Telecommunications operators and working capital management 2014

Cash on the lineTelecommunications operators and working capital management 2014

2 | Cash on the line

Summary03

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Europe: improvement in net trade WC performance in 2013

North America: deterioration in net trade WC performance in 2013

Other regions and countries: diverging trends in net trade WC performance in 2013

Driving WC excellence

How EY can help

Methodology

Glossary

Contacts

Contents

3Telecommunications operators and working capital management 2014 |

In contrast, North American operators saw their net trade WC performance deteriorate in 2013 relative to 2012, marking a break with the steady improvement seen in previous years.

In the eight other regions and countries covered by our survey, operators reported diverging trends in net trade WC performance in 2013 relative to 2012.

These overall WC results were achieved against a backdrop of intense competition, challenging economic and market conditions, regulatory pressures, increased M&A activity and rapid technological developments (with the traditional dividing lines between the formerly distinct segments of technology, media and telecommunications becoming increasingly blurred).

WC management in recent years, although they largely differ in

But as the industry’s business models evolve, and with many of the most readily available opportunities already either fully exploited or traded off against sales growth, margin expansion or customer experience enhancement, managing WC is becoming

under considerable pressure from factors that include increased complexity in billing systems management and additional investment in smartphones and infrastructure, such as the development of installment payment plans.

However, the continuing wide variations in WC performance

for further improvements in WC management. Our research indicates that the leading 15 European operators have up to €24 billion unnecessarily tied up in WC, equivalent to 7.5% of their combined sales. For the six main operators in North America, the

combined sales.

To capitalize on this opportunity, leading operators will need to focus on a number of key initiatives, including:

Managing WC as a strategic initiative, including taking a balanced approach to cash, costs, customer experience and risks

Improving billing and collection and enhancing dispute management

More effectively managing payment terms for suppliers

access to their market and product expertise

More effectively managing interconnection agreements

Improving demand forecasting processes

Aligning executive compensation with the appropriate WC performance measures

Operators may also be able to identify additional opportunities for releasing cash in non-trade WC areas.

For 2014, we expect WC results to show even wider divergences

failure of their efforts to adapt their business models to this new and evolving landscape.

Cash on the line 2014 is the latest in a series of working capital (WC) management reports based on EY research.The results from our analysis of leading telecommunications operators in Europe in 2013 shows an improvement in net trade WC performance compared with 2012, following relatively little change in performance between 2012 and 2011.


The results from our analysis of leading telecommunications operators in Europe in 2013 shows an improvement in net trade WC performance compared with 2012, following relatively little change in performance between 2012 and 2011. The net trade WC to sales ratio dropped from -4.8% in 2012 to -5.2% in 2013. Cash-to-cash (C2C) fell by 1.6 days to a

Out of 15 companies analyzed, 12 (or 80% of the total) reported better net trade WC results (11 companies saw improved C2C performance), posting a positive swing of 0.8% overall. In contrast, the worst performers saw a deterioration of 1.1%.

Table 1: Change in WC metrics, 2012–13

Days 2013 Change from 2012

52.0 0%

DIO 5.5 2%

DPO 61.3 3%

C2C -3.8 down 1.6 days

% sales 2013 2012

Net trade WC -5.2% -4.8%

Table 2: Number of companies showing improved WC performance, 2013 vs. 2012

Days Change 13/12

DIO reduction 6

DPO enhancement 11

C2C reduction 11 out of 15

Net trade WC reduction 12 out of 15

01 EuropeImproved net trade WC performance in 2013

C2C (cash-to-cash), with metrics calculated on a sales-weighted basis.


This stronger WC performance in 2013 was due to an increase in DPO (up 3%), partly driven by higher investment in new handsets

remained unchanged. In contrast, the levels of advance billing (amounts billed in advance for line rentals and subscriptions) declined from 4.3% to 4.1% of sales.

