Cash on the line. Telecommunications operators and working capital management 2013

Transcription

1 Cash on the line Telecommunications operators and working capital management 2013

2 About EY s Global Telecommunications Center Telecommunications operators are facing a rapidly transforming business model. Competition from technology companies is creating challenges around customer ownership, and service innovation, pricing pressures and network capacity are intensifying scrutiny on return on investment. Additionally, regulatory pressures and If you are facing these challenges, we can provide a sectorbased perspective to address your assurance, advisory, transaction and tax needs. Our Global Telecommunications Center is a virtual hub that brings together people, cultures and leading ideas from across the world. Whatever your need, we can help you improve the performance of your business. 2 Cash on the line

3 Contents Foreword 4 Europe: unchanged net trade WC performance in North America: further improvement in net trade WC performance in Other regions and countries: diverging trends in net trade WC performance in Driving WC excellence 16 Case studies 16 How EY can help 17 Methodology 18 Glossary 18 Contacts 19 Telecommunications operators and working capital management

4 Foreword Cash on the line 2013 is the latest in a series of working capital (WC) management reports based on EY research. With revenues under pressure, the global telecommunications service industry has continued to evolve rapidly striving to capture the growth potential from data bundling of services and and improving returns on capital. Against such a challenging background, most operators have maintained their focus on WC management as a lever for improving cash, reducing costs, enhancing customer service, boosting network differentiation and funding new investment. Yet, as the pace and scale of industry change continue to grow and with the low-hanging fruit in this area already largely harvested, managing WC will become increasingly challenging. Factors such as the rising penetration of smartphones with expensive handsets and the economic strain caused by the subsidy model will put receivables and inventories under unprecedented pressure. The leading operators of the future will be those that embrace more substantial and sustainable operational and structural changes in the way they address WC. This will mean targeting all the key operational levers and ensuring that a robust supporting infrastructure is in place, including focused metrics, aligned incentives and strong risk management policies and processes. Other essential enablers include improved billing and cash collections, more effective leveraging of procurement, closer initiatives. Operators will also need to adopt an approach that strikes the right balance between cash, cost and service levels. 4 Cash on the line

5 Results for European telecommunications operators in 2012 show a stability in net trade WC performance compared with 2011, against a backdrop of ever-growing demand for data, regulatory changes and challenging economic conditions, especially in certain South European countries. This is in sharp contrast to the gains achieved in recent companies showing better results. Nevertheless, compared to their counterparts in Europe, operators in North America continue to carry higher levels of net trade WC in relation to sales. While part of the performance gap can be explained by differences in the mix of revenues, payment terms and usage, it suggests that they could the payables cycle in particular. In the other eight regions and countries covered by our survey, there were diverging trends in the net trade WC performance reported by operators in 2012 compared to Looking at the results of operators in all regions, those based in other regions and countries continue to carry the lowest level of net trade mobile services and the high proportion of prepaid subscribers. In addition, capital expenditure requirements remain large. Within each region, current net trade WC performance still varies widely between operators. While this can be partly explained by variations in business models and payment practices, the scale of disparity in companies performance indicates fundamental differences, both in the degree of management focus on cash and in the effectiveness of WC processes. For example, a high-level of aggregate sales. For the six main operators in North America, the regions are lower than a year before, suggesting that the spread of WC performance between operators has tightened. Telecommunications operators and working capital management

6 Europe in In 2012, the WC performance of telecommunications operators in Europe remained unchanged compared with the previous year, cash-to-cash (C2C). This stability contrasts sharply with the gains achieved in recent years. (eight companies saw improved C2C performance), posting a Table 1. Change in WC metrics, Days 2012 Change 12/11 DSO DIO C2C -2 % sales Net trade WC Table 2. Number of companies showing improved WC performance, 2012 vs Days Change 12/11 DSO reduction 8 DIO reduction 6 C2C reduction Net trade WC reduction Note: DSO (days sales outstanding), DIO (days inventory outstanding), DPO (days payable outstanding) and C2C (cash-to-cash), with metrics calculated on a sales-weighted basis (amounts billed in advance for line rentals and subscriptions) stood A number of factors may explain these WC variations, each with varying impacts on different companies: Compared with 2011, overall sales by the operators in our survey remained unchanged, affected by price cuts in response to intense competitive pressures, poor consumer spending (especially in certain South European countries) and regulatory pressure on mobile termination data (boosted by the rise of smartphones), which was offset roaming and interconnection. Against this backdrop, absolute levels of net trade WC and C2C were stable. Stronger receivables performance: The drop in DSO in 2012 was in line with the steady fall seen during previous years (with the exception of 2010). However, part of this reduction of the year, resulting in lower balances of receivables. A high number of operators have continued to focus on accelerating payments by tightening billing cycles and increasing direct debit penetration. Operators have become much more adept and prior past performance. It is worth noting, however, that challenging economic conditions. By contrast, the sustained rise in the postpaid subscriber base continued to weigh down on receivables performance (prepaid services do not carry any customer account receivable). In addition, driven by the development of bundled services (TV, broadband, telephony and mobile), increased complexity in billing systems management may have lengthened payment or billing cycles. In a few cases, bad debt charges also increased as customers were affected by the economic downturn, but overall, the level of bad debt in 6 Cash on the line

