Managed Services Deal Has Far-Reaching Potential

Ericsson has won a five-year managed services contract from Russian telecoms operator VimpelCom to cover 41 locations in Siberia and the Urals. Managed services contracts have gained in popularity in recent years as telecoms operators look to reduce costs in the face of dwindling revenues from traditional voice services on both fixed and mobile networks. With Russia's vast size and dispersed population, network costs are high for operators, adding to the attraction for managed services. BMI believes both companies will benefit from the deal and we expect to see more of these contracts.

VimpelCom has rapidly expanded, with operations across 15 markets in Central and Eastern Europe, Asia, North Africa and Sub-Saharan Africa as well as Central Asia and Italy. In Russia it is one of the country's largest mobile companies and also operates an extensive fixed-line network. The contract with Ericsson will see VimpelCom transfer the management and servicing responsibilities for 10,000 base stations and 10,000km of fibre-optic cables to the vendor.

Margin Pressures Encourage New Strategies
VimpelCom EBITDA & Capex Margins (%)

VimpelCom's acquisitions in fixed and mobile markets leave it with the heavy responsibilities of extending the reach of its networks and ensuring it can meet subscriber demand for voice, data and content. In the final quarter of 2011, capital expenditure as a percentage of revenues reached 63.4% and, although this fell to more reasonable 10-20% levels in Q112-Q312, slower revenue growth does remain an ongoing issue for operators. High costs have led to an overall decline in EBITDA margins with a fall to 37.8% across VimpelCom's global operations in Q411, a trend also seen in VimpelCom's Russian performance.

VimpelCom will benefit from lowering expenditure and turning its focus to services and content for its subscribers. There is still some growth left in areas of the Russian market, but major cities already have much higher penetration rates, meaning there are now opportunities to provide new content and encourage subscribers to use their telecoms services more. As this trend plays out in more mature regions of Russia, this will filter through to other areas, too, making network cost savings a key part of the company's strategy.

With VimpelCom's operations spread across a number of countries, many of which are approaching similar levels of maturity, there will be further opportunities for managed services contracts, in BMI's opinion. Ericsson is already seeing its managed services division grow at a strong pace, helping to offset declines in its core networks division. Managed services saw 20% revenue growth in 2012, above the 16% growth rate for its global services unit. A strong partnership with VimpelCom in its home market will create openings for further deals as VimpelCom looks at network management opportunities elsewhere.


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