A number of factors may explain these WC variations, each with varying impacts on different companies:

Accelerated fall in revenues. Compared with 2012, overall sales by the operators in our survey fell by as much as 4%, negatively affected by highly competitive market conditions,

coming from data increased further, boosted by rising usage of smartphones. The number of cross-border and regional merger deals and proposals in Europe was much higher than the year before, driven by the search for new sources of growth and cost and capital spend synergies.

Stable receivables performance. Contrasting with the downward

2013. However, had one large operator been excluded from our

year-on-year. Operators have continued to focus on tightening billing cycles and increasing direct-debit penetration. They have

target customers based on risk and prior past performance.

by a number of negative trends, including the sustained rise in the postpaid subscriber base and increased complexity in billing systems management, driven by the development of bundled services. Business customer payments have also remained erratic.

with 4 of them showing a decrease of over 5%.

Slightly weaker inventory results. Increased investment in smartphones and related infrastructures led to a further buildup in inventory, which more than offsets progress made in rationalizing product and service offerings and in pursuing more active collaboration strategies with equipment suppliers. Nine out of 15 operators reported weaker results. However, it is worth noting that the overall deterioration in inventory performance has remained limited in spite of the shift toward more expensive handsets. This suggests that supply chains have become more

Stronger payables performance. In contrast with last year, operators’ payables performance improved, notably on the back of further extension in payment terms and increased use of

increase in capital expenditure in relation to sales (from 15.4% in 2012 to 16.5% in 2013). The reported changes in payables

and tactics. For example, some have been stretching their terms with suppliers or reducing their supplier base to achieve greater leverage in negotiations. Meanwhile, others have opted to pay faster in return for bigger cash discounts or have tightened their payment processes to focus on adherence to contractual terms, payment trigger points and payment-run frequency. Increased outsourcing and network-sharing agreements have also continued

as 11 operators reported a higher DPO, with 6 of them showing an increase of over 5%. Note, however, that payables performance may have been affected by a revised European directive aimed at

2013 at the latest.

Reduction in the levels of advance billing. Last year’s drop in the levels of advance billing in relation to sales was due to the rising proportion of postpaid revenues, as customers increasingly use smartphone devices with bundled voice and data service plans. Eight operators posted lower advance billing to sales ratios.

In these latest results, the net trade WC to sales ratio for telecommunications operators in Europe reached a new low at -5.2%. It has been dropping since 2000, when it stood at +1.6%.

However, it is worth noting that the rate of WC improvement has

in the net trade WC to sales ratio since 2008. While operators remain very focused on cash, this may indicate that many of the most readily available opportunities have been already either fully exploited or traded off against margin expansion. The positive impact on performance of changes in the industry service sales mix and payment practices — including increases in the proportion of revenues generated from mobile services and in the number of customers using direct debit — also seems to have been less

The increasing penetration of smartphones and tablets (with a shift toward more expensive handsets, more data and larger bills) was a further negative factor.

Receivables have been the main contributor to WC improvement

2008 and 2013. Inventory performance also improved (DIO down 21% since 2000), but its impact remains small in comparison with other WC metrics given the relatively low level of inventory inherent to this business. Payables performance was also slightly better in 2013 compared with 2000, with DPO up 2%. In contrast, levels of advance billing in relation to sales declined from 4.4% to 4.1% over the same period.


Wide variations in current net trade WC performance among operatorsCurrent net trade WC performance continues to vary widely among different operators in Europe overall and for each metric.

In 2013, the average levels of net trade WC to sales and C2C for the European telecommunications operators were -5.2% and -4 days, with spreads of 5.5% and 17 days, respectively

respectively, with spreads of 17 days, 3 days and 15 days, respectively. Other trade WC average was -4.1%, with a spread of 2.5%.

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

2000

2001

2002

2003

2004

2004

R

2005

2006

2007

2008

2009

2010

2011

2012

2013

Figure 1: Net trade WC to sales ratio, 2000–13

Average* Top quartile Bottom quartile deviation

52 47 70 17

DIO 6 5 8 3

DPO 61 76 53 15

C2C -4 -11 16 17

Other trade WC/sales

-4.1% -3.7% 2.5%

Net trade WC/sales

-5.2% -8.1% 0.1% 5.5%

Table 3: WC performance distribution per operator, 2013

*Weighted

Opportunity for improvementThe wide variations in net trade WC performance among different operators in Europe revealed by our research point to further

the leading 15 operators.

