Change is on the Telefónica horizon with towers and workforce restructure

Telefónica has announced plans to accelerate the strategy of monetizing its tower assets after getting the green light from the Board of Directors.

The woes of Telefónica have been quite apparent in recent years. Despite owning regionalised businesses which are either market leaders or at the top-end of the scale, the firm has been drowning in debt. In bygone years, it was rumoured the firm was struggling with €53 billion debts, though it does seem to have gotten a handle on things.

At the end of 2018, thanks to several cost saving initiatives, debt had been reduced to €41.785 billion. During this period the firm did toy with a number of divestments (O2 UK) and an IPO of the tower infrastructure business, Telxius. This IPO fell through, but the business unit does present a new opportunity.

Following the Board Meeting, the team is pushing forward with plans to generate more profits through monetizing both passive and active telecoms equipment. And it does appear there are profits to be made.

Telefónica currently claims to own roughly 68,000 sites globally, either directly or through subsidiaries. Of those 68,000, tower infrastructure business Telxius owns approximately 18,000, with the remaining 50,000 owned by other units within the group. 60% of these assets are located within the four major markets (Spain, UK, Germany and Brazil).

By comparing the value of these assets with market benchmarks, Telefónica believes it can generate €830 million in revenues and €360 million in OIBDA. Another attractive component is the belief these sites would only require €25 million in maintenance capital expenditure across the year.

While this strategy might be considered as a means to aid rivals, the numbers are attractive to a business which is facing financial and competitive strain. Aside from the debt which is still looming above the heads of executives, subscriptions data is not the most attractive either as you can see from the table below:

Total access (connections/subscribers on network) in millions
Year Spain Germany UK Brazil South HISPAN North HISPAN
2015 41.97 48.36 25.29 96.92
2016 41.23 49.35 25.76 97.22
2017 40.99 47.6 25.31 97.91 58.45 72.57
2018 41.55 47.09 32.98 95.3 56.91 73.56

What is worth noting is that ‘total access’ accounts for everything which is running across one of the Telefónica networks in that region. That could mean mobile, wholesale, MVNOs, TV or broadband. That said, the numbers tell a story for themselves; Telefónica isn’t really going up or down, just hovering around.

If the traditional means of making money, attracting more subscribers, isn’t necessarily paying off the debtors, Telefónica needs to think about new strategies. Monetizing the tower infrastructure assets is certainly one way to go, and restructuring the workforce is another idea which might save money across the year.

Alongside the tower monetization announcement, Telefónica Spain has also said it is currently in negotiations with trade unions concerning its workforce. In short, that means some will be retrained, some will be encouraged into retirement and others will be shown the way to the door.

“The collective agreement we signed four years ago has enabled us to make great advances and has provided us with social and labour stability during this period,” said Emilio Gayo, Chairman of Telefónica Spain.

“Now we have to be more ambitious and evolve into a more digital company that is ready for the challenges ahead.”

Although Telefónica Spain is not putting any numbers out into the public domain, reports have emerged that the workforce will be trimmed by roughly 5,000. Those over the age of 53 will be offered a ‘voluntary individual suspension plan’, while the plan is to double the training budget to reskill staff members.

With an eye on the horizon, Telefónica is seemingly preparing to future-proof its largest expense; employees. The management team anticipates more than half of sales will be through digital channels in a few years’ time, while legacy fixed and mobile networks will be shut down during the ‘modernisation’ period. This will make a number of people redundant.

In fairness to Telefónica , it is creating plans to help evolve the skill sets of employees, but with any business evolution there will always be the messy job of headcount reduction.

Huawei founder has been expecting 5G conflict for a decade

After Motorola pulled out of discussions to purchase Huawei more than a decade ago, Huawei founder Ren Zhengfei warned executives of a conflict, but this has exceeded what he had in mind.

With Huawei as the proxy of the on-going, and increasingly aggressive, trade war between the US and China, big changes are on the horizon. Few in the business anticipated such drama.

“I could never have expected this controversy to be so intense though,” Ren said in a recent interview with Sky. “We knew that if there were two teams climbing up the same mountain from opposing sides, we would eventually meet on the peak and we may clash. We just didn’t expect this clash to be so intense and lead to this kind of conflict between the state apparatus of a country and a company.”

