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Comparing the multiples at which network equipment providers (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. To try to understand the reasons behind this apparent lack of trust, Accenture has carried out detailed financial analysis of listed businesses in the sector and conducted 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 take in order to rebuild investor trust.
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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. 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, according to data from S&P Capital IQ.
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. While analysts do not find it hard to understand NEPs present business models, they struggle to display the same confidence when it comes to predicting future earnings and the drivers behind them.
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. This is clearly higher than for the IT service provider peer set Accenture 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.
Analysts see the returns from investments in telecom operators producing smoother returns, with fewer surprises. NEPs, on the other hand, have been subject to significant volatility and cyclicality. 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.
Our analysis shows that NEPs have considerable work to do to transform their prospects. But with the continued strong growth across all markets driven by 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.
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