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Downturn Fog Clearing in Europe

Reports from three leading European carriers today raise cautious hope that Europe has cleared the telecom downturn.

British Telecommunications plc (BT) (NYSE: BTY; London: BTA), Deutsche Telekom AG (NYSE: DT), and Telefònica SA all had at least some heartening news in quarterly earnings summaries (see BT Reports Q2 Results and DT Posts Q3, Cuts Debt).

The results show steady forward progress in revenues and profits, along with continued reductions in debt and expenses -- all pointing to a more stable outlook. Here are some highlights:

  • BT reported flat quarterly revenues of £4.5 billion (about US$7.6 billion), but continuing last quarter's trends, profit before taxation was £529 million ($892 million), up 7 percent year-over-year and 5 percent sequentially; and earnings per share of 4.4 pence was up 19 percent year-over-year and 7 percent sequentially. Free cash flow for the fiscal half-year to date was up 60 percent to £1.2 billion ($2.02 billion). BT's net debt of £8.768 billion ($14.8 billion) is also down 33 percent since last year. While BT has seen its traditional services like wireline voice continue to decline in revenue, broadband, mobility, and other "new wave" services are on the upswing. For the half-year ended September 30, BT reported £5.76 billion ($9.7 billion) in traditional services, down 5 percent year-over-year; but £915 million ($1.54 billion) in "new wave" services was a 20 percent year-over-year increase.

    The results have led BT to increase its latest dividend by 42 percent, to 3.2 pence per share, and set a goal of bringing its dividend from 50 percent of earnings for the full year to 60 percent of earnings for its next fiscal year.

  • Deutsche Telekom posted quarterly revenue of €14.1 billion (about $16 billion), up 3.6 percent sequentially and 5 percent year-over-year. Net income was up €508 million ($596 million), continuing a "back in black" trend that started this spring (see Deutsche Telekom Back in Schwarz), reversing the alarming losses of 2002 (see Telekom Drops Bomb on CeBIT), when DT reported a stunning €20 billion ($23 billion) loss for the third quarter. The carrier boasted, too, of reducing its debt to €49.2 billion ($57.7 billion) from €64.3 billion ($75.4 billion) at the end of the last year's third quarter. "We have achieved the turnaround...," said DT chairman Kai Uwe-Ricke in a speech in Bonn this morning. "We have subjected the Group to a really drastic cure -- but this has done us good." He said the company's focus will now be on "profitable growth."

  • Telefònica reported revenues of €20.8 billion (about $24.3 billion) for the nine months ended September 2003. While that was down 3 percent from the same period in 2002, the difference was largely due to exchange rates, the Spanish carrier said. Quarterly revenue was up over 5 percent, thanks largely to mobile sales. Net income was €2 billion ($2.3 billion) for the nine months ended September 2003, compared with a net loss of €5 billion ($5.86 billion)for the same period last year. Operating profit was €4.59 million ($5.38 million), a 20.7 percent year-over-year increase. Revenues for the company's Latin American operation increased more than 15 percent last quarter.

While the three companies weren't specific on market outlook, all appeared buoyed by their results. The big question remains: Is the market itself turning around?

Some market researchers say yes. "I would say the downturn has bottomed out in Europe," says Richard Webb, directing analyst at Infonetics Research Inc. He says carriers have managed to decrease capex but increase revenues sufficiently to show a ratio between the two of below 15 percent -- much healthier than the 23 percent ratio of 2001.

Webb says European carriers are also slowly but surely moving to IP deployments that will supersede legacy networks and pave the way for better revenue growth.

Another forecaster, senior analyst João Bello of Pyramid Research, says European incumbents, notably BT, have managed to stabilize their spending, while DSL is driving a move to IP-based networks. As DSL gets more popular and prices continue to drop, Bello says, carriers will start opening their wallets on aggregation gear.

But Bello is clear there won't be any grand layout of capex in Europe: Instead, he says, DT and BT will make only "demand driven investments," making growth slower but more reliable than it was during the bubble.

— Mary Jander, Senior Editor, Light Reading

SIVROCX 12/4/2012 | 11:15:27 PM
re: Downturn Fog Clearing in Europe From the information presented in this article I do not see how any person can draw the conclusion that the market is turning around in Europe. I think the author of this article had his head, well shall we say between cloud layers!
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