Ren has reportedly sent out another memo detailing the fallout of the conflict, which does finally seem to be hitting home. Job cuts are on the horizon, with replicative staff facing the axe and a simplified management structure promised. Contracts and payments will face higher scrutiny also, to keep an eye on free cash flow, while R&D seems to have been impacted also.

This is perhaps the most worry outcome of this on-going saga. Huawei can weather the storm in terms of financial impact and reputational damage but hitting the technology roadmap is not an element anyone would have wanted to plan for.

“In August and September, we will undergo a run-in period before we can mass produce these new versions,” Ren said. “So, we can only produce around 5,000 base stations each month during that period. Following that, we will be able to produce 600,000 5G base stations this year and at least 1.5 million next year. That means we don’t need to rely on US companies for our survival in this area.”

Huawei might still be considered the leader when it comes to the radio and transmission, but we would have suspected the ‘beta’ mode of its 5G products might have been completed by now. There are customers driving towards scaled deployment today, yet they seemingly don’t have the raw materials at their disposal. This is perhaps one of the most obvious impacts of the trade war and entry into the Entity List; Huawei has had to re-jig some products to ensure a US embargo could be compensated for.

The other very obvious challenge concerns the operating system on its smartphones.

Again, Ren has suggested the prospect of such a ban has been on the horizon, Harmony OS has been an on-going project for “several years”, though we suspect this is somewhat of an exaggeration. If Ren and the management team had forecast this issue, it wouldn’t be in the sticky situation it could potentially find itself in.

“If the US doesn’t want to sell the Android system to us, we will have no choice but to develop our own ecosystem,” Ren said. “This isn’t something that can be achieved overnight. We estimate that it will take us two or three years to build this ecosystem. In light of all this, we don’t believe we will be able to become the No.1 player in the device sector any time

soon.”

This is a massive problem for Huawei. The potential damage should not be undervalued whatsoever.

If Huawei cannot resolve its relationship with Android, it potentially becomes a security risk to users, as its devices will not be treated to timely security updates. Introducing Harmony OS onto Huawei devices might be the only reasonable route forward to address security concerns, but without the supporting ecosystem it becomes difficult to justify purchasing a device.

The consequences of this conflict are starting to become very apparent. Not just in the Huawei business, but there are straining relationships between governments while telco deployment plans are potentially going to be impacted.

Ren might have been able to predict a conflict between the US and China, wrestling for control of the 5G economy, but few could have predicted the current incumbent of the White House. This is the variable factor which would have caught everyone by surprise (except the writers of The Simpsons).

To call President Trump unconventional would be one of the understatements of the century. The approach to politics, relationship management and conflict resolution currently been applied by the US Government is something which is more at home on satire than it is in the home of the worlds’ most powerful and influential nations. This is the variable Ren was missing, perhaps he was expected a reasonable, mature and measured statesman.

So far, Huawei has weathered the storm, but slowly the defences are being eroded. The damage to Huawei’s business is starting to show.

Ren confirms Huawei restructure on the cards

An internal memo from Huawei founder Ren Zhengfei has been doing the rounds, suggesting a major business restructure to ensure the business can survive US aggression.

Although it remains the heavyweight champion in the network infrastructure segment, the last two years have been marred with a White House propaganda mission to limit the prospects of the business. Huawei has remained strong in the face of adversity to date, though in a memo to staff, Ren has admitted the damage has been dealt.

Over the next three to five years, Huawei will undergo a major business restructure to ensure it is capable of withstanding continued aggression from the US. This is a preparatory strategy from the Chinese vendor and we suspect the depth or breadth of the strategy will depend on the winner of the 2020 Presidential Election.

Of course, the inadequacies of the business have been highlighted to date. Although Huawei is not as dependent on the US as its domestic rival ZTE, there are areas where the US ban has hurt the giant. Should Trump win re-election, it would be a fair assumption the anti-Huawei campaign will continue though it might not be as aggressive under a Democrat administration.

Irrelevant to the outcome of the election, a restructure is probably needed and has been highlighted here by Ren.

