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Telenor's Cost-Cutting Focus Rattles InvestorsTelenor's Cost-Cutting Focus Rattles Investors

Norwegian incumbent loses 4% of its value in Oslo after analysts question focus on efficiency and accuse it of 'hoarding cash.'

Iain Morris

April 24, 2018

4 Min Read
Telenor's Cost-Cutting Focus Rattles Investors

Telenor's first-quarter numbers should have been a treat for any investor. Up 20% year-on-year, to 4.99 billion Norwegian kroner ($630 million), first-quarter net profit easily beat analyst expectations of NOK3.53 billion ($450 million). Dividend payments to shareholders could total NOK18.6 billion ($2.35 billion) this year, up from just NOK11.3 billion ($1.43 billion) in 2016. "It's a record year in terms of distribution to shareholders," CEO Sigve Brekke told analysts this morning.

Yet the Norwegian operator's share price was trading down 4% in Oslo this afternoon, following the earnings update. Setbacks in India, where Telenor Group (Nasdaq: TELN) is struggling to offload its loss-making Indian business to Bharti Airtel, seem partly to blame. But a Q&A session with analysts also revealed unease about Telenor's cost-cutting strategy and low financial leverage.

Weak growth prospects have spurred Telenor to prioritize efficiency above all else. One in five jobs will go in the next three years because of digitization and automation, the operator said in early 2018. It finished last year with 31,000 workers, down from 37,000 a year earlier, although the planned sale of its Indian business accounts for about 4,000 of those reductions. (See Downsizing Telenor Pins Margin Hopes on Automation.)

Jobs seem bound to go with the opening of a single IT and network delivery center in Asia to replace older facilities. This has already been equipped to support operations in Bangladesh, Malaysia and Myanmar. Telenor hopes it will deliver a 20-30% reduction in annual regional costs of about NOK2.6 billion ($270 million). In Singapore, meanwhile, it has set up a new procurement business that should manage three quarters of external spending by 2020. That seems likely to result in job losses elsewhere, as does the growing customer enthusiasm for new digital tools when upgrading or querying service plans.

The results so far are undeniably impressive. Operating costs in the first quarter were 7% lower than a year earlier. Even though sales fell nearly 2%, to NOK27.6 billion ($3.5 billion), earnings (before interest, tax, depreciation and amortization) were up 7.6%, to NOK11.3 billion ($1.4 billion), rising 10% in "organic" terms, according to Brekke. Telenor has cash to fling at shareholders.

But Goldman Sachs questions whether this is sustainable and points to a "lack of confidence" in the investor community. It frets about the riskiness of cutting marketing and commercial expenditure with sales in decline, and worries that similar cost-saving aggression displayed by Telenor's rivals, including Swedish incumbent Telia, could erode any advantage Telenor might have.

Forced to defend the strategy, Brekke and CFO Jørgen Rostrup insisted that cost savings were not about delivering a short-term boost to profits and would not hinder competitiveness. "These are cost reductions based on procurement, common delivery centers, virtualization, cloud-based IT systems," said Brekke. "We are systematically making the organization more efficient. The machine is starting to work."

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There is, moreover, concern that Telenor is "hoarding cash," as one analyst put it during the operator's Q&A session. Its net debts currently equal about 0.9 times annual EBITDA, while most of its peers in Europe operate at multiples of between two and three. "There will always be different views on what is solid," said Rostrup. "We've said we want to be below two and balance that with attractive shareholder remuneration."

But the gearing also points to some interest in M&A opportunities, should they arise. Telenor has spent 2017 and the early part of 2018 in divestment mode, negotiating the sale of its Indian subsidiary, selling a stake in emerging-markets giant VEON and, most recently, flogging its assets in central and eastern Europe to private equity group PPF. Still active across Scandinavia and in the southern Asian countries of Bangladesh, Malaysia, Myanmar, Pakistan and Thailand, it could benefit from a bigger presence in some markets as it continues to automate operations. "We want to take careful steps into looking at inorganic opportunities in core geographies," said Brekke. (See Telenor Offloads Its CEE Unit for €2.8B, Telenor Eyes Eastern European Exit and Airtel to Acquire Telenor in India.)

Despite the investor unease this week, Telenor's share price is still about a fifth higher than it was this time last year. And in many ways, the company's strategy is a signpost for other operators with lackluster growth prospects and a legacy burden. Of 17 Tier 1 operators examined by Light Reading, Telenor saw the biggest percentage increase in revenues per employee last year, with the figure up 13.4%, to more than NOK4 billion ($510,000, at today's exchange rate). That should be an encouraging indicator for shareholders, even if it is a troubling one for staff. (See Efficiency Drive by Major Telcos Has Claimed 74K Jobs Since 2015.)

— Iain Morris, International Editor, Light Reading

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About the Author(s)

Iain Morris

International Editor, Light Reading

Iain Morris joined Light Reading as News Editor at the start of 2015 -- and we mean, right at the start. His friends and family were still singing Auld Lang Syne as Iain started sourcing New Year's Eve UK mobile network congestion statistics. Prior to boosting Light Reading's UK-based editorial team numbers (he is based in London, south of the river), Iain was a successful freelance writer and editor who had been covering the telecoms sector for the past 15 years. His work has appeared in publications including The Economist (classy!) and The Observer, besides a variety of trade and business journals. He was previously the lead telecoms analyst for the Economist Intelligence Unit, and before that worked as a features editor at Telecommunications magazine. Iain started out in telecoms as an editor at consulting and market-research company Analysys (now Analysys Mason).

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