Tele2 targets further cuts as sales remain flat

Swedish service provider Tele2 has raised fears of workforce reductions by revealing plans to slash annual operating costs by another 1 billion Swedish kronor (US$100 million) during the next three years.

The plans were announced as the company published financial results for the final quarter of 2019 that showed a 1% fall in sales, on a like-for-like basis, and a 10% increase in underlying earnings, compared with the year-earlier period.

Boosted by Tele2's $3.3 billion takeover of cable firm Com Hem in November 2018, reported revenues were up 10%, to about SEK7.3 billion ($760 million). Tele2 also swung to a net profit of SEK790 million ($82 million), from a net loss of SEK679 million ($70 million) a year earlier, thanks mainly to a fall in depreciation and amortization charges.

CEO Anders Nilsson said Tele2 had already managed to cut the annual run rate for operating costs by roughly SEK800 million ($83 million) and that its latest cost-saving targets would mean "that we will have reduced cost by at least SEK1.8 billion [$190 million] between 2018 and 2022."

The savings, he said, are to come partly from the removal of legacy IT systems and partly from the elimination of "silos" and "double functions." Nilsson said the cuts would mainly be realized in 2021 and 2022 and that Tele2 planned to "reinvest savings into our two new product launches this year."

He is targeting low single-digit percentage growth in service revenues this year as well as mid-single-digit growth in earnings (before interest, tax, depreciation and amortization, after leases).

Nilsson said Tele2's strategy to reduce operating costs but maintain or increase capital expenditure would lead to "significant cash flow generation, and we intend to distribute that to shareholders."

Tele2 expects to invest between SEK2.5 billion ($260 million) and SEK3 billion ($310 million) in capital expenditure this year, after spending SEK2.4 billion ($250 million) in 2019, and is proposing a 25% increase in its ordinary dividend this year, to SEK5.50 per share.

Despite the increase, Tele2's share price barely moved in Stockholm during early morning trading, although it has risen 27% over the past year.

While Sweden remains the company's largest market, Tele2 also serves customers in Estonia, Latvia, Lithuania and Germany, and had 5,184 employees on its books at the end of 2018, up from 4,398 a year earlier. The figure was boosted by the Com Hem takeover, which added 897 employees, said Tele2 in its last annual report.

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Workforce numbers are not yet available for 2019, but Tele2's 2018 data means it was generating about $474,000 per employee that year (using today's exchange rate), a figure that puts it ahead of major European incumbents such as BT, Deutsche Telekom, Telecom Italia and Telefónica.

The company is increasingly dependent on Sweden, where it generated more than 80% of its revenues in the final quarter of 2019. Yet growth opportunities remain few in such a developed market for telecom services.

Like operators in other countries, Tele2 believes a move into "convergence" -- or the sale of fixed, mobile and TV services under one bill -- will help to attract customers and minimize churn. Its takeover of Com Hem gave it the fixed-line assets it needed to become a fully convergent player.

The deal was previously welcomed by analysts as a logical move. "In such a market the strength of your brand and distribution is very important, and of course size matters," said Bengt Nordström, the CEO of Northstream, a consulting business today owned by Accenture, when the deal was announced. "The bigger the marketing budget you have the more you can spend on your brand and the more extensive your distribution can be. That is why a deal like this makes sense."

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— Iain Morris, International Editor, Light Reading

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