We have calculated this gap by comparing the performance of the WC components of each company (including other trade WC) with that of the average (low estimate) and the upper quartile (high estimate) of its regional peer group. Even at the top end of

geographies shows that a dedicated focus on WC management can often realize results at or above this level.

Differences in WC performance among operators may be partially due to variations in the mix of product and services, customer base (residential, small, medium-sized and large companies),

suggests that operators fundamentally differ both in the degree of management focus on cash and in the effectiveness of WC processes.

Our high-level benchmarking analysis indicates that the leading 15 European operators have between €12 billion and €24 billion of cash unnecessarily tied up in WC processes, equivalent to between 3.8% and 7.5% of their combined sales. The range of cash opportunity is higher than a year before (when it was between 3.7% and 7.2% of sales on the same calculation basis), mostly

Note that with most operators across Europe now relying on the same limited number of global equipment suppliers, companies’ efforts to realize the potential opportunity in payables should not

individual performance in this area.

* WC scope = sum of trade receivables, inventories, accounts payable and other trade WC

except two operators (March 2014).

Table 4: WC cash opportunity, 2013

Value (€b) % WC scope* % sales

Average Upper quartile



Receivables 2.7 6.4 6% 14% 2.0%Inventories 0.2 4% 0.1% 0.3%Payables 6.2 13.5 12% 2.0% 4.2%Other trade WC 3.0 3.2 23% 24% 1.0%

Total 12.1 24.0 10% 20% 3.8% 7.5%


Figure 2: Net trade working capital in relation to sales per operator, 2013

4.1%

Sale

s

6%

4%

2%

0%

-2%

-4%

-6%

-8%

-10%

-12%

-14%

-16%

1.5% 1.3% 1.2%

Average2013

-1.0% -1.1%-1.9% -2.2%

-5.2%-7.0% -7.7% -7.9% -8.4% -8.6%

-11.9%

-14.6%

Figure 3: C2C per operator, 2013

3240

30

20

10

0

-10

-20

-30

2017 17 15

128 8

-4 -6 -7 -10-12

-16-20

-26Average2013

Days

Figure 4: DSO per operator, 2013

96100

90

80

70

60

50

40

30

20

10

0

8479

74

6560 59

53 53 52 51 5144 41 40 39Da

ys

Average2013

European telecoms: WC performance comparisons

Figure 5: DIO per operator, 2013

121110

9876543210

Days

Average2013

1111

99

6 66 6 6 6 6

5 54 4

3

Figure 6: DPO per operator, 2013

90

80

70

60

50

40

30

20

10

0Average

2013

8983

78 77 7670

63 61 59 57 57 55 52 5144

40Days

Source: annual accounts in December 2013, except two operators (March 2014).


Net trade WC performance in 2013 deteriorated for North American operators relative to 2012, in sharp contrast with the steady progress made in previous years. The net trade WC to sales ratio increased from -0.6% to -0.4%. However, C2C was marginally better. There were identical numbers of operators showing improved or worse net trade WC results (and four operators out of six showing improved C2C performance).


Days 2013 Change from 2012

38.2 -2%

DIO 4.6 0%

DPO 32.6 -2%

C2C 10.2 -1%

% sales 2013 2012

Net trade WC -0.4% -0.6%

Change 13/12

4

DIO reduction 4

DPO enhancement 3

C2C reduction 4 out of 6

Net trade WC reduction 3 out of 6

Table 6: Number of companies showing improved WC performance, 2013 vs. 2012

(cash-to-cash), with metrics calculated on a sales-weighted basis.

