Ericsson Pain Is VEON Gain in Q1

A $350 million compensation payment from Ericsson has boosted VEON's profits for the first quarter of this year, but results were also helped by organic sales growth in major markets and cost cutting at Group level.

VEON, which counts Russia as its biggest country market, reported first-quarter sales of about $2.1 billion and saw net profit rise to $530 million, from just $42 million in the year-earlier quarter. The company blamed currency headwinds for a 5.6% drop in sales and said they were up 7.4% organically.

VEON's share price was up nearly 1% to €2.15 on the Amsterdam exchange at the time of publication, following today's earnings update, but remains 3% lower than at the start of the year amid some concern about various setbacks on digital transformation.

Ericsson coughed up its payment after its project to overhaul VEON's business support systems (BSS) ran into problems. The operator had been a flagship customer for Revenue Manager, a BSS package Ericsson launched in 2016. But when Revenue Manager was ditched earlier this year, VEON said it would fall back on alternative IT products from the Swedish vendor.

As previously revealed by Light Reading, its Russian business has also switched to a BSS product from Amdocs.

Ericsson blamed its decision to stop investing in Revenue Manager on a lack of market interest in such "full-stack" BSS products. The move prompted Ericsson to announce provisions of 3 billion Swedish kroner ($320 million) in pure write-downs and a total of SEK4.6 billion ($490 million) in restructuring charges at its digital services business.

"We are revising the terms of our relationship with Ericsson and redirecting them to help us with DBSS [digital BSS] architecture across many of our markets and as a result we have a $350 million dollar settlement that comes into the P&L in the first quarter," said Trond Westlie, VEON's chief financial officer, on a call with analysts this morning.

Thanks partly to the Ericsson payment, Group earnings before interest, tax depreciation and amortization (EBITDA) were up 52%, to nearly $1.3 billion.

VEON said its organic EBITDA margin improved one percentage point year-on-year because of lower group costs. Corporate costs were down one third, to $54 million, compared with the year-earlier period. VEON aims to cut the annual amount from $431 million in 2017 to around $216 million in 2020, and today's update suggests it may hit that target early.

The savings stem partly from the closure of an office in London as well as cutbacks at corporate headquarters in Amsterdam, triggered by VEON's decision several months ago to scrap a digital platform aimed at mobile customers across the entire Group.

Data published in March, in a filing with the US Securities and Exchange Commission, indicates that Group headquarters finished 2018 with just 507 employees, down 133 on the year-earlier figure.

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But overall headcount rose sharply over the same period, from 39,938 in December 2017 to 46,132 a year later, as VEON absorbed retail activities that were previously a part of Euroset, a joint venture with rival operator MegaFon.

Euroset was broken up in February last year, with VEON acquiring one half of its retail stores and making a $20 million payment to MegaFon under the terms of that deal.

Despite the increase in headcount, VEON's "cost intensity" (costs as a percentage of sales) fell 1.9 percentage points year-on-year, although the EBITDA margin in Russia shrank 1.1 percentage points, to 36.9%, on a pre-IFRS 16 basis, which ignores the impact of new accounting rules.

Kjell Johnsen, VEON's chief operating officer, said a good performance in the markets of Pakistan, Ukraine and Russia had buoyed results. "Those three countries are driving topline growth," he told analysts on VEON's call.

Organically, the operator continues to guide for low single-digit percentage growth in sales and low to mid-single-digit growth in EBITDA this year. While VEON did not provide capital expenditure guidance, Westlie said there is likely to be a slight increase this year because of needs in Russia and Pakistan. Last year it spent $1.4 billion across all geographical markets.

Executives declined to comment on speculation about the Bangladeshi business following local reports that VEON is trying to sell the asset.

"I don't see any reason why there shouldn't be decent growth this year, but I don't want to raise expectations for the long term," said Johnsen when asked to comment on the performance in Bangladesh. "We are more optimistic about Bangladesh now than before."

Reported first-quarter revenues in Bangladesh were up 3.5%, to $134 million, compared with the year-earlier period, while EBITDA rose 7.4%, to $60 million.

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— Iain Morris, International Editor, Light Reading