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News from Members Global telecoms operators should overhaul their performance metrics

Global telecoms operators should overhaul their performance metrics

by EY March 8, 2013

Website www.ey.com

The fast-changing nature of the telecommunications sector is driving the need for substantive changes in the ways operators measure and report their operational and financial performance according to Metrics transformation in telecommunications, a new report by Ernst & Young to coincide with the World Mobile Congress. Current metrics have not kept pace with business model changes and operators must align information assets and reporting to an environment where they are offering a growing range of data-centric services.

Overall, the industry’s performance has been resilient but unexciting over this period. According to the new Ernst & Young’s Institutional investors survey, only 11% of respondents cited telecommunications as a top sector to invest in, compared to technology (20%), oil & gas (26%) and consumer products (27%).

In these conditions, metrics in telecommunications need to reflect take-up of new services while also providing greater granularity in terms of profitability of data services. For example, smartphone take-up has proved to be a double-edged sword given the effect of device subsidies on margins. At the same time, new types of coverage and penetration metrics will be needed to communicate the socio-economic benefits of new infrastructure. Ultimately, new performance metrics can do much to help investors evaluate the sector and its transformational qualities in the years to come.
Current metrics fail to capture growth and profitability
Performance metrics commonly used across the industry, such as net additions and Average Revenue Per User (ARPU), are no longer sufficient to provide management and investors with a compelling story. Instead, telecoms operators need to provide the evidence that the business model is performing well and that there is a solid track record of growth and an actionable plan to sustain profitability.

In addition, many new connections are now being generated by multi-SIM consumers and by enterprise and machine-to-machine connections, blurring what a net addition means. These new types of connectivity also have very different usage revenue and margin profiles compared with traditional customer base.

Future successful players will differentiate through their ability to up-sell new services to existing customers in both the consumer and enterprise markets. Metrics such as revenue generating units per subscription have already been successfully leveraged by cable companies – operators should find new ways to communicate the benefits of a widening services portfolio.
A wider set of financial metrics is vital
On the financial side, operators should consider moving beyond earnings before interest, tax, depreciation and amortization (EBITDA) as a primary metric. Core earnings do not factor in capital expenditure, which is very much a key concern for investors as they consider the infrastructure upgrades required to support new demand scenarios.

Metrics such as return on capital employed (ROCE) and return on invested capital (ROIC) are becoming more important tools through which performance can be assessed. In addition, new services offered by operators would benefit from evaluation through a wider set of financial metrics beyond EBITDA margin, which has been the mainstay of operator financial reporting for many years.
Migrating to new metrics will bring additional challenges
Operators are already starting to move forward to new industry metrics – the rise of Average revenue per account (ARPA) in the United States is one such example. Yet the need to build industry consensus on new metrics is paramount, while operators should also ensure that their systems and processes are able to capture new insights in a consistent way.

Looking ahead, as operators migrate to new metrics, they should bear in mind a number of key considerations. This involves evaluating which metrics should be used to communicate profitability at a time when margins remain under pressure, but also the internal challenge of ensuring that data can be collected in a consistent and robust manner. Greater levels of comfort with internal metrics will in turn spur more confident communications of performance levels externally.

About Ernst & Young
Ernst & Young is one of the world's leading professional services firms with approximately 167,000 employees in 700 offices across 140 countries, and revenues of approximately $24.4 billion in 2012. Our network is the most integrated at global level and its vast resources allow us to help our clients benefit from every opportunity. In Romania, Ernst & Young has been a leader on the professional services market since its set up in 1992. Our over 500 employees in Romania and Moldova provide seamless assurance, tax, transactions, and advisory services to clients ranging from multinationals to local companies. Our offices are based in Bucharest, Cluj-Napoca, Timisoara, Iasi and Chisinau. For more information, please visit www.ey.com

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