7 Inventory challenges: In contrast to 2011, when nine operators results in Increased investment in smartphones and related infrastructures most likely led to a build-up in inventory, which more than offset progress made in rationalizing product and service offerings and in pursuing more active collaboration strategies with equipment suppliers. Mixed payables performance: Operators payables performance was affected by the ongoing efforts made to contain costs and capital expenditure. However, progress in this area continues to be supported by a strong focus on procurement and payables, notably via extended payment terms. Some operators have also companies reported a deterioration in payables performance. differing strategies and tactics, including stretching terms with suppliers; reducing the supplier base to achieve greater leverage in negotiations; choosing to pay faster in return for enhanced cash discounts; or tightening 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 to play a Stability in the levels of advance billing: In spite of a further rise in the proportion of postpaid revenues, the levels of advance billing in relation to sales was almost unchanged in 2012 compared to Ten operators reported an increase. In these latest results, the net trade WC to sales ratio for meaning that it has been dropping since 2000 (when it stood at swing in the net trade WC to sales ratio since This may indicate that the low-hanging fruit have now been largely harvested. However, it is clear that operators remain very focused performance. 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 period under review. The increasing penetration of smartphones (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 comparison with other WC metrics given the relatively low level of inventory inherent to this business. By contrast, payables advance billing in relation to sales were unchanged. Figure 1. Net trade WC to sales ratio, % 1% 0% -1% -2% -3% -4% -5% R Telecommunications operators and working capital management

8 Wide variations in current net trade WC performance among operators Current net trade WC performance continues to vary widely between different operators in Europe overall and for each metric. In 2012, the average levels of net trade WC to sales and C2C compared with 2011, spreads have tightened for each metric, except for DIO. Table 3. WC performance distribution per operator, 2012 Average* Top quartile Bottom quartile Standard deviation DSO DIO C2C Other trade WC/ sales Net trade WC/ sales *Weighted -4.8% -7.9% 0.0% 5.8% European telecoms: performance comparisons Figure 2. Net trade working capital in relation to sales per operator, 2012 Sales 6% 5.7% 3.9% 4% 3.3% 2% Average 0.3% % -0.2% -0.2% -2% -0.6% -0.6% -1.0% -4% -6% -8% -10% -12% -14% Figure 3. C2C per operator, 2012 Days Figure 4. DSO per operator, % -6.2% -7.6% -8.3% -9.6% -12.0% -12.4% 1 Average Days Average Cash on the line

9 Opportunity for improvement Figure 5. DIO per operator, 2012 Days Figure 6. DPO per operator, 2012 Days Average Average The wide variations in net trade WC performance between different operators in Europe revealed by our research indicate 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 the range, our experience across many projects, industries and geographies show that often a dedicated focus on WC management can realize results at or above this level. Differences in WC performance between operators may be due, at least in part, to variations in the mix of product and services, customer base (residential, small and medium-sized and large companies), country exposure and local payment practices. Yet all these factors are not enough to explain the size of the gap, suggesting that there are fundamental differences between operators, 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 of cash unnecessarily tied up in WC processes, equivalent to range of cash opportunity is lower than a year before (when it was suggesting that the spread of WC performance between operators has tightened. Table 4. WC cash opportunity, 2012 Value ( b) % WC scope* % sales Average Upper quartile Average Upper quartile Average Upper quartile Receivables 8.0 Inventories Other trade WC 4.6 Total * WC scope = sum of trade receivables, inventories, accounts payable and other trade WC Telecommunications operators and working capital management

