrease from the same point in 2018. Aggressive competition in the Italian market was mostly to blame, though net ARPU and net AMPU across the Group also decreased by 8% and 7% to €12.94 and €11.04 respectively.

Perhaps more than anything else, these figures demonstrate the important of a diversified business and the convergence business model. Not only will these elements build customer loyalty, but ARPU can be increased with more services being offered.

One of the more common trends across the developed telecommunications markets around the world is the decreasing price of data per GB, while more customers are shifting towards unlimited data tariffs. These trends commoditise the data transmission segment but also erode profit margins.

Three is in somewhat of a difficult position, though it is certainly not alone, as many of the individual business units currently operate as a pure-play mobile telco. This looks to be a dangerous strategy to follow, as these trends are likely to accelerate rather than reverse.

There are initiatives in place to diversify revenues, Three UK is venturing into the world of fixed-wireless access (FWA), though the broadband market is already incredibly competitive. Others have also questioned the sustainability of a FWA market when fibre deployments are accelerating, and pricing also has to be very measured. Three UK currently charges £27 a month for 4G FWA, which is competitive.

Trends influencing the European business would perhaps suggest than more needs to be done to create added-value services into the mix. Content is a popular one for many telcos, though some are looking into areas such as financial services or digital security also. Partnerships are key, leaning on the expertise of other companies (Netflix or Disney+ for example) to reduce risk, and can offer recurring revenues for the telco who has the existing billing relationship with a customer.

These numbers should be considered very worrying for Three. The commoditisation of data is only going to be more aggressive as more data-intensive applications emerge and more elements of society are underpinned by digital, and it is incredibly likely more users will be paying less for data tariffs as competition inspires the race to the bottom.

AT&T follows Italian lead by temporarily unlocking data limits

AT&T has announced it will suspend download limits on its broadband products in response to the coronavirus outbreak.

The restrictions on data usage, which accounts for both downloads and uploads, are dependent on the amount charged for customers. Those with a DSL service are limited to 150 GB per month, FWA customers are limited to 250 GB, and for those who have a service with maximum speeds between 768 Kbps to 300 Mbps, the data restriction is 1 TB per month.

These limitations will now be lifted as the telco reacts to the on-going global pandemic.

In response to the more significant impact COVID-19 is having on the US, more than 1,000 cases have been confirmed to date, a group of 17 Senators have written to the major telcos to suggest the same actions are taken across the industry.

“No one should be penalised or suffer financial duress for following guidance from the CDC, their employer, local health public officials, or school leaders,” the letter, addressed to CEOs of the major telcos, states.

“While its likely that your networks will experience significantly greater traffic as a consequence of social distancing measures, we encourage you to forebear from application of broadband caps and associated fees or throttling as workers and families cope with the effects of this health emergency.”

Comcast is another which has taken action against to assist low income families. New customers for the Internet Essentials Service, the $9.99 a month broadband product, will be able to sign-up with without a long-term contract, credit checks will be dropped as will shipping fees for routers.

These actions seem to be following the actions of the Italian telcos who have been lifting data restrictions for all mobile and broadband products for customers in the impacted areas. Italy is the worst affected country outside of China and Iran.

Interestingly enough, as more people are forced to self-isolate or work from home, the more strain communications infrastructure will come under.

In Italy, Telecom Italia has said it has seen internet traffic across its network of 70%, mostly thanks to the increased use of video and gaming applications. The telco has said Fortnite and Call of Duty are applications which have seen notable increases over the last few weeks as schools have been closed and children need to be entertained.

With more companies asking employees to work from home and the potential for more schools to be closed, home broadband networks might be strained in a way never seen before. These are elements of the network which have not been designed to deal with this intensity of data traffic; how this is managed will certainly be an interesting story to unfold over the coming weeks.

TIM annual revenues drop 5.1% but eyes future through convergence

Telecom Italia has reported its financial results for 2019, with Group revenues standing at €17.97 billion, a 5.1% year-on-year decline.