“We have to complete an overhaul in harsh and difficult conditions, creating an invincible iron army that can help us achieve victory,” Ren said in a memo seen by Bloomberg.

“We absolutely have to complete this re-organisation within three to five years.”

Although the existence of Huawei was not in question, the Chinese domestic market is large enough to support it alone, the international success of the business has been called into question as a result of the on-going US/China conflict.

Huawei has largely been a proxy of the trade war, perhaps due to the success of the business on the world stage. ZTE is a more obvious target for US aggression, it is partly state-owned after all, however it does not have the presence of Huawei. Few companies have leapt out from behind the Great Firewall of China and dominated a segment in the same way Huawei has.

This is the precarious position Huawei currently sits in. Valuable relationships with international telcos are under threat thanks to the US bullying allies into line, while its supply chain is looking dented. Some suppliers can be replaced by alternatives, though there are a couple of areas where it is incredibly difficult. OS Android for its smartphones is top of the list due to fact there are no alternatives which can match.

“Two bullets fired at our consumer business group unfortunately hit the oil tanks,” Ren said in the memo.

This might be a reference to the significant damage which has been done to the consumer business. Although it is still in a position of strength, the reference might suggest it is living on borrowed time.

In the first half results, Huawei said its consumer business has grown by 24% year-on-year, though this now looks to be driven by the domestic market. Research from Canalys suggests smartphone shipments in China have increased by 31% year-on-year for the second quarter, though a decline of 16% for the same period was estimated in Europe. Patriotism is fuelling growth in the domestic market, though Huawei’s international reputation has been dented.

What Huawei looks like in a couple of years in a very interesting game to play. However, the turbulent storms of 2018/19 might lead to a stronger company in the long-run.

If US aggression continues its aggressive campaign, Huawei will be forced to completely restructure its supply chain. If it can maintain international relationships and customers throughout this period of restructure, it will have removed reliance on the US and a major weapon of the White House when attempting to bully its way through international relations.

Vodafone ponders spin off of European tower business

After reporting declines in group revenues, Vodafone needed to bring some good news to the earnings call, and it seems the creation of a standalone tower business has done the job.

CEO Nick Read announced during the Q3 earnings call work had begun to legally separate the European tower infrastructure business, with plans to have the new organization up-and-running by May 2020. The team intends to monetize the tower business through an IPO or disposal of a minority stake in the next 18 months, dependent on market conditions.

“We will capture industrial efficiencies through network sharing agreements signed in multiple markets, and today we are announcing the decision to create Europe’s largest tower company,” said Read. “We believe there is a substantial opportunity to unlock the embedded value of our towers, and we have started preparations for a range of monetisation options over the next 18 months, including a potential IPO.”

Looking at the revenues, total group revenues declined by 2.3% year-on-year for the quarter to €10.6 billion, with Europe accounting for a 2.1% decline. Italy and Spain accounted for the biggest drops across the continent, though the operational challenges faced here are well-known to all. Germany and the UK both offered marginal growth, but there is hope on the horizon for these two markets.

In both the UK and Germany, Vodafone is readying itself for a more aggressive push into the convergence game with broadband offerings. In the UK, it has partnered with the rapidly expanding CityFibre and launched a 5G FWA offering, while in Germany, the recently approved Liberty Global acquisition will give it more of a presence in the cable market.

“Modest results in a challenging competitive European environment,” said Paolo Pescatore of PP Foresight. The move to lead in 5G with punchy pricing gives it a perfect opportunity to gain momentum. But margins will continue to be under immense pressure with unlimited price plans.”

On the network side, Vodafone is readying itself for an expansive rollout into the 5G world. Being one of the world’s largest operators does sound nice, however the catch is that there are massive financial commitments when it comes to infrastructure overhauls, such as the one the 5G era presents. With a new network sharing partnership in the UK with O2, a tie-up with Orange in Spain and potentially one with Telecom Italia in Italy, the burden could certainly be lessened.

While this is all good news for the operations, the tower infrastructure business will steal the headlines. This is becoming an increasingly common trend in the telco world as operators look to appease the financial appetites of investors by monetizing tower infrastructure assets. On the surface, it does seem to have worked, share price has risen almost 9% in early morning trading.