10 North America Further improvement in net trade WC performance in 2012 improvement in net trade WC performance in 2012 relative to The net trade WC to sales ratio fell from 0.4% to -0.8%, representing a swing of 1.2%. C2C dropped by 35% to 10 days. Five companies out of six demonstrated improved results in net trade WC and C2C performance. Table 5. Change in WC metrics, Days 2012 Change from 12/11 DSO DIO C2C 10 % sales Net trade WC Table 6. Number of companies showing improved WC performance, 2012 vs Days Change from 12/11 DSO reduction 2 DIO reduction C2C reduction Net trade WC reduction (days payable outstanding) and C2C (cash-to-cash), with metrics calculated on a sales-weighted basis. This stronger WC performance in 2012 was due to much higher and payables. There was also a further drop in DSO (down subscribers and the number of these opting for deferred payment As in Europe, North American operators are seeing a shift of revenues toward data, resulting from increased sales of smartphones. Another feature of the North American landscape has been ongoing consolidation among operators. This has provided the industry with opportunities for negotiating favorable payment terms with customers and suppliers, while rationalizing product and service offerings. In these latest results, the net trade WC to sales ratio for telecommunications operators in North America reached a new operators in North America reported improved performance in net Compared to their counterparts in Europe, North American operators continue to carry higher levels of net trade WC in and post-pay, 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 are relatively high and trade terms generally longer in Europe. Yet the extent of the disparity in performance suggests that North cash conversion cycles, notably on the payables cycle. 10 Cash on the line

11 Interestingly, the level of bad debt on North American operators balance sheets in relation to sales remains well below that seen by differences in provisioning policies, as well as by the lower of customers upgrading to smartphones and paying for their handsets over time continues to grow. Wide variations in current net trade WC performance among operators Current net trade WC performance continues to vary widely between different operators in North America overall and for each metric. In 2012, average levels of net trade WC to sales and C2C among with spreads of 6 days, 4 days and 8 days, respectively. Other compared with 2011, spreads have tightened for each metric, except for DIO. Table 7. WC performance distribution per operator, 2012 Average* Top quartile Bottom quartile Standard deviation DSO 6 DIO C2C Other trade WC/sales Net trade WC/sales -0.8% -1.6% 0.7% 2.1% Opportunity for improvement As revealed by our research, the variations in net trade WC performance between North American operators suggest some potential for improvement. A high-level benchmarking analysis indicates that the six leading the range of cash opportunity is tighter than a year before calculation basis). North America are much lower than in Europe, partly due to there being fewer surveyed operators, 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, 2012 Cash opportunity Value ( b) % WC scope* % sales Average Upper quartile Average Upper quartile Average Upper quartile Receivables Inventories Other trade WC Total % 12% 1.8% 2.8% * WC scope = sum of trade receivables, inventories, accounts payable and other trade WC *Weighted Telecommunications operators and working capital management

12 North American telecoms: performance comparisons Figure 7. Net trade working capital in relation to sales per operator, 2012 Figure 9. DSO per operator, % 2.0% 2.2% Sales 1.0% 0.0% -1.0% -2.0% -3.0% 0.7% 0.6% -0.5% Average % -1.9% Days % -3.7% -5 Average 2012 Figure 8. C2C per operator, 2012 Figure 10. DIO per operator, Days Days Average Average 2012 Note: average is sales-weighted Source: annual accounts December Cash on the line

13 Figure 11. DPO per operator, Days Average 2012 Telecommunications operators and working capital management

14 Other regions and countries Diverging trends in net trade WC performance in 2012 In the other eight regions and countries covered by our survey Eastern Europe, China, India, Japan, Latin America and Russia), there were diverging trends in the net trade WC performance reported by operators in 2012 compared to 2011 Net trade WC results worsened in three regions (India, Japan unchanged in Africa and Middle East, China and Latin America. Operators were almost evenly split between those that saw an improvement in net trade WC performance and those that posted a deterioration. Table 9. Change in C2C and net trade WC to sales ratio by region and country, C2C Africa Middle East Central and Eastern Europe China India Japan Latin America Russia Net trade WC/sales Africa Middle East Central and Eastern Europe China India Japan Latin America Russia % % These results for 2012 mean that the net trade WC performance has deteriorated in Africa and Middle East, Central and Eastern Europe, India, Japan and Russia since 2007, while improving in 14 Cash on the line

15 Variations in net trade WC performance the different business models deployed by operators. Key factors and mobile and pre-pay and post-pay, local payment practices and methods, and the 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 expenditure requirements) and low DSO (due to the importance of mobile revenues, combined with a high proportion of prepaid subscribers). Russia also displays a strong net trade WC performance. Its DSO remains second-best in class, thanks to the importance of mobile revenues, combined with a high proportion of prepaid subscribers. However, this result is partly offset by a poor showing in payables performance. By contrast, Japan scores particularly poorly. due to a high DSO and low levels of advance billing. Eastern Europe, and Latin America, the net trade WC to sales ratio receivables and payables cycle differential). Table 10. WC metrics by region, 2012 Days Africa Middle East Central and Eastern Europe China India Japan Latin America Russia DSO DIO C2C Telecommunications operators and working capital management

