INDUSTRY CHANGE

DSO 1.9 ⇓

DIO 1.7 ⇓

DPO 10.0 ⇑

DWC 4.3 ⇓

Strong operating cash flows (89% of Underlying EBITDA) generated as a result of improved working capital discipline.


Speedcast International Limited

Half year results, 30 June 2018

Reduced DWC driven by a material increase in DPO and moderate improvements across debtor and inventory cycles (DSO and DIO).

Our sample of Telecommunications companies reported average revenue growth of 2% in 2018, with all companies reporting an increase. However, this did not translate to a blanket improvement in earnings, with 56% of the sample experiencing a contraction in earnings. Notably, the performance of the sample was heavily influenced by Telstra Corporation (Telstra), which experienced a period of flat revenue growth and declining EBITDA.

The Telecommunications sector benefits from a relatively short working capital cycle (DWC), which averaged 12.2 days in 2018. Across our sample, the average payment cycle (DPO) was 28.0 days longer than the collection cycle (DSO). In addition, a number of sampled companies had little or no inventory (average DIO of 12.6 days) due to the service-based nature of business models for those companies.

Strong operating cash flows (89% of Underlying EBITDA) generated as a result of improved working capital discipline.


Speedcast International Limited

Half year results, 30 June 2018

In 2018, DWC reduced by 4.3 days, the result of a 1.9 day decrease in average DSO (to 44.3 days), a 1.7 day reduction in average DIO (to 12.6 days) and a 10.0 day increase in average DPO (to 72.3 days).

Given the scale of some market participants, incremental improvements in working capital performance result in a material cash flow impact. By way of example, the 1.9 day decrease in average DSO equated to a combined cash release of $467.7 million for our sample, largely driven by improvements in cash conversion on large infrastructure projects. A third of our sample carried negative working capital in 2018, which highlights that the working capital burden is often carried by the suppliers to this sector.

While experiencing some operational challenges that impacted its 2018 results, Telstra reported an improvement in its working capital performance and was a top performer amongst the selected sample. The decrease in DWC of 12.9 days was driven by a 16.9 day reduction in DIO, attributed to an increase in progress billings for commercial works. Telstra was also able to reduce its DSO (down 6.4 days) and increase its DPO (up 28.5 days). Another strong performer was amaysim Australia which achieved a reduction in DWC of 9.2 days in 2018. This was largely driven by shortening its collection cycle (DSO) by 9.0 days. The net cash benefit to amaysim and Telstra from these improvements was $14.6 million and $919.3 million, respectively.

Top 5 DWC improvements - Telecommunications

Days

DWC at 30 June (or latest available)

Telecommunications

Days 2017 2018 Change
DSO 46.2 44.3 (1.9)
DIO 14.3 12.6 (1.7)
DPO 62.3 72.3 10.0
DWC 16.5 12.2 (4.3)

Best & Worst

Days Best Best Spread
DSO 9.0 92.8 83.8
DIO - 82.3 82.3
DPO 179.9 13.5 (166.4)
DWC (23.4) 59.9 83.3

Telstra Corporation Limited

Days 2017 2018 Change
DSO 76.9 70.5 (6.4)
DIO 99.2 82.3 (16.9)
DPO 131.6 160.1 28.5
DWC 72.8 59.9 (12.9)