European Telcos Cut Costs To Fight Competition, Regulation
July 30 2009 - 1:36PM
Dow Jones News
European telephone operators are trying to eke benefits from
cost cutting while earnings and revenue remain under pressure due
to increased competition and regulatory scrutiny.
Many telecos have slimmed down to gain traction in a fierce
fight for dominance in the competitive European mobile and
broadband market and as national and European regulators force down
the cost to consumers of voice calls, text messaging and data.
But while cost-cutting moves have strengthened many operators,
results at France Telcom (FT)and Spain's Telefonica SA (TEF) showed
the industry is still vulnerable to economic swings.
Telefonica's net profit declined 6.1% in the second quarter due
to the slowdown in some of its mature European markets and after
asset sales boosted the year-ago figure.
Telefonica, Europe's largest telecommunications company by
market capitalization, said net profit for the quarter ended Jun.
30 fell to EUR1.93 billion. In the first quarter last year, it
booked a combined EUR257 million gain from the sale of radio
operator Airwave and a stake in Spanish pay-TV firm Sogecable.
In May, Telefonica said it was reducing expenses and capital
expenditure in response to the weak European market and to preserve
cash flow and honor dividend commitments. Telefonica's operating
expenses fell 6.6% in the second quarter to EUR8.47 billion.
"Our capital expenditure and operating expenditure cuts are
focused on the right areas," Telefonica's Chief Executive for
Europe, Matthew Key, said in an interview with Dow Jones Newswires.
"We always said 2008 would be our peak for capital
expenditures."
The extra cash helps Telefonica mitigate the impact of falling
revenue on its bottom line and free up cash for dividends.
Telefonica has been forced to lower rates as competition grows
and consumers look for cheaper alternatives for mobile and Internet
services. The shift is particularly evident in Spain, where
unemployment is higher than in most of Europe and low-cost
competition has increased recently.
In addition, European Commission telecommunications chief
Viviane Reding has pushed to reduce the fees operators charge each
other to connect calls, which directly hurts the revenue of mobile
carriers.
To be sure, Telefonica has benefited from its exclusive contract
to sell Apple Inc's (AAPL) iPhone, which helped to cement its top
spot in the intensely competitive U.K. market.
Telefonica earlier this month also won the exclusive contract to
sell Palm Inc.'s (PALM) new "Pre" smart phone in its European
markets, alongside the iPhone, giving it another unique selling
point. The iPhone has been sold by Telefonica in the U.K., Spain
and Ireland since November 2007.
France Telecom, which also faces pressure in key European
markets, plans to cut costs in the second half of the year after
lowering general expenses in the first half,in an effort to limit
the erosion of its operating margins and to maintain its dividend
policy and strong cash position.
A strong cash position can also help companies maintain their
credit ratings.
Net profit for the first six months ended June 30 fell 4.3% to
EUR2.56 billion from EUR2.68 billion last year, also beating
analysts' forecast of EUR2.4 billion.
Second quarter revenue fell 3.8% to EUR12.77 billion from
EUR13.28 billion last year, as all regions declined amid the
economic downturn, except France, Africa and the Middle East.
France Telecom closed up 3.3%, or 57 euro cents, at EUR17.56;
Telefonica closed up 2.1% or 37 euro cents, at EUR17.84.
European telecoms groups have come under pressure due to lower
mobile termination rates - the fees operators charge each other to
connect calls on their networks - and higher competition.
Dutch telecommunications company Royal KPN NV (KPN.AE) last week
lowered its revenue guidance for the full year and for 2010,
despite posting higher second-quarter net profit due mainly to
lower demand from businesses.
But the effects of the global downturn are not affecting all
companies equally. Vodafone Group PLC (VOD), the world's largest
mobile operator by revenue, last week reported a 9.3% rise in first
quarter revenue and reiterated its full-year guidance, despite the
steady decline in European revenue.
-By Jason Sinclair, Dow Jones Newswires, +34 913958127,
jason.sinclair@dowjones.com
Order free Annual Report for Vodafone Group PLC
Visit http://djnweurope.ar.wilink.com/?ticker=GB00B16GWD56 or
call +44 (0)208 391 6028