Tài liệu Network Equipment Providers Restoring Investor Trust ppt

Network Equipment Providers Restoring Investor Trust 1 Global penetration of mobile data subscription is expected to exceed 100 percent by 2015. In some markets that figure could reach as high as 150 percent (ie 1.5 times more subscriptions than individual subscribers). 1 The growth of smartphones and IP-connected devices has driven exponential growth in data traffic. And examining the volume of data sent and received by devices such as smartphones it is easy to see why the increase is so marked. When compared to a standard phone, the data traffic generated by new devices is many times higher. Smartphones, for example, send and receive 35 times and tablets over 100 times the amount of data of a standard mobile phone. 2 The use of mobile devices is extending to almost all activities and areas of life, from travel to education, and from social networking to making financial transactions. And as more and more people do more and more online, and IP-enabled devices directly communicate, the demand for data traffic will only continue to grow around the world. 1 In that context, it would be easy to assume that all participants along the broad communications industry value chain, from telcos, to network equipment providers and newer entrants such as over the top content and service providers would benefit – albeit to different extents – from that huge increase in traffic. After all, network operators should be able to capitalize on the increasing demand for data traffic and accordingly would need to continue investing in improving their network capacity and performance. That should mean investors would view all their prospects with a degree of optimism. But the financial picture shows that intuition could be wrong. Investors’ sentiment towards network equipment providers (NEPs) does not demonstrate a high degree of confidence in NEPs’ ability to achieve growth. Comparing the multiples at which NEPs are traded with others in the communications value chain shows a marked discrepancy: investors do not necessarily trust NEPs to generate returns in line with present results, let alone deliver growth. 3 To try and understand the reasons behind this apparent lack of trust, Accenture has carried out detailed financial analysis of listed businesses in the sector and carried out in-depth interviews with investor analysts who cover at least two companies in the NEP segment. This point of view looks at some of the underlying factors and suggests some steps that NEPs may need to address in order to rebuild investor trust. Growth forecasts for the NEP sector show only modest annual increase (+ 4 percent 2011 to 2016) for the core area of their business: carrier network infrastructure. The important area of telecoms operations management system licenses shows just slightly higher annual increase (+ 6 percent 2011 to 2016). 4 Limited growth is partly attributable to advances in technology that are eroding equipment prices. Greater competition from lower cost manufacturers in China has also played a part. On the other hand, telecom operators’ demand for professional services is expected to grow annually by 12 percent, which should, on the surface, open up a strong growth opportunity. 5 However, services is a broad area. It’s partly new territory for NEPs, in particular system integration and related changes to business operations. Furthermore, the large IT service providers and software providers are already well established in this segment, which means it presents a different competitive landscape for NEPs to navigate. +4% 2016 100,561 2011 82,807 Professional Services, Total addressable market* USDm +12% 2016 164,800 2011 93,500 Carrier Network Infrastructure Equipment USDm Source: Gartner forecast Carrier Network Infrastructure, Worldwide, 2009-2016, 2Q12 update Source: Informa Telecoms and Media: Managed Services: Strategies for network, service and support systems outsourcing, Dec 2011 * Total addressable market includes services related to Consulting/Advisory, Integration and Management across th e areas of Networks, Data/Applications, and OSS/BSS 9,053 +6% 2016 12,181 2011 Telecom Operations Management Systems, Licenses only USDm Source: Gartner forecast Telecom Operations Management Systems, 2009-2016, 2Q12 update Financial analysis methodology Accenture carried out financial analysis to validate the hypothesis that Network Equipment Providers (NEP) are traded at lower multiples and hence lower investor expectations of their future performance. To do this, we compared NEP peerset performance across a number of financial metrics including: •Currentvalue/futurevaluebreakdownon enterprise value •EnterpriseValueperInvestedCapital •RevenueandFreeCash-Flowdevelopment Peersets include •NetworkEquipmentProviders:Allmain vendors •Telecomoperators(22companiesacross global geographies) •ITserviceproviders(6companies) •OverTheTopserviceproviders(7companies) 