Telcos emerge from a two-year nightmare?

3 Jun 2003

European telecom companies have begun to post their first profits in two years, after the worst crash in the telecoms industry, which research house Ovum suggests is the result of successful write-downs and cost-cutting exercises.

According to Ovum senior analyst Jan Dawson, many of Europe’s biggest fixed operators have recorded large asset and goodwill write-downs for 2002, reflecting more accurate valuations. “At the same time, many of them booked record-breaking losses caused by these non-cash charges. The theory was that, once the balance sheets were cleaned up, the businesses would be on better footing going forward. And the practice seems to have borne out the theory – several of the same companies have booked profits in the first quarter,” Dawson says.

Deutsche Telekom, Vivendi Universal, France Telecom, Telefonica and KPN all posted record-breaking losses in full-year 2002. The same five companies posted €83.7bn between them in 2002.

“However, these losses reflected a decision on the part of the management of the operators in question to get the bad news out of the way in 2002, in order to be able to start 2003 with a clean slate. Something of a ‘write-down party’ ensued, but the theory was that there would be no hangover when morning came, in the first months of 2003,” Dawson explains.

So far, Q1 2003 results released by these companies bear this theory out. Deutsche Telekom recorded its first quarterly profit in two years, and KPN, TeliaSonera, Telenor, TDC and Telefonica have all similarly reported profits after net losses in full-year 2002.

Dawson explains: “Part of the reason seems to have been a direct result of the write-downs taken at the end of last year, with depreciation and amortisation down. However, general operating improvements also account for some of the turnaround. Operating costs are down at almost all of these companies as a result of belt-tightening exercises involving redundancies, streamlining of processes and portfolios, automation, and a rise in e-commerce. Capital expenditure has been slashed, in some cases by over 50pc, and what capex there is has been focused on key growth areas such as broadband and wireless data.

“Revenues have also been up for some of these companies, reflecting growth in broadband, mobile, and data services. Declines in legacy fixed line business units have offset some of these reductions, but several have posted year-on-year improvements in Q1. It’s always important not to try to annualise Q1 results, due to the unique spending and revenue trends in the first quarter of the year, but they bode well for full-year 2003,” Dawson says.

In terms of Ireland’s national carrier, Eircom, the company in the past three years has reduced its workforce from 13,000 to 8,500. Last year, as a result of its acquisition by the Valentia consortium, Eircom became a privately owned company. It is currently embroiled in a battle with ComReg over its pricing structure, which ComReg insists is too expensive and argues that the national carrier still has too many staff and inefficiencies. According to recent reports, Eircom is threatening to postpone a major €1bn investment, which could seriously undermine Ireland’s national telecommunications infrastructure.

By John Kennedy