“Exploring options to float or monetise infrastructure assets is becoming a fashionable play among some network operators, motivated by driving greater value from them and reducing costs,” said Kester Mann of CCS Insight.

“Better asset utilisation and driving greater efficiency has been a leading part of Vodafone CEO Nick Read’s strategy so far. The company has also established a number of 5G network-sharing deals, increased focus on online sales and customer care and replaced many legacy tariffs with new simplified plans.”

Verizon hits reset button with 2.0 launch

Verizon has announced it is now a new business, one which is customer centric and ready for the digital world of tomorrow. Smells like a polite way of announcing a restructure.

It might sound like a PR plug to stay relevant, heavily relying on friendly buzzwords such as customer centric and corporate social responsibility, but there is some pragmatism in behind the fluff. Like many telcos around the world, Verizon appears to be prepping for a restructure to refocus the business on tomorrow’s digital bonanza.

“It’s not only that we have a new operational structure from today, but it is also about the way we are thinking about our customers, the way we are thinking about our culture and leadership and society,” said Hans Vestberg, CEO of Verizon Communications. “We have a strategy that we are going to execute on.”

The plug itself seems to be focused on five areas. Firstly, corporate social responsibility. This will now be one of the promoted corporate values of the business, and will also factor into procurement decisions, but will also likely be included in various marketing campaigns.

While this sort of announcement might get some excited, Verizon is late to the show and, quite frankly, we’re surprised it has taken this long to include CSR in the corporate values. This is PR 101 and is a play which almost every other company on the planet is taking advantage of. Verizon might plug this as ‘innovation’, but the tiresome beast is catching up on a trend which ran wild years ago.

Secondly, the business will split into two business groups, Consumer and Business. Again, this seems like a move which should have been made some time ago.

Thirdly, Verizon 2.0 isn’t just a PR play but also symbolises progress which has been made on the network. Network virtualisation and softwarisation of the network is key here, and a critical component to ensure Verizon is a competitive force in the digital economy of tomorrow.

“We’ll also be working in new ways,” said Verizon employee Sravya Gajjala. “2.0 is our opportunity to take a look at what’s in front of us, at our existing processes and make fundamental changes across the business.”

This is the fourth point which to us sounds like corporate slang for restructure.

It might sound like a dirty word, perhaps because pain is a natural accompaniment to restructure, but it is critical. If Verizon is to maintain its lofty position of influence, it needs to be a business which is ready for the digital economy. This might mean redundancies, but it will certainly mean evolving from a Communications Service Provider (CSP) to a Digital Services Provider (DSP).

The final plug is innovation, the most overused and meaningless buzzword in the technology industry. Innovation means very little when everyone claims to be innovative because, quite frankly, only a small percentage actually are. For Verizon, this means pushing into new segments and offering new services. The imagery in the promotional video, which you can see at the foot of the article, suggest data is going to be a key aspect.

This might not sound revolutionary or new, but it is critical. The data intensive industries of tomorrow are going to rule the economy, but the telcos are not sitting in a strong position to capitalise on the gains. Trends are leading the telcos towards the role of utility, though there is still an opportunity to play a valuable role in the blossoming and disruptive segments.

This is the crux of the message; Verizon is attempting to re-model itself as a business which is relevant for the digital economy. It wants to be a partner of these innovative companies, offering services which go above and beyond the connectivity utility.

 

 

Investment bank backs the BT waiting game

Don’t expect BT to give too much away over the next couple of months, but investment bank Jefferies thinks there is enough there to make the telco a good bet.

The arrival of new BT CEO Philip Jansen has sparked the prospect of the telcos revival, at least from a share price perspective, though Jefferies believes cards will be held very close to the chest for the moment. Don’t expect too much insight on future strategies over the near-future, but the foundations seem steady enough to put BT in a solid position.

The last few years have not made for comfortable reading for many BT investors. In November 2015, share price stood at £4.99. This was not a historical high, but it was a peak in recent memory. Since that point, share price has declined 56% after gains from EE remained elusive, the Openreach position was challenged and a disastrous entry into the content game. Under former-CEO Gavin Patterson, BT entered a slump.