While performance in the Brazilian business stood relatively stable in comparison to the previous year, the domestic Italian unit saw the dramatic drop. Revenues in Italy were €14.08 billion, a 6.3% decline, as competition in the market continues to take a bite out of the operator’s fortunes.

Although this does not make for the prettiest of pictures, the Board of Directors has also approved the 2020-2022 Strategic Plan. As part of the plan, TIM has outlined several key objectives for the next 24 months:

  • Increase Equity Free Cash Flow to €4.5-5 billion
  • Bring group net debt below €20 billion by 2021. Proceeds from the sale of 12.4% of INWIT will contribute towards this element of the plan
  • Group Organic Services Revenues will decline slightly over this period, as are Revenues from Domestic services
  • Domestic Capex is expected to be roughly €2.9 billion each year

In the consumer division, convergence is the key word. The core business of connectivity is key to this drive, though adjacent services (TV, smart home, security or gaming for example) are expected to grow revenues and improve the resilience of the business. The deployment of ultrabroadband services is another area to bolster the offering here.

Another interesting element of the consumer business unit is the ‘TIMVision’ initiative. This content proposition is taking more of an aggregator approach and is starting to look very healthy. Partnerships with Disney, Netflix, Sky, Dazn and Amazon are creating an attractive platform, which when bundled effectively, might give TIM an edge in the ultra-competitive environment.

Looking at the business and whole elements of the business, these are two areas which have been primed for growth by the team. The recently announced partnership with Google Cloud will certainly open up new opportunities in the increasingly important cloud services market, while tie-ups with the likes Olivetti in IoT and Telsy in cybersecurity have the potential to open new revenue streams.

In wholesale, the full-fibre deployment plan will see 5.1 million homes passed in 2022. Opening up this network does increase competition in the market, though the wholesale opportunity does look like an attractive one.

Looking at the financials and competition elements of TIM alone does not create the most comfortable reading. Italy is a tricky market, though TIM is pivoting to create a more diversified and future-proofed business. The groundwork looks to be effective but soon enough the team will have to enter into execution phase. There is opportunity, but Italy is a fast-evolving market.

TIM gets fined for rigging Italian fibre market, will appeal

The Italian Antitrust Authority (AGCM) reckons operator TIM acted to restrict competition in certain parts of the domestic fibre market. TIM disagrees.

We’re relying on Google Translate here, as the decision hasn’t been published in English yet, but the decision refers to ‘white areas’, which are parts of the country that offer relatively poor returns on fibre investment. TIM had initially decided it couldn’t be bothered with them, it seems, but then changed its mind when competitors stepped in with a bit of help from the tax payer.

“The Authority has ascertained that TIM has hindered the holding of tenders, launched under the Government’s ultra-broadband national strategy, for the support of investments in ultra-broadband network infrastructures in the most disadvantaged areas of the national territory ( so-called white areas),” said the translated AGCM announcement.

“In particular, TIM decided to make an unprofitable modification of the coverage plans of these areas during the tenders and at the same time undertook legal initiatives instrumentally aimed at delaying the same.” Accordingly TIM is being fined €116 million.

TIM doesn’t see what the problem is since it has already sorted all this stuff out with the Italian telecoms regulator AGCOM, and accordingly will appeal. “AGCM’s decision also raises concerns, not least because the Italian telecoms watchdog AGCOM has taken an entirely different view of TIM’s alleged anti-competitive behaviour,” said the TIM response. “In fact, AGCOM has on several occasions dealt with the issues discussed in the preliminary investigation, adopting specific regulations on most of the cases covered by the provision.

“The main objection of the decision refers to an investment project in market failure areas (so-called White Areas), considered by AGCM to be abusive towards Open Fiber which should build a fibre infrastructure to the homes with public resources (as recalled by the AGCM), which though did not take place as also highlighted by several institutional offices.”

It all seems fairly technical and the size of the fine by itself is not that significant. Having said that, if TIM doesn’t think it has done anything wrong and the regulator agrees then still got to hurt. The most intriguing part of this is that it seems to pitch the regulator in direct opposition to the antitrust authority and it will be interesting to see which prevails.