1. Source: Pyramid Research DataTracker, Q4 2011 2.Source:Cisco,VirtualNetworkingIndexMobile,2012 3. Source: Accenture analysis based on data from S&P Capital IQ 4. Source: Gartner, Forecast: Carrier Network Infrastructure, Worldwide, 2009-2016, 2Q12 update, June 2012 (Peter Kjeldsen, Ian Keene and Akiyoshi Ishiwata); Gartner, Forecast: Telecom Operations Management Systems, 2009-2016, 2Q12 update, June 2012 (Kamlesh Bhatia, Norbert Scholz and Martina Kurth) 5. Source: Informa Telecoms and Media: Managed Services: Strategies for network, service and support systems outsourcing, Dec 2011 (Kris Szaniawski) Forecast growth per market sector 2 No recovery in sight Over the last decade, the NEP industry has seen increased competition leading to significant consolidation. This has taken the form of M&A activity as well as the development of joint ventures and the failure of some players in the market alongside the emergence of new players from emerging markets. In 10 years, the number of major players has contracted from nine to six, who between them make up more than 80 percent of the market. 6 From 2003 until 2007 NEPs enjoyed steady growth in enterprise value with an almost equal weight consistently placed on current and future values. However, in 2008 as a result of the financial crisis, value collapsed. Future value shrank from an average of 41 percent in 2007 to just 3 percent in 2008. Unlike other companies in the communications sector, NEPs’ value has failed to bounce back. In 2011 the future value of the sector entered negative territory, seeing its total valuation fall by more than 60 percent from peak levels in 2007. Yet in 2007, investors displayed more confidence in the prospects of NEPs than they did for telcos. Today, that has reversed completely, and telecom operators’ value puts them back at the level they were at in 2006, with investors still identifying some future value. 7 In even more marked contrast, however, is the valuation of the most recently emerged segment in the value chain: the over the top (OTT) content and value added service providers. While the comparison has to take into account other factors driving the high valuation given to the segment (such as participation in other industries – there are few pure OTT businesses for which public data is available) investor confidence in the ability of the segment to achieve strong future performance stands in marked contrast to NEPs. IT service providers have also fared better than NEPs, showing steady growth over the last decade, with current values continuing to grow after the financial crisis, and maintaining a consistent proportion of future value over the last few years. An additional measure of investor sentiment is the investor premium on invested capital. Here again, NEPs are seriously underperforming their peers in other industry sub-segments. Investor premium for NEPs is negative and has more than halved since 2003. Given that this headline figure includes an assessment of services (an area that typically requires less capital to generate returns) as well as equipment, the figure may mask an even greater negative sentiment for equipment than face value suggests. From our analysis of available financial data, it’s clear that from an investors’ point of view NEPs do not present an attractive proposition for future returns. On the measures that we used, they compare poorly to other segments of the communications value chain. To try to find out what some of the reasons for that perception might be, we conducted in-depth interviews with investor analysts that cover at least two NEPs. Enterprise value defined •Enterprisevalue=totalvalueofabusiness. Formula: Market capitalization + Net debt •Currentvalue=thepresentvalueofcurrent operations. Formula: Net operating profit less tax/weightedaveragecostofcapital •Futurevalue=theportionofEnterprise value that represents the expectations from investors on future cash-flow levels. Formula: Enterprise value – current value 2,5 1,8 1,2 6,6 1,4 2,0 3,0 7,9 1,9 2,9 5,4 0,9 IT service provider subset OTT subset Telco subset NEP 201120072003 Source: Accenture analysis based on data from S&P Capital IQ Investor premium on Invested Capital multiple (Enterprise Value/Invested Capital) 6. Accenture analysis of company performance 7. Source: Accenture analysis based on data from S&P Capital IQ EnterpriseValue(bnUSD)andFutureValueweight Investor premium on Invested Capital multiple(EnterpriseValue/Invested Capital) 2011 160 -19% 2010 232 15% 2009 241 21% 2008 232 3% 2007 420 41% 2006 357 38% 2005 373 50% 2004 355 48% 2003 343 50% Future value Current value Enterprise Value (bn USD) and Future Value weight 279 6% 280 13% 253 18% 232 8% 330 38% 282 27% 285 37% 238 32% 196 25% 20072006200520042003 20112008 2009 2010 NEPs Telecom operator subset Source: Accenture analysis based on data from S&P Capital IQ 2011 592 49% 2010 477 56% 