02 North AmericaDeterioration in net trade WC performance in 2013


This weaker net trade WC performance in 2013 was due to the combination of a further decrease in levels of advance billing in relation to sales (from 3.4% to 3.2%) and a fall in DPO (down 2%).

unchanged.

In contrast with Europe, overall sales by the operators in our survey continued to grow, up 2% in 2013 compared with 2012.

As in Europe, North American operators are seeing a shift of revenues toward data. Consolidation also continued apace, with the traditional dividing lines between the formerly distinct areas of technology, media and telecommunications becoming increasingly blurred, resulting in increased complexity and risk in managing businesses.

Another feature for the North American industry last year was the decision of another large operator to offer installment payments plans for smartphones (through which new phones are no longer subsidized by the operator, but either fully paid up front or paid off in installments tacked on to the monthly bills by the phone subscriber). For those operators, these value plans have and will

customer base grows and migrates from the old plans into the new ones.

In these latest results for 2013, the net trade WC to sales ratio for telecommunications operators in North America rebounded from a low in 2012 to a level (-0.4%) that remained well below that seen

DIO was up marginally while levels of advance billing decreased from 3.6% to 3.2% of sales. Over the period under review, four out of six operators in North America reported improved performance in net trade WC and C2C.

Compared to their counterparts in Europe, North American operators continue to carry higher levels of net trade WC in

(six days versus a negative nine days). Part of this performance

and postpay, with North America exhibiting a much lower ratio of prepaid subscribers than Europe (albeit with sharp differences in rates across countries). In addition, direct-debit penetration rates

the extent of the disparity in performance suggests that North

cash conversion cycles, notably on the payables cycle.

Interestingly, the level of bad debt on North American operators’ balance sheets in relation to sales remains well below that seen in Europe (2.7%). Having fallen steadily since 2006, it reached a new

and customer provisioning policies. However, keeping bad debt at

of customers deciding to upgrade to smartphones and paying for their handsets over time continues to grow.

Wide variations in current net trade WC performance among operatorsCurrent net trade WC performance continues to vary widely among different operators in North America overall and for each metric.

In 2013, average levels of net trade WC to sales and C2C among North American telecommunications operators were -0.4% and 10 days, with spreads of 2.2% and 7 days, respectively (using

DPO averages were 38 days, 5 days and 33 days, respectively,

trade WC average was -3.2%, with a spread of 1.3%.

Table 7: WC performance distribution per operator, 2013

*Weighted

Average* Top quartile Bottom quartile

Standard deviation

38 37 41 6

DIO 5 3 4

DPO 33 41 28

C2C 10 16 7

Other trade WC/sales

-3.2% -4.0% -3.3% 1.3%

Net trade WC/sales

-0.4% -2.5% 1.1% 2.2%


North American telecoms: WC performance comparisons

1.4% 1.3% 1.2%0.8%

-0.4%

-2.8%

-3.7%

2%

1%

0%

-1%

-2%

-3%

-4% Average2013

Sale

sDa

ys

19

16

1413

10

7

0

Average2013

20

16

12

8

4

0

Days

52

41 40 38 38 37 36

55

45

35

25

15

5

-5Average

2013

10

12

65

3 3 3

Average2013

14

12

10

8

6

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2

0

Days

Days

Average2013

50

45

40

35

30

25

20

15

10

5

0

48

4239

33 33

2723

Figure 7: Net trade working capital in relation to sales per operator, 2013

Figure 8: C2C per operator, 2013

Figure 9: DSO per operator, 2013

Figure 10: DIO per operator, 2013

Figure 11: DPO per operator, 2013


Opportunity for improvementThe variations in net trade WC performance among North American operators revealed by our research suggest some potential for improvement.

A high-level benchmarking analysis indicates that the six leading

range of cash opportunity is wider than a year before (when it was between 1.8% and 2.8% of sales on the same calculation basis).

America are much lower than in Europe. This is partly due to the fact that the number of surveyed operators is much lower, but also because of the homogeneity in payment practices as opposed to the wide variations seen in many European countries.

