UK Telecom Giants BT and Vodafone Suffer Double-Digit Decline

UK telecoms have been under pressure over the past three months as Ofgem tries to keep prices down while costs keep rising. Is there any light at the end of the tunnel, or are they due additional declines on top of the 20% and 15% losses incurred in the same period?

Layoffs Were Not Enough

At the start of last quarter, BT and Vodafone announced massive layoffs to get costs down and take advantage of the efficiencies offered by AI. While their stock price did stage a little bit of a recovery in the immediate aftermath, since then, it has been downhill for the share price in the UK's leading telcos. Recently BT tried to get ahead by replacing its CEO, but the change in leadership hasn't inspired investors to buy. With no end to the current cost-of-living crisis, the sector could be in for some tough times. At least until (and if) the cost-cutting measures start to deliver.

In the latest earnings reports, both companies tried to provide an optimistic tone for the outlook. But, despite the cost-cutting measures announced earlier, Vodafone and BT simply reiterated their already-provided outlook for the coming year. Vodafone cheered on its organic growth in sales but was still generally focused on its merger with Three. The key metric for investors at that moment - profit - was not disclosed.

Raising Prices, Losing Customers

BT also lauded its growth in Revenue but did admit it was thanks to higher prices, primarily. The investment in Openreach appears to be starting to pay off, as it saw a 34% increase in customer demand. But overall, customers have fallen, seduced by competitors offering lower prices. Vodafone faced a similar problem, with reported revenues falling despite improved organic performance due to customers shifting to other providers.

Unlike Vodafone, however, BT was willing to disclose that it saw an increase in reported profit of 11% over the prior year - but that was offset by specific items that will likely be disclosed in the final results later in the year. UK telecoms can pass on increasing inflation costs to consumers, but Ofgem is looking closely at those increases. More specifically for the telcos, however, is that their costs aren't necessarily in line with the national inflation rate. Key components such as chips, semiconductors, and optic cables have experienced supply chain problems that have boosted costs. This is on top of both telcos investing heavily to increase broadband. For now, there haven't been any rumours of a dividend cut, which could keep yields attractive and provide a floor for the share price.

BT Forms Double-Bottom

The share price of BT has fallen below where it started 2023, with a double-bottom formation near 110 GBX at play. Losing the regional floor will open the door to double digits, expected to reach as low as 95 and perhaps lower. Chances of reversal will remain minimal if the stock price remains under 130 GBX, let alone the swing low of 120 GBX. Only breaking past the 140 GBX would raise the probability of additional price increases.

Source: SpreadEx / BT GROUP

Key Takeaways

BT and Vodafone have been facing challenges as they try to lower costs while dealing with rising prices. Both companies announced layoffs and emphasized the use of AI for efficiency. Despite cost-cutting measures, both companies maintained their outlook for the coming year. While BT saw growth in revenue due to higher prices and increased demand for its services, it also lost customers to competitors offering lower prices. Vodafone faced a similar problem, with falling revenues despite improved performance. Both companies are grappling with supply chain problems and the need to invest heavily in broadband infrastructure.