2009 364 56% 2008 191 45% 2007 357 82% 2006 201 82% 2005 169 83% 2004 78 86% 2003 25 92% OTT subset 2011 433 22% 2010 434 22% 2009 397 21% 2008 287 -4% 2007 366 39% 2006 333 48% 2005 274 41% 2004 276 48% 2003 256 55% IT service provider subset 3 4 7 5 3 6 2 3 4 Predicting/understanding customer demand, market development Lack of detailed information on products, contracts etc Understanding competitive dynamics and differentiation Understanding impact of future technology development Measuring/predicting gross margins Understand operators’ technology roadmaps and intentions Other Top 3 challenges in analyzing the Network Equipment Provider segment Number of responses Base: All (14 interviews) Source: Accenture survey of Network Equipment Provider Investment Analysts, 2012 Top 3 challenges in analyzing the Network Equipment Provider segment A clearer picture needed The survey reveals that analysts face some serious challenges understanding the network equipment industry. They express their difficulty in obtaining a clear picture of the market’s development and associated demand as the largest single barrier, followed by the lack of detailed information on products and NEPs’ contracts as well as more generally the impact of technological development on the future shape of the market and the demand it will drive. While analysts do not find it hard to understand NEP’s present business models, they struggle to display the same confidence when it comes to predicting future earnings and the drivers behind them. And one of the reasons for that lack of confidence is the dearth of information analysts have to help support their view of the industry’s future – and their requests for additional information include both broad and more detailed information. “The disconnect between carrier capex and equipment spending, […] they give their capex budgets only about half the budget or less to spend on active equipment linking what carriers are doing back to what equipment revenues are likely to be.” “…the main problem is actually lack of information on their contracts so it is essentially a business which is determined by some very, very large contracts but we have very little understanding of these contracts.” “How productivity and equipment improve going forward I think is probably the #1 issue […] There are things we know today but it is technology so there will always be innovation.” ”It is really hard to know what is going to happen next. Revenues can be very volatile and market shares can change quickly.” 5 “The OTT guys are high-growth profitability companies, the carriers are low growth but high profitability and the vendors are low growth, low profitability companies. That’s why the multiples move the way they do.” “…for OTT’s, compare growth… … service providers show superior earnings and stability in earnings compared to the equipment vendors.” “The over the top guys are growing, the other ones (NEPs and Telcos) aren’t.” Revenue & Free Cash-Flow (USD m) NEPs 200,000 100,000 0 201120102009200820072006200520042003 40,000 30,000 20,000 10,000 0 400,000 300,000 Revenue Huawei revenue FCF Source: Accenture analysis based on data from S&P Capital IQ, Accenture survey of Network Equipment Provider Investment Analysts, 2012 OTT subset 40,000 30,000 20,000 10,000 0 100,000 200,000 300,000 0 201120102009200820072006200520042003 FCF Revenue Revenue & Free Cash-Flow (USD m) Comparing segments When asked about the difference in the basis for valuing NEPs compared with OTTs and telcos, investor analysts generally point to the difference in growth. Some analysts ascribe the slightly higher valuation of the telcos to their higher and more stable earnings. Analysts see the returns from investments in telcos producing smoother returns, with fewer surprises. NEPs, on the other hand, have been subject to significant volatility and cyclicality. 6 Variation from Analyst Consensus on Net Income in quarterly reporting, 2006-2011 NEP Telco subset IT Service Provider subset Telco subset average IT Service Provider subset average NEP average % of Reporting Times Below Consensus Expectations 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Average Negative Deviation from Consensus Expectations, (% of revenue) 16%14%12%10%8%6%4%2%0% VariationfromAnalystConsensusonNetIncomeinquarterlyreporting,2006-2011 Not only do NEPs have more volatile earnings, they also more frequently fail to communicate effectively with investors about those fluctuations. On average, in two out of three reporting instances over the past five years NEPs failed to meet analyst consensus on earnings (net income), and negative deviations expressed as a percentage of revenue are on average 6.1 percent. 8 This is clearly higher than for the IT service provider peer set studied during the same period. NEPs also on average underperform when compared to the telco peer set. However there are big differences in the performance of individual companies in both groups. 