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Euro Carriers Suffer Profits Dip

Europe's telecom operators have experienced a tough start to 2007, with a number of carriers all over Europe reporting a slump in profits for the first three months of the year.

Increasing competition, pricing pressure, and operating cost issues have all played their parts in depressing the profit margins of a number of incumbent and significant competitive carriers, though there are still a few that are bucking the trend.

  • In the Netherlands, incumbent KPN Telecom NV (NYSE: KPN), which has been tackling some operational issues as it rolls out its consumer VOIP service, saw its first-quarter net income drop by 18 percent to €313 million (US$424 million). That slump would have been greater without an improved performance from its mobile operations in Belgium and Germany. (See KPN Suffers VOIP Hiccup and KPN Reports Q1.)

  • In Denmark, national operator TDC A/S (Copenhagen: TDC) announced a 27 percent drop in first-quarter profits to 806 million Danish Kroner ($146 million) from revenues down 1 percent at DKK11.4 billion ($2.1 billion). CEO Jens Alder sums up the situation neatly: "We are in a market with hardly any growth and at the same time prices continuously go down," he states in the company's earnings announcement, which notes that "earnings are not satisfactory." (See TDC Reports Q1.)

    One way to address the situation is by cutting costs, so TDC is cutting between 5 and 7 percent of its Danish staff this year -- that's between 650 and 910 jobs being cut. The cull is starting at TDC Solutions, the fixed-line services division, where 465 folk will be made redundant.

  • Switzerland's national operator, Swisscom AG (NYSE: SCM), today reported first-quarter revenues unchanged from a year ago at 2.38 billion Swiss Francs ($1.95 billion), as broadband and mobile sales compensated for the drop in traditional voice revenues. Net income, though, dipped 14 percent to CHF467 million ($383 million) due to costs associated with new services, such as IPTV, and the development of new business opportunities. (See Swisscom Reports Q1, Swisscom Finally Launches IPTV, and Swisscom Fires Up VDSL.)

    Swisscom is keen to find growth opportunities outside its domestic market, which is why it's buying Italian triple-play pioneer Fastweb SpA (Milan: FWB). (See Swisscom Bids $4.9B for FastWeb.)

  • Telenor Group (Nasdaq: TELN), the national carrier in Norway, also had a tough first quarter in terms of profitability, as increasing costs sent net income down about 27 percent to 2.68 billion Norwegian Kroner ($446 million), even though revenues climbed 5 percent to NOK22.45 billion ($3.74 billion). (See Telenor Reports Q1.)

  • Golden Telecom Inc. , one of the most aggressive carriers in Russia, saw its net income fall by 33 percent to $12.6 million compared with a year earlier, even though revenues soared by 44 percent to $256 million. (See Golden Reports Q1.)

    The main cause of that profit reverse was a change in the carrier's executive incentive scheme from a cash bonus plan to a stock options-based incentive scheme. The cost of converting from one scheme to the other, and the resulting conversion of outstanding and accrued cash bonuses into stock, bit a hole in the first quarter's profits. The move wasn't a hit with investors, as Golden's share price lost $4.20, nearly 7 percent, on Tuesday to close at $56.54.

  • Germany's carrier giant, Deutsche Telekom AG (NYSE: DT), reports its first-quarter results Thursday (May 10) and is expected to follow the trend by reporting lower profits compared with a year ago. The analyst team at Dresdner Kleinwort expects net income to fall by about 15 percent to €828 million ($1.12 billion) from revenues of nearly €15.3 billion ($20.7 billion), up more than 2 percent.

    Bucking the trend
    Not all of Europe's carriers are reporting lower profits, though. Telecom Italia (TIM) , the subject of much ownership attention in the past few weeks, has just announced a 4.2 percent rise in first-quarter profits, to €775 million ($1.05 billion), from revenues of €7.54 billion ($10.2 billion), up nearly 1 percent. (See Telecom Italia Reports Q1 and Telefónica Takes Stake in Telecom Italia.)

    And French alternative carriers Iliad (Euronext: ILD) and Neuf Cegetel Group (Euronext: NEUF) continue to perform well, having both announced significant profit gains in their full-year 2006 reports, and, more recently, healthy revenue increases in the first quarter of 2007. (See Iliad Reports Q1, Iliad Reports 2006, Neuf Cegetel Reports Q1, and Neuf Cegetel Reports 2006.)

    — Ray Le Maistre, International News Editor, Light Reading

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