Europe cuts into carrier profits

Michael Carroll
09 May 2011

Early indications show that Europe was a tough nut to crack in the first quarter, with income at several domestic telcos down due to lower sales in the region.

Deutsche Telekom, Belgacom and Telecom Italia are the latest to admit that strong competition and regulatory measures impacted sales in the region during Q1, following on the heels of France Telecom, which earlier reported a 5.1% drop in EBITDA to €3.7 billion.

Belgacom’s net income fell from €638 million ($918.1 million) in 1Q10 to €194 million, as EPS plummeted from €1.99 a year ago to €0.60 in 1Q11. Revenue fell 3.5% year-on-year to €1.5 billion, due mostly to a €52 million hit from higher regulatory costs.

Deutsche Telekom fell short of analyst’s forecasts with a similar fall in revenue to €14.6 billion, and 5% lower EBITDA during the quarter. Analysts at RBC Capital Markets note tough conditions in Europe played a part in the falls, but attributed most of the blame to T-Mobile USA.

“Bond holders and shareholders alike must be keeping their fingers crossed that the sale to AT&T gets regulatory clearance,” Roger Appleyard, global head of credit research at RBC told TelecomAsia.

The US business lost 471,000 contract customers and generated EBITDA 7% lower than analysts predicted, he said, noting that revenues were also down at Deutsche Telekom’s units in the Netherlands, Greece, Austria, Poland, Slovakia and Germany, though the domestic division boosted earnings by slashing 7% from opex.

“These results can be summarized as, Domestic = good and Europe (excluding Germany) = bad,” Appleyard comments. “T-Mobile USA is ugly, but that is less relevant for the credit as it is being sold (hopefully).”

Telecom Italia will wish the same is true of its first quarter results, with Appleyard noting its domestic performance “was a disappointment,” after revenues fell €378 million to €4.5 billion during the period. Higher sales at its Argentine and Brazilian businesses spared the carrier’s blushes, though, fueling a 3.6% rise in overall EBITDA to €2.9 billion.

“There is not much comfort to be gained from the numbers,” Appleyard notes. “Domestic mobile continues to be heavily challenged, and the long sought after improvement remains elusive.”

Appleyard cautions the firm’s credit rating could be at risk if “double-digit mobile revenue declines continue through the year.”

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