8. Source: Accenture analysis based on data from S&P Capital IQ 7 No future consensus Analysts’ recommendations about where NEPs should invest show no clear consensus. They demonstrate a wide range of views about the extent to which investments should be focused on existing and new revenue opportunities. The areas for future investment are similarly vague and diverse with very few concrete suggestions – though solutions to manage data and traffic bottlenecks attract the largest number of recommendations. The conservatism of those views is echoed in analyst projections of the shape of the industry in the future. Most believe that there will be fewer larger providers in five years’ time, and believe that network equipment will remain the core business for leading competitors, though some argue that provision of services will dominate in future. In sum, analysts’ relative pessimism about the prospects for the sector continues to depress their assessments of value. They see little evidence that the growth the sector experienced in the years between 2003 and 2007 will return. 9 However, the lack of evidence that they see may be partially explained by the lack of information that they identify and the associated inability to spot the future trends – whether in the market, from technology or from customers – that will drive future growth. “I think there is [sufficient] investor confidence. I don’t know if much can be done to boost it any further ” “[Owing to] cyclicality [these businesses] can go from boom to bust very quickly and with very little warning, [therefore] you don’t want to overpay for these companies.” “[One challenge] for investors [is that they] can be completely blindsided by a real slowdown - [without that] it would be more predictable and they could invest with more confidence.” 9. Source: Accenture survey of Network Equipment Provider Investment Analysts, 2012 Investor analysts’ examples of attractive investment areas Most attractive investment balance between existing and new revenue opportunities 0% 20% 40% 60% 80% 100% Analyst K Analyst J Analyst I Analyst H Analyst G Analyst F Analyst E Analyst D Analyst C Analyst B Analyst A Existing New 8 2 3 6 Higher level networking (layer 4-7) Next generation wireless in general Solutions to manage data and/or reduce traffic bottle necks Other • When asked, most investor analysts suggest investments in traditional network equipment domains • Several investor analysts want to see investments in technology to help operators manage the growing data volumes • Expansions into new domains, such as new verticals, or new business models, such as Cloud computing, are not frequently mentioned • There is no consensus view among the investor analysts on how investments should be balanced by existing and new revenue opportunities Source: Accenture survey of Network Equipment Provider Investment Analysts, 2012 Number of responses Base: All (14 interviews) Most attractive investment balance between existing and new revenue opportunities Investor analysts’ examples of attractive investment areas •Thereisnoconsensusviewamongthe investor analysts on how investments should be balanced by existing and new revenue opportunities •Whenasked,mostinvestoranalysts suggest investments in traditional network equipment domains •Severalinvestoranalystswanttosee investments in technology to help operators manage the growing data volumes •Expansionsintonewdomains,suchasnew verticals, or new business models, such as Cloud computing, are not frequently mentioned Investor analysts’ examples of attractive investment areas Most attractive investment balance between existing and new revenue opportunities 0% 20% 40% 60% 80% 100% Analyst K Analyst J Analyst I Analyst H Analyst G Analyst F Analyst E Analyst D Analyst C Analyst B Analyst A Existing New 8 2 3 6 Higher level networking (layer 4-7) Next generation wireless in general Solutions to manage data and/or reduce traffic bottle necks Other • When asked, most investor analysts suggest investments in traditional network equipment domains • Several investor analysts want to see investments in technology to help operators manage the growing data volumes • Expansions into new domains, such as new verticals, or new business models, such as Cloud computing, are not frequently mentioned • There is no consensus view among the investor analysts on how investments should be balanced by existing and new revenue opportunities Source: Accenture survey of Network Equipment Provider Investment Analysts, 2012 Number of responses Base: All (14 interviews) 8 Regaining investor trust Addressing investors’ concerns is likely to require two fundamental things: first, delivering both top and bottom-line growth and second, enabling better predictability by stabilizing earnings and communicating performance to the market more effectively. In a context, such as the NEP industry, where