16 Driving WC excellence Telecommunications operators have made albeit with large differences in the degree and speed with which each one of them was able to these initiatives include: Building cash into product design and customer acquisition strategies More effective organizational structure of collections and dispute management Increase in direct-debit penetration and change in advanced billing Enhancement of customer acquisition and risk management processes Tightening up controls around terms and effective terms accelerate invoice production Consolidation and control of spend More effective management of payment terms for suppliers, including renegotiation of terms Improvement in forecasting processes, working more closely with telecommunications equipment suppliers and content providers Introduction of vendor-managed inventory techniques More effective management of interconnection agreements Development of new partnerships models, embracing revenue-sharing, provisioning, pricing and billing Tracking and monitoring of WC metrics and linking compensation to these metrics Case studies: improving WC management A major telecommunications operator, which had pursued a number of initiatives to improve receivables management during the past few years, felt that its performance could still be improved much further. An EY project team was engaged to support management in reviewing the existing processes and designing an action plan to implement leading practices in this area. The program involved setting up a collection and dispute management process; designing a receivables management organizational structure that and metrics to monitor and assess progress; and putting in place the right incentives to motivate and change internal behaviors. For another large telecommunications operator, EY designed and implemented a program to improve the management of of suppliers. This program involved segmenting the supplier base according to payment terms, trigger and frequency; renegotiating and harmonizing payment practices for each segment; eradicating the root causes of invoice processing delays; and rationalizing the supplier base after assessing 16 Cash on the line

17 How EY can help EY s global network of professionals helps clients to identify, evaluate and prioritize realizable improvements to liberate cash from WC through sustainable changes to policy, process, metrics and procedure adherence. We can assist organizations in their transition to a cashfocused culture and help implement the relevant metrics. forecasting practices and then assist in implementing processes to improve forecasting and frameworks in order to sustain those improvements. Companies that undertake WC improvement initiatives often realize a high ROI. In addition to increased levels of optimization, through 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. Telecommunications operators and working capital management

18 Methodology This report is based on a review of the net trade WC performance of the largest telecommunications operators (by sales) headquartered in Europe operators) and eight other regions and countries India, Japan, Latin America and Russia). the impact of acquisitions and disposals and off-balance sheet arrangements. In the absence of detailed accounts, for some operators, trade accruals have been estimated. The review on which the report is based is region-, country- and overall WC management and identify the resulting levels of cash opportunity. statements, the performance of individual operator is not disclosed. The companies included in our report are as follows: Europe: Belgacom, BT, Deutsche Telekom, France Télécom- Italia, Telefónica, Telekom Austria, TeliaSonera, Telenor and Vodafone. North America: AT&T, BCE, CenturyLink, Sprint Nextel, Telus and Verizon. Other regions and countries: América Móvil, Batelco, Bharti Airtel, BTC, Cesky Telecom, China Mobile, China Telecom, China SingTel, SK Telecom, Slovak Telekom, Slovenije Telekom, Tata Communications, Telecom Argentina, Telecom Malaysia, Telecom Vimpelcom and Zain Group. Glossary 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 number of days of sales, unless stated otherwise) installations which have not been billed and should have been billed; unbilled receivables when reported separately have been added back to trade receivables Current advance billing: current amounts billed in 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 a number of days of sales, unless stated otherwise) Trade-accrued expenses: accrued payables to suppliers, 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 days of sales, unless stated otherwise) C2C number of days of sales, unless stated otherwise) Pro forma sales: reported sales adjusted for acquisitions and disposals when this information is available 18 Cash on the line

19 Contacts Working Capital Services contacts Country Local contact Telephone/ UK&I Jon Morris Matthew Evans Marc Loneux US Edward Richards Mark Tennant Eric Wright Asia Mike Gildea Australia Wayne Boulton Benelux Danny Siemes Canada Simon Rockcliffe Chris Stepanuik Finland Gösta Holmqvist France Benjamin Madjar Germany Dirk Braun Bernhard Wenders India Ankur Bhandari Israel Nir Ben-David Italy Stefano Focaccia Latin America Sweden Johan Nordström Switzerland Telecommunications Sector contacts Jonathan Dharmapalan Global Telecommunications Leader Holger Forst Germany India Olivier Lemaire Luxembourg Luis Monti Brazil David McGregor Australia Masahiko Tsukahara Japan Telecommunications operators and working capital management

20 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. How EY s Global Telecommunications Center can help your business Telecommunications operators are facing a rapidly transforming business model. Competition from technology companies is creating challenges around customer ownership. Service innovation, pricing pressures and network capacity are intensifying scrutiny on return on investment. Additionally, regulatory pressures and shareholder expectations require agility and cost efficiency. If you are facing these challenges, we can provide a sector-based perspective to addressing your assurance, advisory, transaction and tax needs. Our Global Telecommunications Center is a virtual hub that brings together people, cultures and leading ideas from across the world. Whatever your need, we can help you improve the performance of your business EYGM Limited. All Rights Reserved. EYG no. EF0125 CSG/GSC2013/ ED 0114 This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. EY_Telecoms