Table 8: WC cash opportunity, 2013

* WC scope = sum of trade receivables, inventories, accounts payable and other trade WC

Cash opportunity

Value (€b) % WC scope* % sales

Average Upper quartile Average Upper quartile Average Upper quartile

Receivables 0.7 1.6 2% 5% 0.2% 0.5%Inventories 0.7 1.4 17% 33% 0.2% 0.4%Payables 2.3 3.8 8% 16% 0.7% 1.1%Other trade WC 2.8 3.1 26% 0.8%

Total 6.5 9.9 8% 12% 1.9% 3.0%


In the eight other regions and countries covered by our survey (namely Africa and

and Eastern Europe, India, Latin America, and Russia), operators reported diverging trends in net trade WC performance in 2013 compared to 2012.

There were a similar number of regions and countries showing an improvement in net trade WC performance (Africa and Middle East, China, Japan and Russia) to those that showed a deterioration (Asia-

and Latin America). However, out of a total of 34 operators, as much as two-thirds reported a higher net trade WC to sales ratio in 2013 than in 2012.

03 Other regions and countriesDiverging trends in net trade WC performance in 2013


Net trade WC/sales

Africa and Middle East

Asia- Central and Eastern Europe

China India Japan Latin America

Russia

2013 -3.1% 1.0% 2.6% -35.0% -12.6% -0.4%

2012 1.4% -34.0% -13.7% 10.4% -0.5% -6.6%

C2C Africa and Middle East

Asia- Central and Eastern Europe

China India Japan Latin America

Russia

2013 4 18 16 -32 45 8 -16

2012 4 17 12 -74 -33 44 6 -12


Variations in net trade WC performance Performance in individual regions and countries varies

postpaid on the other, as well as by local payment practices and methods and levels of capital expenditure in each marketplace.

Of the other eight regions and countries, China and India exhibit the lowest levels of net trade WC in relation to sales. This can be attributed to a high DPO (on the back of large capital

of mobile revenues, combined with a high proportion of prepaid subscribers).

remains second-best in class, thanks to the importance of mobile revenues, combined with a high proportion of prepaid subscribers.

and low levels of advance billing.

With regard to other regions and countries, the net trade WC to sales ratio ranges between -2% and -3%.

Overall, two-thirds of operators exhibit a negative net trade WC, as well as a negative receivables and payables cycle differential.

Table 10: WC metrics by region, 2013

Africa and Middle East

Central and Eastern Europe

China India Japan Latin America Russia

58 57 63 15 36 82 45 30

DIO 6 5 4 6 0 14 6

DPO 60 43 52 100 68 51 55 52

C2C 4 18 16 -32 45 8 -16

Net trade WC/sales

-3% 1% 3% -35% -13% 10% 0% -8%

13Telecom operators and working capital management 2014 | 13Telecommunications operators and working capital management 2014 |


Driving WC excellence Case studiesAs the pace and scale of industry change continue to escalate and the rate of C2C reductions slows down, leading telecommunications operators seeking to achieve further progress in WC will need to focus on a number of key initiatives. These include:

Managing WC as a strategic initiative, including taking a balanced approach to cash, costs, customer experience and risks

Improving billing and collection and enhancing dispute management

Building cash into product design and customer acquisition strategies

Increasing direct-debit penetration and changing advanced billing

Enhancing customer acquisition and risk management processes

Tightening up controls around terms and effective terms

accelerate invoice production

Consolidating and controlling spend

More effectively managing payment terms for suppliers, including renegotiation of terms

to ensure access to their market and product expertise

Improving demand forecasting processes, working more closely with telecommunications equipment suppliers and content providers

Introducing vendor-managed inventory techniques

More effectively managing interconnection agreements

better

Aligning executive compensation with the appropriate WC performance measures

a number of initiatives to improve receivables management during the past few years, but it felt that there was still scope to improve performance further.

processes and design an action plan to implement leading practices. The planned steps included setting up a collection and dispute management process, designing a receivables management organizational

introducing reports and metrics to monitor and assess progress, and putting in place the right incentives to motivate and change internal behaviors.

