Unified communications – Momentum building
December 01, 2015
Earlier in the year we released the first of a series on Unified Communications (UC). In it, we made the case for the untapped demand that exists amongst UK SMEs for a common communications ecosystem offering users anytime, anywhere connectivity from any device.
A proprietary survey we conducted for the last report established that roughly half of all UK SMEs remain stuck in an entirely pre-UC world. Meanwhile just one-fifth of businesses can be judged to have adopted advanced UC solutions (dubbed “2.0”).
In the last report we also considered some of the benefits that UC is driving in businesses, with fully 93% of buyers realising some benefit, whether that be in terms of ‘hard’ bottom line oriented benefits or softer benefits, such as collaboration and employee morale.
We also made some predictions for what the market would look like in 2020, predicting near 100% penetration of UC, the importance of mobile and cloud and increasing trust in voice over IP.
This second in the series turns our attention towards the supply side, sharing our perspectives on the competitive landscape and offering some proof points around growing investor interest in the sector.
The UC competitive landscape: ripe for deal-making?
Today, telecom operators continue to loom large with over two-thirds of the market by revenue. The remaining one-third is made up of a long tail of 50 or so other service providers, some with network assets themselves, most others wholesaling network access from the likes of BT and TalkTalk.
It was market liberalisation back in the 1980s that caused a proliferation of the large number of small, owner-funded calls and lines resellers. Many of these businesses still stand today, but a portion have ‘stalled’, generating a large pipeline of potential acquisition targets for larger consolidators. They exist as profitable standalone enterprises often serving local needs, but themselves lack firepower for M&A and/or the ambition to drive significant organic growth.
This long tail of (non-Telco) ICT providers has outperformed the wider business communications market as a whole. In the last 3 years, 4 in 5 (non-Telco) service providers have achieved a rate of growth exceeding 5% per annum. Over half are currently achieving EBITDA margins of at least 10%.
Robust growth and strong profitability… with M&A as an accelerator
Further, there is a compelling case for ‘buy and build’, with value creation driven through a range of strategies, including multiple arbitrage, cross-sale, as well as revenue and cost scale benefits.
The power of mergers and acquisitions (M&A) as a revenue and profit accelerator is also born out in the data.
ICT service providers which have employed M&A growth strategies have achieved a cumulative average growth rate (CAGR) of 17% in their last 3 reported financial years; 11% higher than the growth rate of players which have grown organically. More significantly, profitability of acquisitive companies is also higher relative to their stand-alone counterparts: EBITDA margins of providers which have employed M&A is on average 14%, whereas it stands at 9% for companies which have grown on an exclusively organic basis.
Investor interest in the sector has been piqued. Over the past 3 years, deal volume has grown on average 27% and deal value has grown 77%. Corporates have accounted for over 60% of completed deals, able to drive incremental value over and above standalone assets. Private equity (European and US) firms have also been active, completing 23 major deals between 2012 and 2014. The completion of a number of landmark deals so far in 2015 means there are no signs of this investor interest abating.
By 2020, we expect:
- A greater premium for service - Continued greater spread of capabilities, especially in IP-based communications and complex networking. Adoption of UC services will continue on a rising trend with higher levels of service demanded by clients. Providers that demonstrate excellent service will prosper.
- Margin maximisation - Providers which consolidate will boost profitability for the industry as a whole, buoyed by operational efficiencies, improved sales and marketing impact through scale and high share of customer wallet through cross sale.
- Material consolidation - Significant consolidation amongst service providers; the number of major providers to fall from 50+ to less than half that number.
Download our latest Unified Communications report here.
What do you expect to see by 2020? To what extent do you see the UC landscape as ripe for deal-making? Share your thoughts below or schedule a meeting to discuss this topic in more detail.