Finland's Elisa bucks trend of telco decline

Think of Finland and people would probably conjure images of snowy flatlands furrowed by the odd rifle-toting, cross-country skier. Geographically, it's almost as big as Germany but only 5.5 million people live there, speaking a language that seems to have more in common with Hungarian than other Nordic tongues. National pastimes, besides trudging through snow and sniping at moose, include sitting in steamy log cabins and self-flagellating with a birch twig.

To the telecom observer, it's also home to one of the world's largest equipment vendors in Nokia and one of its most unusually named and distinctive operators. Most network companies go with does-what-it-says-on-the-tin names like Acme Telecom. So did Finland's biggest mobile operator previously, calling itself Helsingin Puhelin (Helsinki Phone) until the turn of the millennium, when it suddenly switched to Elisa, a popular girl's name in Spain that also (apparently) means "God's promise" in ancient Hebrew. Either the company boss had just met the woman of his dreams, or he had found religion.

It bucks a five-year trend among Europe's telecom incumbents of share-price shrinkage (every one of the big six – BT, Deutsche Telekom, Orange, Telecom Italia, Telefónica and Vodafone – is worth less now than it was in July 2017 bar Deutsche Telekom), gaining 45% over this period. And its second-quarter results published today are strangely good for a company in this sector.

Elisa's share price in Helsinki (€)
(Source: Google Finance)
(Source: Google Finance)

The headline figures show a 7.7% increase in sales, to €522 million ($524 million), compared with the year-earlier period, and a 12.3% increase in pre-tax profit, to €108 million ($108 million). It has achieved that while extending 5G services to 80% of the Finnish population, it claims. Across Finland and Estonia (its only other market), Elisa picked up another 68,000 mobile customers in the quarter, serving more than 5 million at the end of June. The figure has steadily ticked up from about 4.7 million in 2016. Customers are spending more, too. In Finland, average revenue per user (ARPU) has risen to €19.9 a month, from €16.6 in 2016.

It helps that Finland is not the most fiercely contested mobile market, despite what Elisa says about the "intensely competitive" environment in its earnings update. While neighboring Denmark and Sweden are each home to four networks, Finland has just three – the lowest number possible before the word "duopoly" starts floating around. Its telecom regulator is kinder than others in Europe. During the last major spectrum auction in 2018, the sale was structured so that each network emerged with 130MHz in the important midband. Fees of just $0.04 per MHz per head of population were among the lowest in the region.

Automation pioneer

What really marks out Elisa, though, is a bid to become a supplier to other telcos. It claims to be a pioneer in automation and as long ago as 2018 was boasting that its network operations center was run entirely by machines. A self-organizing network (SON) developed internally was then carrying out 3 million configuration checks and 3,000 network changes every day, supervised by a sole engineer.

Lacking big geographical markets into which it can expand, and facing a domestic market in which there are many more phones than people, Elisa has pursued growth by selling its smarts to operators elsewhere. In 2019, it acquired Polystar, a Swedish provider of analytics, service assurance and monitoring software, before adopting Elisa Polystar as the brand for its telco-facing unit. Bolt-on takeovers of FRINX, a Slovak specialist in automation software, and Cardinality, a UK firm in the service assurance and analytics space, have recently followed (as recently as last week, in the case of the Cardinality deal, which is not expected to close until September).

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It would be an exaggeration to say all this has been transformative. While nowhere in its financials does Elisa break out Elisa Polystar revenues, Polystar made just €37 million ($37 million) annually at the time of the acquisition, and Elisa's annual revenues from corporate customers rose only €65 million ($65 million) between 2019 and 2021, to €757 million ($760 million). A line item for "digital services revenues" in its earnings spreadsheet recorded sales of €107.2 million ($107.7 million) for the second quarter, up 16% year-on-year.

But there is analyst optimism that recent activity could boost Elisa. James Crawshaw, a principal analyst with Omdia (a sister company to Light Reading), thinks highly of Cardinality and believes that deal and the FRINX takeover could help Elisa Polystar to become a "more significant player" in service assurance than it has previously been.

Fixed and Russian worries

Other parts of the company are a bigger concern. At its fixed-line unit, broadband subscriptions have fallen from about 700,000 in 2020 to 653,000 at the end of the recent second quarter. "Competition in the fixed broadband market has continued to be intense in multi-dwelling units, and the number and usage of traditional fixed network subscriptions is decreasing," complained Elisa in today's update.

What's more, its outlook is bleaker than its latest set of numbers would suggest. For the full year, Elisa is guiding for both revenues and earnings "at the same level as or slightly higher than in 2021." This comes after sales rose more than 5% last year and earnings by roughly 3% and would seem to augur a slowdown in the second half of 2022. The market's reaction today was to send Elisa's share price down about 2% in Helsinki.

Management has the usual worries in today's world of broken supply chains, rising inflation and geopolitical scares. Russia's war in Ukraine gets a mention in the earnings report. The concern there is about the impact on energy prices and the possibility of "cyber incidents," a euphemism for Vladimir Putin-led sabotage. Given that Finns ski not far from a 1,340km land border with the world's biggest rogue state, the anxiety is hardly a surprise.

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— Iain Morris, International Editor, Light Reading

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