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Telekom Austria Eyes Mobile Capex Cuts

After years of expanding into Central Europe, Telekom Austria AG (NYSE: TKA; Vienna: TKA) is now focused on saving cash, and it is prepared to cut capital expenditure in its mobile networks to hit its free cashflow target this year, if necessary.

The operator aims to have operating free cashflow of €1.1 billion (US$1.6 billion) for full-year 2009, and is determined to meet that target even if it means scaling back on network investments.

"You need to have good cash flow in a difficult time," said CFO Hans Tschuden, speaking to a group of journalists in Vienna on Monday. "If there is a shortfall, we can compensate by less capex spending."

Tschuden told Unstrung that if it is forced to reduce infrastructure investments, then mobile access is where the cuts would be made because the mobile business has not grown as much as the operator thought it would this year.

"Year over year, we had anticipated certain growth in subscriber numbers and volume, and here and there the growth is not materializing yet," he said. "So we can shift capex for this year to next year or maybe later."

Telekom Austria's estimated total capex spend for 2009 is €800 million ($1.2 billion). As of the end of the second half of this year, the operator had spent just €265.3 million ($395 million) of that budget. But Tshuden explained that the operator always spends more in the second half of the year and that there are four fiber-to-the-home (FTTH) projects going on that will need investment this year.

Capex can be reduced in several ways, explained Tschuden, and it is not necessarily a simple matter of buying less equipment. The operator can renegotiate the terms and conditions it gets from a supplier, for example. Also, certain greenfield markets may not need as much investment this year as the previous year. And the competition among vendors can also drive down prices.

"Here and there we see new suppliers coming in like Huawei , which wants to gain a foothold in Europe and they try to offer attractive terms to players like us," he said.

Huawei Technologies Co. Ltd. already supplies Telekom Austria's mobile operator Mobilkom Austria AG & Co. KG with 3G data cards and dongles, but it does not supply mobile infrastructure equipment "yet," according to Tschuden.

Telekom Austria's mobile infrastructure suppliers, which could potentially be affected by a capex cut, are Alcatel-Lucent (NYSE: ALU), Ericsson AB (Nasdaq: ERIC), Motorola Inc. (NYSE: MOT), and Nokia Networks for GSM, and Alcatel-Lucent and Ericsson for 3G. These are the operator's suppliers across the group, which includes operations in Belarus, Bulgaria, Croatia, Macedonia, Serbia, and Slovenia.

A look at Telekom Austria's latest financial report shows the slowdown in the mobile business: Mobile revenues were down 1.2 percent to €1.6 billion ($2.4 billion) in the first half of this year compared with the same period last year. And mobile operating income was down 11.3 percent to €297 million ($442 million), compared with €334 million ($497 million) last year.

What about LTE?
Since Telekom Austria is closely watching its mobile capex budget this year, it is not ready to splash out on next-generation mobile broadband Long Term Evolution (LTE). And the operator has already invested to beef up its 3G network. Mobilkom launched one of the world's first HSPA+ networks with downlink speeds capable of up to 21 Mbit/s in March, and it plans to upgrade that to 28 Mbit/s by the end of the year.

"Some of our competitors already announced they are prepared to invest in LTE, which is kind of strange," said Tschuden. "We have unutilized capacity in UMTS networks in Austria. LTE is something I have a question over the rationale behind... besides the fact that there's frequency missing for LTE networks."

The Austrian regulator has not yet determined how 800 MHz spectrum (the so-called digital dividend) will be allocated to mobile operators and when. It is not likely to be available in the country until 2013. And Telekom Austria views 2.6 GHz spectrum, which will be available sooner for LTE services, is not cost effective for a nationwide LTE rollout. (See T-Mobile Reveals LTE Trial With Huawei.)

"With 2.6 GHz, [it takes] a lot of investment to have good coverage," said Tschuden.

Or, as Mobilkom CTO Johann Pichler puts it, rather directly, "2.6 GHz is stupid and makes no sense [for nationwide LTE] - no one will pay for that."

— Michelle Donegan, European Editor, Unstrung

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