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General

Telefonica Deutschland Q1: weak results underline need for E-Plus merger

Thursday 15 May 2014 | 13:53 CET | Background

Telefonica Deutschland's results for the first quarter underline the operator's interest in merging with rival E-Plus. The listed company is majority controlled by Telefonica and offers mobile services over its own network and fixed services over the Deutsche Telekom network. It also has it owns fibre backbone. Telefonica has an agreement with DT to offer VDSL with vectoring, offering a potential market for 50 Mbps service to 15 million households. 

Telefonica Deutschland is focused mainly on rolling out LTE, for which it has introduced new subscription plans (O2 Blue All-In for consumers and O2 Unite for SMEs). The LTE-800 network has an outdoor coverage of almost 50 percent. As of April, it had sold around 1 million LTE handsets, and the company reported data usage over LTE phones is three times that of non-LTE users. On the fixed market, it's managing a shift from ADSL to VDSL. 

Telefonica, as well as E-Plus' owner KPN, expect to secure regulatory approval for the transaction by the end of June. After this, they plan a rights issue to strengthen the company's capital. The operator's results show that it has every reason to hope the merger goes ahead.

Financial results

The most important financial elements were as follows in Q1:

  • Revenues fell 8.8 percent to EUR 1.12 billion. This was blamed on trends in the mobile and fixed markets and lower handset sales. Regulation (MTR) also had a slightly negative impact. 
  • The cost of sales fell by 15 percent, largely thanks to the lower handset sales and reduced termination costs for SMS traffic. costs rose by 3.2 percent, in part due to a salary increase for personnel. 
  • OIBDA declined 16 percent to EUR 234 million, in part due to discounts. The margin was 20.9 percent, down from 22.6 percent a year earlier.
  • The net result was a loss of EUR 40 million.
  • Capex totaled EUR 132 million, down 9.3 percent due to the timing of some investments, while cash flow (EBITDA minus capex) dropped 23 percent to EUR 102 million.
  • Net debt was at 0.4x adjusted EBITDA at the end of the quarter.

Mobile market

The number of mobile customers fell by 126,000 in the quarter to 19.3 million. The prepaid base dropped by 204,000 to 8.9 million, while postpaid grew by 78,000 subscribers to 10.4 million, and the operator added 4,000 M2M Sims for a total 95,000. Smartphone penetration increased to 32.8 percent from 31.4 in the previous quarter, including 71 percent of postpaid customers and 21 percent of prepaid users.

Mobile revenues fell 9.5 percent to EUR 827 million, including a 3.5 percent fall in service revenue and 33 percent lower equipment sales. The loss of prepaid customers, price pressure in postpaid (ARPU -4.1%) and the quickly contracting SMS market (traffic -34%, revenue -25%) were the most important reasons for the revenue decline. Non-SMS data revenue rose 12 percent, and this now accounts for 72 percent of total data revenue (including SMS). Voice traffic was up 1.7 percent, as minutes of use per customer increased slightly to an average 131 per month.

Split according to in and outside the bundle and incoming voice and SMS revenue, revenue shows a shift towards in-bundle, at 68 percent of the total. Outside-bundle revenue fell from 27 percent last year to 22 percent in the latest quarter. The other two revenue sources each account for around 5 percent of the total.

Fixed market

The number of connections on the fixed market developed as follows:

  • Broadband: -18,000 to 2.23 million. The decline in ADSL was not fully compensated by growth in VDSL.
  • Narrowband: -6,000 to 266,000.
  • Telephony: -16,000 to 2.11 million.

Revenue fell by 7.0 percent to EUR 293 million.

Conclusion

From a financial perspective, things are not going well at Telefonica Deutschland. The EBITDA margin is low, and it's making a loss. Hence, the desire to merge with E-Plus. This should bring economies of scale and synergies, helping the company compete better. The focus on LTE and VDSL is unavoidable. On the fragmented fixed market, acquisitions could prove a good idea as well, helping it better fight the significant strength of Deutsche Telekom and the cable operators.



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