Mon, Dec
0 New Articles

Jefferies Equity Research analyses effect of virus on churn in Europe


Reduced churn could mitigate the impact of falling sales, but will it change market dynamics after lockdown?

The key finding of the research, Quantifying Churn Benefits During COVID-19, is that from reported data by the operators, churn fell by 63% in France, 59% in Italy and 55% in Belgium compared with pre-lockdown rates.

The research house expects other countries with longer notice periods to change contracts to follow the same trend, once enough time has elapsed to see the effects of customers’ decisions taken under lockdown converted into actions.

Jefferies chose these three countries as, despite having very different market structures and dynamics, they all have relatively short notice periods for customers wishing to change provider. Interestingly, the fall in churn is markedly similar in every country.

Two major impacts

While a drop in churn is to be expected, given the considerable role shops still play for many people wishing to change operator (and of course they are all closed), Jefferies wanted to find out the size and import of the reduction, and its likely impacts.

Firstly, Jefferies reckons the lower associated commercial costs – which can run at 15 to 20% of sales – will help ease pressure on the top line as it equates to potential savings of 10 percentage points. With the reduced CapEx of operators during the pandemic, this could enable their free cash flow predictions made ahead of the outbreak to remain accurate.

Secondly, Jefferies said the other big impact of reduced churn is altered market dynamics. For instance, in Italy, disruptor Iliad’s sales are flagging as a result of lockdown, which is giving Wind-Tre some respite. In France, Bouygues and to some extent SFR have also lost momentum, which has strengthened Orange and Iliad.

The research house acknowledges that reduced churn benefits all the operators, but said incumbent operators are “double winners” as they reap the benefits of less cost and avoid loss of market share.

Post-virus world

Whether these behaviours will continue post-virus remains to be seen after the lockdowns remains to be seen as this period suppressed commercial activity across Europe. Further, it is likely consumers have other priorities than upgrading mobile handsets, which is a major driver of contract sales, and are reluctant to risk of connectivity disruptions, as is always possible when switching supplier.

Perhaps the real point is who comes out of the lockdown weaker or stronger.

Jefferies acknowledges its analysis has some limitations, including the lengthy notice periods in some markets resulting in a delay between the subscriber decision and the number port. Nor does it cover certain types of post-M&A number migrations and notes that MVNOs changing network host are not subscribers' decisions.

Also, resellers that could affect operators' phone numbers do not show up as ports. Finally, IFRS15 [rules that govern reporting of income from contracts with customers] 'smoothing' of contract acquisition could negate the impact on profit and loss over the duration of the contract.