Upwardly mobile - telecommunications - Industry Trend or Event

CommunicationsWeek International, Nov 15, 1999

Despite the best efforts of many incumbent service providers and equipment vendors to `get with it' on new technologies and services, the CWI Top 100 shows a share market valuing youth, vigor, and mobility over age and experience

This year We're taking a slightly different approach to the CWI Top 100 ranking.

For the Top 50 Service Providers we've made a radical change and moved to capital valuation (see article below).

For the Top 50 equipment vendors we continue ranking them on current revenue generation--that way we can continue to compare position changes--but for the Top 10 of those 50 vendors we've also analyzed the relationship between their revenues and their current stock market values.

Those results show that the so-called "multiples" (capital value as a multiple of annual revenue) range from 0.5 for NEC, (currently worth only half its annual turnover) to Cisco, rated at a staggering multiple of 21.9 times revenue (see page 29).

Today an expectation of radical change has led to a huge disparity in the way investors value different types of player, seemingly regardless of current performance. The next five or so CWI Top 100 rankings should show whether that approach is misconceived.

Top 50 Carriers

BY GRAHAM FINNIE, THE YANKEE GROUP

Every tradition needs refreshing from time to time, and CWI's annual round-up of the Top 50 service providers is no exception.

Now in its seventh year, the survey has focused until now on revenues earned from providing international phone services and leased lines. This year, however, for the first time, we are measuring providers by capital value.

Why the change? In the first place, measuring companies by international phone revenues is becoming both more difficult to do and less relevant as a pointer to the real significance of the sector's players. Developments in the wholesale sector, widespread refiling of traffic, the growth of the Internet, the mobile sector and data services all are rendering measures based on phone revenue alone obsolescent. And in an era of multi-service network fabrics and providers, that trend can only strengthen.

At the same time, we believe that measuring companies by capital value better reflects the rapid transformation of the sector, and the forces transforming it. The defining corporate event of the past four years in telecoms was WorldCom Inc.'s acquisition of MCI-a purchase financed and backed by WorldCom's rising capital valuation; or, putting it more precisely, the market's belief that the stock would continue to appreciate. Because BT could offer the market no such assurance about its own stock, shareholders preferred WorldCom's bid. Likewise, Global Crossing Ltd., number 36 on our list, could not have created such a splash internationally without the enthusiasm of the investment community.

As never before, capital value and growth have become the management yardsticks used to judge failure and success.

Moreover, ordering the sector by capital value allows us to include companies previously left out--such as Nippon Telegraph and Telephone Corp. (NTT), Vodafone AirTouch plc and Bell Atlantic-because they were not international phone service providers. As borders tumble, that also seems a change for the good.

So if capital value is the new measure of future worth, what does the list tell us about the future of the sector?

Finally, more than ever before markets are valuing stocks on their future growth prospects, which is one reason why valuations have become so high. Consequently, a survey based on stock valuations gives us plenty of clues and the basis for a good debate about the direction in which the industry is headed. So if capital value is the new measure of future worth, what does the list tell us about the future of the sector?

Several headlines instantly jump out from the data. The first is that, despite a lackluster performance over the past three months, in the year to 30 September as a whole the market's love affair with the communications sector continued to swell. Overall, the capital value of our Top 50 stocks rose by no less than 52%, and only one stock fell in value in the year under review. Stocks in some developing regions--in parts of Asia and Latin America--did not grow by much due to local economic recession. But in general it's a rosy picture.

As financial advisers never tire of telling us, stocks can fall as well as rise, and many on the list have taken a tumble since July. Nevertheless, if measured by traditional yardsticks such as price/earnings ratios, confidence in the sector's future remains sky-high. Delivering on that promise, though, is likely to pose some tough questions to more than a few of those companies.

The second inference we can draw is that the valuations clearly highlight the growing significance of mobile communications. Most obviously, NTT DoCoMo is now the second-largest company in the world; and along with the newly merged Vodafone-AirTouch entity, it has pushed the mighty AT&T, with few mobile assets, into fourth place.