telecommunications operator to implement a global supplier payments extension program. This involved segmenting the supplier base by industry and country and implementing changes to payment terms, trigger and frequency, all while ensuring compliance with the latest 2013 European payment directive (including understanding the accepted exceptions to the rules based on location and industry) and documenting the related policies and processes. Recommendations for new standard terms were based on a review of the main suppliers’ median and third-quartile receivables performance.


can helpEY’s global network of dedicated working capital professionals helps clients to identify, evaluate and prioritize realizable improvements to liberate

changes to commercial and operational policy, process, metrics and procedure adherence.

We can assist organizations in their transition to a cash-focused culture and help implement the relevant metrics. We can also identify areas for improvement

implementing processes to improve forecasting and frameworks in order to sustain those improvements.

WC improvement initiatives often create value.

improvements, from reduced transactional and operational costs, and from lower levels of bad and doubtful debts and inventory obsolescence. Our WC professionals are there to help wherever you do business.


This report is based on a review of the net trade WC performance of the largest telecommunications operators (by sales) headquartered in Europe (15 operators), North

Canadian operators) and seven other regions and countries (34 operators in total across Africa and Middle East,

America and Russia).

off-balance-sheet arrangements. In the absence of detailed accounts, for some operators, trade accruals have been estimated.

regions, countries and operators. It uses metrics to provide a clear picture of overall WC management and identify the resulting levels of cash opportunity.

operators is not disclosed.

The companies included in our report are as follows:

Europe: Belgacom, BT, Deutsche Telekom, KPN, Orange,

and Vodafone

North AmericaTelus and Verizon

Other regions and countries: América Móvil, Batelco, Bharti Airtel, BTC, Cesky Telecom, China Mobile, China Telecom,

Argentina, Telecom Malaysia, Telecom New Zealand, Telstra,

Net trade working capital cycle = receivables cycle plus inventories cycle minus payables cycle

Receivables cycle = trade receivables plus unbilled/trade-accrued income plus work in progress minus current advance billing and customer prepayments

DSO (days sales outstanding): year-end trade receivables net of provisions, including VAT, added-back unbilled/trade-accrued income, securitized receivables and work in progress, divided by full-year pro forma sales and multiplied by 365 (expressed as a number of days of sales, unless stated otherwise)

installations that have not been billed and should have been billed; unbilled receivables when reported separately have been added back to trade receivables

advance for line rentals and subscriptions

Payables cycle = trade payables plus trade-accrued expenses minus supplier prepayments

DPO (days payable outstanding): year-end trade payables, including VAT and added-back trade-accrued expenses, divided by full-year pro forma sales and multiplied by 365 (expressed as a number of days of sales, unless stated otherwise)

interconnect and roaming charges and retailer commissions

Inventories cycle = inventories net of provisions minus work in progress

DIO (days inventory outstanding): year-end inventories net of provisions minus work in progress, divided by full-year pro forma sales and multiplied by 365 (expressed as a number of days of sales, unless stated otherwise)

C2Cas a number of days of sales, unless stated otherwise)

Pro forma salesand disposals when this information is available

Methodology


Country Local contact Telephone/emailAmericas +1 212 773 0562

[email protected]

UK&I Jon Morris

Matthew [email protected]

Paul [email protected]

Marc [email protected]

US Edward Richards +1 212 773 [email protected]

Peter [email protected]

Mark Tennant +1 212 773 [email protected]

Eric [email protected]

Asia Alvin [email protected]

[email protected]

[email protected] +33 1 55 61 00 67

Germany Dirk [email protected]

Bernard [email protected]

Benelux +31 88 407 [email protected]

India Ankur Bhandari [email protected]

Finland

Latin America +5411 4318 [email protected]

Sweden

[email protected]

[email protected] Forst

[email protected]

[email protected]

[email protected] van Droogenbroek

[email protected]

Working Capital Services contacts Telecommunications Sector contacts

Contacts



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Telecommunications operators and working capital management 2014