That said, in January BT reported positive results, suggesting the restructuring process implemented over the last 12 months was setting the foundations for recovery. Jansen was entering a business which was in a reasonable position.

“BT welcomes its new CEO with foundations to build on, not a slate to wipe clean,” the Jefferies investor note states.

However, with Jansen’s first earnings call just weeks away, don’t expect too much insight on BT’s future strategy. With Ofcom’s Access Review still yet to see the light of day, it would be “illogical” for BT to make too much of a commitment in the near future.

Depending on the outcome of this review, there might be room for Openreach to consider premiums on FTTP, there might be demands to increase CAPEX, there might be a need to cut Dividend Per Share (DPS). There are too many maybe’s floating around the regulatory uncertainty created by government ambitions to fibre-up 15 million UK homes by 2025.

While there is a suggestion DPS growth might freeze or reverse, this could allow BT to redirect funds towards the CAPEX column at Openreach. This could assist the telco in creating a friendlier relationship with Ofcom, an outcome which would be beneficial for everyone involved.

Jefferies feels there are too many unknowns for the telco to make any concrete commitments moving forward, but in encouraging customers to Buy BT, there is seemingly a lot of confidence.

Verizon reworks the corporate jigsaw puzzle in the name of 5G

Verizon has unveiled a new corporate structure in an attempt to make a lean, mean, money-making machine at the dawn of the 5G era.

While many of these announcements are usually coupled with some form of job cuts, there doesn’t seem to be one in this case. We’ve been unable to locate the relevant forms on the Securities and Exchanges Commission website, though considering there have been numerous ‘streamlining’ initiatives already announced, it might be a case of fitting the business around the new headcount.

“This new structure reflects a clear strategy that starts with Verizon customers,” said CEO Hans Vestberg. “We’re building on our network transformation efforts and the Intelligent Edge architecture to deliver new customer experiences and optimize the growth opportunities we see as leaders in the 5G era. We’re focused on how our technology can benefit customers’ lives and society at large.”

The new Verizon business will be organized into three business functions (Consumer, business and Media), supported by a network and IT organization, and corporate-wide staff functions. The consumer group will feature both the wireless and the broadband business units, as well as wireless wholesale, led by Ronan Dunne, who is currently President of Verizon Wireless. The business unit will include the wireless and wireline enterprise, small and medium business, and government businesses, as well as wireline wholesale and Verizon Connect, the company’s telematics business, headed up by Tami Erwin, the current EVP of Wireless Operations. The media unit will essentially be the Oath business, with current CEO Guru Gowrappan in charge. Kyle Malady will lead the network and technology department, while there will no changes to the management team on the corporate side.

While job losses have been an unavoidable topic in the telco world over the last couple of years, Verizon made a pretty weighty announcement last month. In an effort to trim the number of lifers and dead-weight in the management layer, Verizon offered 44,000 staff a redundancy package of three weeks of severance pay for every year worked, though it is not entirely clear how many heads the telco want to count rolling out the front door.

As it stands, Verizon currently employs 153,000 people across its various markets, though this figure was as high as 183,400 in 2012. What is worth noting is that it would be unfair to point the finger of destruction at Verizon alone, the trend is clearly visible across an industry rocked by OTTs, and a North American market which has consistently and aggressively sought to undercut rivals.

With many telcos around the world attempting to take advantage of the convergence trend, perhaps this new structure will offer Verizon a leg-up. The launch of its 5G fixed wireless access business certainly gives the business something to talk about, though with both the consumer wireless and broadband units now on the same branch of the family tree, a more consolidated approach on products, tariffs and marketing can be taken. How this impacts the Verizon message remains to be seen, though an aggressive 5G assault is almost guaranteed with new devices promised over the next 12 months.

Research from RepeaterStore suggests only 41% of US consumers were aware 5G is just around the corner, and while the conversation for many telcos is now focusing on the enterprise side, in the US the 5G p*ssing contest appears to be circling the consumer. With such low consumer knowledge of 5G, the telcos will have to do a considerable marketing push to communicate the benefits of 5G.