Sweden's Telia Company is wrestling with mounting costs at its domestic unit that could derail its earnings ambitions this year unless swiftly brought under control.
Senior executives expressed their dissatisfaction with the performance of the Swedish business, which accounts for nearly a half of overall sales, during an earnings call with analysts earlier today.
But they insisted it would not prevent the company from achieving its target of delivering stable earnings (before interest, tax, depreciation and amortization) this year, compared with 2016.
"We are definitely not satisfied with the position and we don't think it's sustainable," said Christian Luiga, Telia's chief financial officer. "But we will take down the costs in the coming three quarters -- that will come through in the second quarter but mainly be visible in the third and fourth."
Telia Company saw overall sales fall by 5.6% year-on-year in the first quarter, to about 19.3 billion Swedish krona ($2.2 billion), but claimed they were up 3% in "organic" terms.
EBITDA fell by 1.1%, to SEK6.1 billion ($700 million), and by 0.9% organically, said Telia, which blamed cost increases in both Sweden and Finland for the decline.
A closer look at the company's earnings report reveals that EBITDA shrank by as much as 6.4% in Sweden, to around SEK3.4 billion ($390 million), even though sales rose 2.7%, to SEK9.1 billion ($1 billion).
In Finland, EBITDA fell 4.1%, to SEK974 million ($111 million), while revenues were up 3.5%, to SEK3.3 billion ($380 million).
Luiga blamed rising Swedish costs on several factors, including an IT overhaul that has resulted in some costs shifting from capital expenditure to operating expenditure.
The launch of new services also looks partly to blame: In the business sector, Telia has started offering consultancy services through its technicians, driving up the costs of serving small and medium-size enterprises in particular.
Investors appeared unconcerned about the cost situation, with Telia's share price up 1.2% in Stockholm at the time of publication, but analysts present at the company's earnings call sounded worried about the implications.
Telia is nearing the end of a broad IT transformation aimed at making it a leaner and fitter player in the digital age, and there is evidently some worry the project has not had the desired impact. (See TeliaSonera Looks to IT Revamp for New Lease of Life.)
"We should not be worried in general but our business model is changing and the service revenue mix is different," said Luiga, attempting to dispel the anxiety. "We will continue to step up and tune and shape this company to fit the future model and that is the short answer."
The cost increase in Finland was blamed on rebranding costs, with the Telia brand replacing those used by local subsidiaries in both Finland and Lithuania during the quarter.
Despite cost concerns, there was good news for Telia on other fronts, including a reduction in the expected charges it will face for corruption in Uzbekistan. (See Eurobites: Uzbek Fine Takes Toll on Telia.)
Having previously assumed it would have to cough up $1.45 billion for its wrongdoings in the central Asian country, Telia is now guiding for a settlement charge of just $1 billion.
"That is based on constructive dialog we have had and that has put us in a situation where we see a better outcome when we finalize this," said Johann Dennelind, Telia's CEO. "We will need to settle the full package with authorities and hopefully can settle in near term."
Telia is quitting a number of markets in central Asia that are now reported as "discontinued" operations, having decided to focus efforts and resources on the Nordic region. (See TeliaSonera to Quit Eurasia, Focus on Europe.)
Besides reporting first-quarter results, the operator today revealed it had sold its 60% stake in Tajikistan's Tcell to the Aga Khan Fund for Economic Development, putting the for-profit agency in full control of the telco, for a fee of $27.7 million.
In 2015, Telia flagged the $1 billion sale of a majority stake in Nepalese operator Ncell to Malaysia's Axiata Group Berhad , but it is still lumbered with a number of struggling operations in central Asia. (See Telia Lifts Outlook After Earnings Boost.)
Revenues from those discontinued operations fell by 18.7% in the first quarter, to about SEK3.1 billion ($350 billion), while EBITDA dropped a third, to roughly SEK1.2 billion ($140 million).
Quizzed about progress on finding a buyer for those businesses, Dennelind said Telia was making "good progress" and expressed optimism that a deal would materialize this year.
Telia's net income from continuing operations fell 12.3% in the first quarter, to about SEK2.5 billion ($290 million), with free cash flow from continuing operations up 86.4%, to SEK3.8 billion ($430 million).
Telia expects to generate free cash flow from continuing operations of "above SEK7 billion [$800 million]" this year, having generated SEK7.2 billion ($820 million) last year.
A strategic priority for the operator is a move into so-called "converged" offerings that bundle various fixed and mobile services, despite industry concern about the "discounting" impact of such a move.
Telia would not say how many of its customers are now using converged services and said it was trying to avoid racing into the opportunity and sparking off a price war.
"When the time is right we will show you how it looks but we are not mature enough on convergence across the footprint yet," said Dennelind. "It is important to take it step by step -- rushing in will drive price wars and that is not our focus."
— Iain Morris, , News Editor, Light Reading