The average net profit margin for companies in the telecommunications sector, as of September 2018, is approximately 17%, according to CSIMarket.com figures. Net margins typically average about half of a company's operating profit margins. Gross profit margins for the sector can run as high as 80% to 90%, but extremely high overhead expenses erode much of that initial profit balance.
The telecommunications equipment area of the sector tends to generate higher net profit margins than the telecommunications service area (12.5% versus 4.3%, based on New York University's Stern School of Business calculations). This is likely due to the fact that the service part of the industry is such an intensely competitive marketplace.
The telecommunications sector is an extremely important market sector. It is to some extent dominated by major, multinational firms such as Verizon, but it's also highly competitive, with new players sometimes entering the marketplace almost as rapidly as new technology.
- The average net profit margin for companies in the telecommunications sector is approximately 17%.
- The average net profit margin can be higher or lower depending on which sector the company operates in and its amount of overhead expenses.
- Companies calculate net profit margin by dividing net profit by total revenue.
- The telecommunications industry is very capital intensive, with the high costs for research and development, along with the need for continuous capital reinvestment, impacting its net profit margins.
What Is the Telecommunications Sector?
Calculating Net Profit Margins
For all companies, net profit margin is one of the most important metrics for determining profitability and predicting future growth. There are many reasons why net profit margins can fluctuate greatly within the telecommunications sector.
For example, companies that manufacture smartphones will frequently have swings in their net profit margins depending on where they are in the sales cycle for their latest model. Before the launch of a highly anticipated new phone, companies may see consumer spending on their current models begin to diminish. Consumers delay their purchases to see what features the new phone brings. If the new phone is a success, consumers will flock to it, thus pushing sales revenue, and net profit margins, back up.
Companies express net profit margin as a percentage. It is calculated by dividing net profit by total revenue. It represents how much of each dollar of revenue earned results in net profit for the company. For example, if a telecommunications company posts a net profit of 15%, every dollar the business earned for that period generated 15-cents of net profit.
Increasing revenues is just one way a company's management can increase profit margins. Management can also increase profit margins by increasing the price of their products or services, running the business more efficiently, cutting unnecessary spending, and reducing overhead expenses.
A Major Change in the Landscape
The telecommunications industry has undergone a huge fundamental shift in the space of just a few years. Wireless communication has largely replaced fixed-line communications, while various forms of Internet communication has rapidly outpaced traditional phone calls as a primary means of communication for individuals and businesses.
The emerging market economies of India and China have fostered the 21st-century boom in demand for telecommunications equipment and telecommunications services across the board. This includes computer equipment and services, smartphones, and satellite and cable television services.
The sector is very capital intensive, providing larger firms with an easier path to expanding their market share by virtue of having the necessary capital for research and development spending, as well as for continuous capital reinvestment. Extensive underlying cable networks are constantly being expanded, both physically and in terms of capability.
In addition to basic segments such as computers, cell phones, Internet services, and satellite equipment and services, the sector encompasses an array of supporting industries such as Bluetooth equipment, equipment required for the Internet of Things (IoT), coaxial cables, and adapters.
The Bottom Line
The most successful telecommunications firms and those able to command the highest profit margins are those companies that do the best job of managing capital, investing wisely, staying on the cutting edge of technology, and most successfully establishing a brand identity. Investors looking to buy shares in the telecommunications sector can start by reviewing the returns and fundamentals of the biggest telecommunications companies in the world.
An important first step is to familiarize yourself with the differences and similarities between each company, trying to pinpoint what might give one company a competitive advantage over another. In the rapidly evolving telecommunications sector, those companies that can evolve the quickest and most efficiently often have the best chance of gaining market share and propelling themselves to future growth.