Tele2 Earnings Suffer on Dutch 4G Costs

Sweden's Tele2 has reported shrinkage in earnings for the April-to-June quarter due to higher costs in the Netherlands, where it is rolling out its own 4G network, but managed to boost sales thanks to customer growth in Kazakhstan.

Overall revenues grew by 4%, to 6.6 billion Swedish kronor (US$764 million), compared with the second quarter of 2014, while EBITDA fell by 5%, to SEK1.4 billion ($162 million).

Tele2 AB (Nasdaq: TLTO)'s net profit also tumbled to SEK309 million ($35.8 million), from SEK821 million ($95.1 million) in the year-earlier period. Tele2 blamed that drop chiefly on last year's revaluation of a put option in Kazakhstan, which had the effect of boosting its profit before tax by SEK363 million ($42 million) in the second quarter of 2014.

The operator's share price was trading 5% lower in Stockholm at 12:10 p.m. CEST today after it appeared to miss analyst expectations for second-quarter earnings.

Tele2 operates as an MVNO in the Dutch market but has also been deploying a 4G-only network and transferring customers on to this infrastructure -- a process that is proving costly in the short term.

"The surge in data growth coupled with our dependency on an MVNO relationship will … continue to be a drag on EBITDA until full launch," said Mats Granryd, Tele2's president and chief executive, in a company statement.

Tele2's Dutch 4G network is currently available to 80% of the population and the operator expects to complete the rollout by the end of March next year.

Investments in the Netherlands were also to blame for a year-on-year rise in capital expenditure, which grew to SEK1.1 billion ($127 million) from SEK850 million ($98 million) in the year-earlier quarter.

Tele2 finished the second quarter with nearly 13 million mobile customers across its eight mobile markets, up from about 11.9 million in June last year, but its customer base shrank in all countries except Germany, Kazakhstan and the Netherlands.

Customer growth in Kazakhstan, where Tele2 added 421,000 customers in the second quarter, was largely responsible for the increase in overall sales.

But Tele2 also flagged a rise in subscriber acquisition costs in the country, noting that price-based competition remains "intense."

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Besides its mobile operations, Tele2 also operates broadband networks in the markets of Austria, Germany, the Netherlands and Sweden, but its broadband business has been struggling, finishing the second quarter with 593,000 customers, down from 616,000 in June 2014.

Hoping to bolster its performance in the Netherlands, Tele2 earlier this week signed a new seven-year wholesale deal to use broadband infrastructure owned by Dutch incumbent KPN Telecom NV (NYSE: KPN). (See Eurobites: Telefónica Offloads Towers to DT.)

"We don't have great coverage or great speed in higher segments and we'll be able to offer coverage and speed as good as KPN's, which will help us to upsell into the mobile business and reinvigorate the fixed business," Granryd told analysts on an earnings call.

Tele2 continues to generate the bulk of its sales and profits in Sweden, which accounted for 47% of overall revenues and 65% of EBITDA in the second quarter.

The operator claims to have witnessed a 2% increase in sales and a 10% rise in EBITDA in its domestic market over the first half of the year, attributing these improvements to soaring demand for mobile data services, the conversion of prepaid customers to postpaid plans, successes in the enterprise sector and lower expansion costs.

Tele2 is sticking to guidance that mobile service revenue will grow at a "mid-single digit" rate this year and expects to generate overall sales of SEK25.5-26.5 billion ($2.95-3.1 billion), having reported revenues of about SEK26 billion ($3 billion) last year.

It is also forecasting EBITDA of SEK5.8-6 billion ($671-695 million), compared with SEK5.9 billion ($683 million) in 2014, and capex of SEK3.8-4 billion ($440-463 million, up from SEK3.5 billion ($405 million) last year.

In the longer term, Tele2 is aiming to reduce annual costs by SEK1 billion ($116 million) from 2018 onwards through a major efficiency program that will entail the consolidation of network operations, back-office transformation, product simplification and staff redundancies.

The program now includes more than 30 initiatives, including the offshoring of back-office administrative tasks in finance and customer operations to Riga (Latvia) and India respectively.

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

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