Pain in Spain & Eurasia Hits TeliaSoneraPain in Spain & Eurasia Hits TeliaSonera

Sweden's TeliaSonera has reported a decline in operating profit on flattish revenue growth after being hit by price-based competition in Spain and mounting economic problems in Eurasia during the October-to-December quarter.

Operating income fell by 4.8%, to 6.76 billion Swedish kronor (US$820 million), while revenues squeaked up by 0.2%, to SEK26.6 billion ($3.23 billion), compared with the fourth quarter of 2013.

The Swedish company -- which operates networks in an array of European and Central Asian markets -- indicated that revenues would have dropped by 2.2% were it not for favorable foreign exchange movements.

Figure 2: Source: TeliaSonera

Thanks to a sharp fall in financing costs and other one-off effects, it was also able to report a 34.2% rise in net income attributable to owners of the parent, to SEK2.94 billion ($360 million), although net income for the entire year fell by 3.1%, to SEK14.5 billion ($1.76 billion).

Full-year revenues slid by 0.8%, to SEK101.1 billion ($12.28 billion), while operating income was down 7.3%, to SEK22.7 billion ($2.76 billion).

The results appeared to miss analyst expectations, sending Telia Company 's share price down 1.7% in early-hours trading.

Speaking to analysts after the publication of results, CEO Johan Dennelind expressed satisfaction with the performance in Sweden, where the take-up of 4G services fueled revenue growth in the fourth quarter, but concern about conditions in Eurasia.

"For the first time in a long time we are in negative service revenue growth territory across the region as a whole," he said. "Economies are under pressure from the [Russian] ruble's decline and a fall in oil prices -- that's spilling over into these markets."

Figure 1: * Service revenue growth impacted by slower performance in some of the major markets. Source: TeliaSonera

In Spain, meanwhile, revenues slumped by 21.9% year-on-year in the fourth quarter, to SEK2 billion ($240 million), due to a sharp fall in customer spending. Yoigo , TeliaSonera's Spanish business, has been hard hit by competition from rivals Orange Spain and Vodafone España S.A. , and TeliaSonera appears increasingly interested in selling the business to another player.

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"There is space for Yoigo to make an impact but we're open to solutions that might be good for us and for shareholders," said Dennelind when quizzed about a possible sale during the earnings presentation.

TeliaSonera is also optimistic that authorities in Norway will next week approve its SEK5.1 billion ($620 million) takeover of Tele2 AB (Nasdaq: TLTO)'s local business. Consolidation should relieve some of the competitive pressure on Norwegian players, although regulatory authorities could force TeliaSonera and Tele2 to relinquish spectrum holdings or sell network capacity to rivals before signing off on the deal.

Consolidation may be afoot in Denmark, too. Last month, TeliaSonera announced plans to form a 50:50 joint venture in the country with Telenor Group (Nasdaq: TELN), aimed at generating annual savings of 800 million Danish krone ($121 million) from 2019 onwards, and Dennelind hopes to secure regulatory approval for that deal later this year.

He also refused to rule out the possibility of fixed-line acquisitions in Scandinavia, which would help TeliaSonera provide converged services to its customers. "We're taking it step by step -- let's see about the joint venture in Denmark and what happens in Norway and we'll see about taking it to the next level after completing those transactions," he told analysts.

Figure 3: Source: TeliaSonera

Meanwhile, cost cutting remains a key objective for the entire Group. Under its "invest to save" and "invest to grow" programs, TeliaSonera is spending heavily on technologies that will allow it to reduce operational costs and provide next-generation services to customers.

While it did not issue revenue guidance for 2015, the operator expects to generate SEK35 billion ($4.24 billion) in EBITDA -- the same as it made in 2014 -- and to spend around SEK17 billion ($2.06 billion) in capital expenditure, up from SEK16.7 billion ($2.02 billion) in 2014.

"We plan to reduce costs by SEK2 billion [$240 million] in 2017 but to do that we need to invest heavily to get a growth platform for coming years," said Dennelind.

Spending is also being channeled into the rollout of high-speed fixed and mobile networks in Sweden, with capital expenditure up to 16.3% of sales in the fourth quarter, from 11.7% in the same period of 2013.

Having declined in each of the first three quarters of 2014, mobile service revenue in Sweden grew by 1.5% in the fourth quarter, while the number of households covered by fiber networks rose to 1.12 million last year, from 800,000 in 2013. "We're connecting one villa [household] every fifteen minutes but we expect the rate to grow to five every hour," said Dennelind.

— Iain Morris, , News Editor, Light Reading