Sweden's Telia has raised its full-year earnings expectations after reporting profitability improvements for the first three months of the year, driven by cost reductions and merger activity in Norway.
The state-backed operator, which recently changed its brand from TeliaSonera, is undergoing a radical transformation as it looks to sell ailing subsidiaries throughout Eurasia -- where it has been hit by allegations of corruption -- and focus on its core operations in the Nordic and Baltic region. (See TeliaSonera: Timing May be 'Wrong' for Eurasia Sale and TeliaSonera to Quit Eurasia, Focus on Europe.)
Telia Company flagged a 10.4% year-on-year rise in EBITDA in the first quarter, to 6.2 billion Swedish kronor ($769 million), despite a 0.9% drop in sales, to around SEK20.4 billion ($2.53 billion).
Speaking during an earnings presentation earlier today, CEO Johan Dennelind blamed the ongoing decline in Sweden's fixed telephony market and weakness in the country's enterprise sector for much of the revenue setback.
Sweden now accounts for about 43% of Telia's revenues and the operator has been investing in fiber rollout and polishing its mobile data offerings in an effort to rekindle growth.
As part of a broader cost-cutting program, it has also been overhauling its back-office and IT systems to cope with the increasing digitalization of its service offerings. (See TeliaSonera Looks to IT Revamp for New Lease of Life.)
"We have an intensified business transformation -- we've been in this for one and half years and have taken out the quick wins and are now into more complicated take-out of costs and systems," Dennelind told analysts.
EBITDA growth was fueled by lower resource costs throughout Europe as well as synergies in Norway, where Telia continued to benefit from its acquisition of Tele2 Norway last year.
Thanks to the first-quarter improvements in underlying profitability, Telia changed its EBITDA outlook for 2016 to be in line with or slightly higher than EBITDA last year, having previously set a target of maintaining EBITDA at the same level.
But Chief Financial Officer Christian Luiga warned investors that gains would be far less dramatic in the next nine months, partly because Tele2 will start to show up in year-earlier comparisons.
Telia's share price was trading up more than 1% in Stockholm this morning following publication of the earnings report.
EBITDA improvements also fed into net income from continuing operations, which rose by 20.4%, to around SEK2.9 billion ($359 million), but overall net income was hit by the fall in profits from discontinued operations in Eurasia, dropping 4.9%, to SEK3.9 billion ($483 million).
Telia is currently in discussions with players including Turkcell Iletisim Hizmetleri A.S. (NYSE: TKC) about a sale of various Eurasian assets, having late last year sold its 60% stake in Nepal's Ncell to Asian operator Axiata Group Berhad for about $1 billion. (See TeliaSonera Sells Ncell Stake to Axiata.)
Turkcell is looking to buy Telia's 58.55% stake in Fintur, the holding company for assets in Azerbaijan, Kazakhstan, Georgia and Moldova. The Turkish operator already owns the other 41.45% of the Fintur business.
"We are progressing well with Eurasian divestments," said Dennelind. "We closed Nepal and have six remaining markets we believe we'll be able to divest during the year."
Besides Nepal and the Fintur countries, Telia hopes to exit Tajikistan and Uzbekistan. In the latter, it has been accused by authorities in Sweden, the Netherlands and the US of paying bribes to secure business.
Dennelind admitted during today's earnings call that the outcome of an ongoing investigation by the US Department of Justice could have major ramifications for the operator.
"We are hopeful we will be able to resolve during the year and as soon as we do we will have to talk about consequences," he said. "We cannot rule out that there will be an economic impact from discussions but we cannot quantify anything around that."
Another sore spot for Telia remains the local operation in Denmark, where EBITDA fell by 11.3%, to SEK137 million ($17 million), because of fierce competition.
Telia last year tried to merge its Danish business with that of local rival Telenor but eventually abandoned those plans due to opposition from European regulatory authorities.
Asked about the future of the business on today's call, Dennelind hinted that Telia might also be looking to quit the Danish market. "Denmark is not producing returns and we need to look at other options because this is not sustainable in the long term and an organic route is not likely or attractive," he said.
— Iain Morris, , News Editor, Light Reading