x
4G/3G/WiFi

VEON comes unstuck in Russia

VEON CEO Ursula Burns has warned investors that a "course correction" in Russia will take several quarters as she blamed network and distribution problems for customer losses that have triggered a fall in market share.

Results out today show the operator lost 1.4 million customers at its Beeline-branded Russian unit in the year to September, with third-quarter sales falling 2.7%, to 74.7 billion Russian rubles (US$1.2 billion), compared with the same period in 2018.

VEON, which runs networks in a cluster of emerging markets, maintained its financial guidance for modest growth in group sales and profits, but the update on Russia, which accounts for more than half of VEON's revenues, was the focus of analyst attention during a phone call with senior executives earlier today.

"In Russia our operation continues to face challenges related to a coverage and performance gap with competitors, despite improvements," said Alex Kazbegi, who joined VEON as chief strategy officer this year, having previously worked as an analyst for Renaissance Capital.

VEON has been working to fix the Russian mess by channeling additional funds into its networks, boosting the number of 4G basestations by 43% in the third quarter, according to its earnings report.

However, the extra investment led to a sharp increase in Russian capital expenditure as a percentage of revenues (capital intensity). Excluding licensing fees, that figure rose to 18.2% in the third quarter, from 16.8% a year earlier, even though total capital expenditure in Russia (excluding licensing costs) fell by 11%, to about RUB11 billion ($170 million), over the same period.

Kazbegi warned analysts to expect a capital intensity ratio of 22% in Russia this year as VEON works to catch up with bigger Russian rivals MTS and MegaFon.

But executives declined to say whether the 22% capital intensity ratio would continue into next year. "It will include doing what is necessary to fix gaps that still exist," said Kazbegi when asked about the network strategy on today's call. "We will look at the targeted investment to bring up to speed the coverage and capacity in areas where we feel it is most needed."

He also drew attention to inefficiency across the distribution system and said VEON had closed 120 stores in the quarter and would continue reducing its retail footprint and driving customers toward online sales.

VEON had 3,073 so-called "mono-brand" stores in Russia at the end of last year, according to financial documents, as well as 1,761 franchise stores.

Besides witnessing problems on the network and distribution side, VEON appears to have been hit by a shift to "unlimited" tariffs in the Russian market. Average monthly data usage per customer soared 52.7% year-on-year in the quarter, to nearly 5.7GB, and yet average revenue per user was up just 1%, to RUB353 ($5.60) per month.

Kazbegi said VEON had also been changing its pricing model so that service bundles are "more geared to value."

Despite management optimism, a turnaround that lasts several quarters risks becoming a big distraction for the operator, which has already been forced into a U-turn on its digitalization strategy after efforts to create a platform for customers across the entire group met with failure.


For all the latest news from the wireless networking and services sector, check out our dedicated mobile content channel here on Light Reading.


Competitive and regulatory conditions remain difficult in markets such as Algeria and Pakistan and VEON's headline third-quarter revenues fell 4% year-on-year, to about $2.2 billion, although the decline was just 0.9% on a purely organic basis.

The operator's share price had fallen 1.4% in Amsterdam at the time of publication, to about €2.15 ($2.40), and has lost 15% of its value in the past year.

Facing a sales squeeze and unpredictable markets, VEON has been trying to lift profits by slashing costs and enjoyed further success at the earnings (before interest, tax, depreciation and amortization) level in the third quarter, with that margin rising to 44.4% from 38.6% a year earlier.

It is trying to reduce its overall cost intensity by one percentage point annually between 2019 and 2021, and the figure was down from 61.8% in 2018 to 58.9% in the recent third quarter.

Most of the improvement is still expected to come from a reduction in corporate costs, which dropped 40% year-on-year in the quarter, to $56 million, thanks to cuts at VEON's Amsterdam headquarters.

In January, VEON confirmed that its decision to scrap an ill-fated digital platform would trigger the loss of about 200 jobs in the organization, including 100 at group headquarters in Amsterdam. Under a revised digital strategy, the different operating companies will have more autonomy.

Documents filed with the US Securities and Exchange Commission show headquarters finished 2018 with 507 employees, down 133 on the year-earlier figure, with overall group headcount up sharply from 39,938 to 46,132 over the same period. The increase is explained by VEON's integration of retail activities that were previously a part of Euroset, a former joint venture with MegaFon.

VEON today said it was on track to meet its target of halving corporate costs between 2017 -- when it spent $431 million in total -- and the end of this year.

Related posts:

— Iain Morris, International Editor, Light Reading

Be the first to post a comment regarding this story.
HOME
Sign In
SEARCH
CLOSE
MORE
CLOSE