companies are struggling to deliver on the former, the latter is still important but may not yield a significant positive impact on investors’ trust. But for all companies, effective execution and demonstrating tangible results is key to regaining investors’ trust. NEPs need to establish some clear and measurable success stories before they set expectations about future performance. The range of industry options While this paper does not intend to address the fundamental growth challenge facing the NEP industry, it is worth reflecting on the various positions in which different NEP players find themselves. Each of the major NEP players exhibits different financial positions, as shown by the growth-and spread-matrix (above). Companies with a positive spread should focus on growing top line with maintained margin. Creating growth in a mature market is not easy and there is no one-size-fits-all solution. Essentially, companies have two options. They can either try to capture additional market share, or they can grow their addressable market by expanding their coverage both horizontally and/orvertically.Weseeexamplesofboth in the market. One of the more successful examples of the latter is Ericsson’s expansion into the service domain. Another example, which is too early to evaluate, is Huawei’s move into semiconductors. Companies with negative spread but positive growth could remain in this position short- term to gain market share, but eventually need to define a plan to turn the growth they achieve into a sustainable business. Fast- growing companies in particular could have much to gain from taking measures to improve their internal efficiency. For companies with negative spread and negative growth, survival is the name of the game. Finding a way out of their current position could be very challenging. They need to focus on one dimension at a time and should prioritize profitability over top line growth. One option for them could be to focus on specific areas where they could establish a profitable position as one of the leading competitors and divest other, non-profitable segments. Stabilize and communicate Companies in the sector will need to achieve closer alignment between reported results and consensus forecasts. That means avoiding successive profit warnings that have been so obviously damaging to investor trust. NEPs may also need to explore business models that can help smooth the flow or revenues and profits in order to reduce the obvious manifestations of volatility that have made it hard for analysts to create a picture of future performance. As well as addressing performance stability, NEPs may need to invest time in how they communicate with investors. There is a clear information gap between what analysts are able to acquire today and what they say that they need to make more accurate assessments of potential for the sector. NEPs should, where possible, try to augment existing information with the insights that could serve to increase investors’ analysis -20 -10 0 10 20 -30 -20 -10 0 10 20 30 Company 5 Company 1 Company 3 Company 2 Company 8 Company 7 Company 6 Company 4 Spread* (Percent) Year-on Year Revenue Growth (Percent) Growth and Spread Matrix over Network Equipment Providers, Fiscal Year 2011 * Spread: Post-tax Return on Invested Capital less the Capital Charge of future developments. While balancing transparency with competitive pressures is clearly not easy, the more information that NEPs can offer the greater their chances of increasing levels of trust among investors. That may mean creating a clearer link between the evolution of technology and its likely impact on financial performance. It may also mean providing guidance on future market trends and company performance. That might involve rethinking how performance is reported by redrawing it in line with different segments or categories that are independent of organizational structures, for instance by giving insights into volumes and related financial dynamics for both services and products. In that way, analysts will have greater transparency and find it easier to make comparisons over time than they do today. And finally Our analysis shows that NEPs have considerable work to do to transform their prospects. But with the continued strong growth across all markets in the need for better, faster and broader data networks there is still much to play for. There are opportunities for NEPs to capture growth and generate profits. But they need to make sure that they create and communicate a clear strategic response to investors in order to rebuild trust. Growth and Spread Matrix over Network Equipment Providers, Fiscal Year 2011 9 . Network Equipment Providers Restoring Investor Trust 1 Global penetration of mobile data subscription. a clear strategic response to investors in order to rebuild trust. Growth and Spread Matrix over Network Equipment Providers, Fiscal Year 2011 9 10 Contact