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TeliaSonera Profits Dented by Device Costs

Iain Morris
4/21/2015
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Swedish telecom incumbent TeliaSonera has clung to its outlook of delivering stable earnings in 2015 despite reporting a fall in profits for the first three months of the year.

The operator was stung in its domestic market, which still generates more than a third of its sales, by the high cost of subsidizing the smartphones it provides to customers using mobile data services.

Thanks to favorable foreign exchange movements, headline revenues grew by 8.8%, to 26 billion Swedish kronor (US$3 billion), compared with the same period of 2014, while EBITDA rose by 2.1%, to SEK8.5 billion ($980 million).

On an organic basis, however, sales were down 1.1% while EBITDA shrank by 4.3%, and net income dropped by 5.6%, to SEK4.1 billion ($470 million), after Telia Company received lower contributions from its investments in Turkcell Iletisim Hizmetleri A.S. (NYSE: TKC) and MegaFon , mobile operators based in Turkey and Russia.

Speaking to analysts during an earnings presentation, Johan Dennelind, TeliaSonera's president and CEO, said the operator would stick to the guidance it issued when reporting results for 2014 but warned of turbulence ahead. (See Pain in Spain & Eurasia Hits TeliaSonera.)

"I don't know if it will be smooth sailing -- there could be rough seas -- but we're sticking to our guidance for the year," he told investors.

TeliaSonera's share price was trading down around 2% in Stockholm on Tuesday morning following the results announcement.

A relative bright spot was the operator's Yoigo -branded Spanish business, which suffered a huge slump in revenues in the last three months of 2014 because of price-based competition from rivals Orange Spain and Vodafone España S.A. .

After taking steps to improve its service offerings, Yoigo was able to limit the rate of revenue decline to just 2% in the January-to-March quarter. It also flagged EBITDA of SEK93 million ($10.7 million), after registering an EBITDA loss of SEK84 million ($9.7 million) in the year-earlier quarter, thanks to cost-saving activities.

The overall European business -- which includes operations in Denmark, Estonia, Finland, Latvia, Lithuania, Norway and Spain -- benefited from currency movements as well as the acquisition of Tele2 Norway, which added nearly 1 million mobile customers to the Norwegian total. European revenues were up by 7.6%, to SEK10.3 billion ($1.2 billion), with EBITDA rising by 8.4%, to SEK2.3 billion ($260 million).

Yet those figures belied the various challenges that TeliaSonera faced, with regulatory moves and fierce competition lowering regional service revenues by 2.3% on a purely organic basis.

TeliaSonera is under particular pressure in Denmark, where European competition authorities have recently expressed concern that a planned merger with Telenor's local unit could be detrimental to market development. (See Eurobites: Vivendi Eyes Sky.)

In the meantime, organic service revenues in Denmark fell by 1.7% in the first three months of the year due to "high competitive pressure."


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Further afield, TeliaSonera's Eurasian business returned to organic growth after witnessing a sales contraction at the end of 2014. Revenues increased by 1.4% organically and by 21.1% in reported terms, to SEK5.6 billion ($640 million), while EBITDA grew by 15.1%, to SEK2.9 billion ($330 million).

As when commenting on 2014 results, Dennelind blamed the devaluation of the Russian ruble for economic problems in the region, and especially in Kazakhstan, where he also expressed dissatisfaction with TeliaSonera's performance.

"We have a competitive problem -- we are still not yet up to our potential and we're still losing market share," he said.

Kazakh service revenues fell by 10.1% in local currency terms, with 386,000 customers quitting the TeliaSonera service during the recent quarter.

Despite the sales pain, TeliaSonera still looks stronger from a balance sheet and cash perspective than several of its European peers. Net debt was just 1.72 times annualized EBITDA in the January-to-March quarter and free cash flow rose to SEK2.9 billion ($330 million), from SEK2.6 billion ($300 million) in the year-earlier quarter, thanks to working capital improvements.

That should support the operator's plans to raise capital expenditure from SEK16.7 billion ($1.9 billion) in 2014 to SEK17 billion ($1.95 billion) this year -- about 17% of what it made last year in revenues -- with capex (minus spectrum and license fees) rising by 43.9%, to SEK3.7 billion ($430 million), in the recent quarter.

Like several other European incumbents, TeliaSonera is aiming to stay ahead of its rivals by plowing funds into higher-speed fixed and mobile networks.

The spending plan is also expected to support efficiency improvements, leading to annual savings of SEK2 billion ($230 million) by 2017.

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

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