Wednesday, October 20, 2004

Q3 reporting season off to a lousy start

As Yogi Berra said, "It's like deja vu all over again." The Q3 European telecoms reporting season kicked off today just like in Q2, with some disconcerting numbers from Tele2 and a hefty share price fall (11.2% as I write). This time around, Tele2 has delivered net subscriber intake right at the bottom of the consensus range (1.03m), and seen negative fixed line/internet subscriber additions in Southern Europe and Benelux. Southern Europe (-10k net adds) curiously includes the UK, where the company has yet to disclose any subscriber numbers, but part of the weakness could stem from the CPS market there. As a testament to how ugly the competitive pressures are in this Southern region, net subscriber decline of 10k translates to a 3.7% compression in EBITDA margin versus Q3 2003. The release also makes clear that the source of weakness in the Benelux was the Netherlands (no surprises there).

The group revenue line was weak too, which is disturbing for a company which has traditionally delivered high growth rates relative to the incumbents. In its current reporting structure, Tele2 has delivered sequential revenue growth of at least 2% every quarter for the past five quarters - before today. Q3 is typically a seasonally strong one, but this time the top line is unchanged from Q2's result, and I calculate a 4% sequential ARPU decline this quarter. Last year's Q3 sequential ARPU decline was 5%, but the company also added 60% more customers in that quarter than this year.

Sweden, the critical home market, also proved problematic once again. Mobile EBITDA margin in Sweden contracted by 6.5 percentage points compared to Q3 last year, the single largest YoY compression in its history. Even so, the poor performance in many other operating regions means that Tele2's reliance upon its domestic mobile business is actually increasing again (46.6% of total EBITDA this quarter, up from 43.6% in Q2) - this is a significant reversal of trend, and one which the market would not like to see sustained.

As the first company to report in Q2, Tele2 proved to be something of a bellwether for the turgid Northern European PTT results that followed (with the exception of Telenor). I have a bad feeling that we may see a repeat of this scenario in Q3. Given its scope and scale, Tele2 could be considered the best proxy for the sector overall in Europe, and the evidence we see today - of rising churn, poor customer growth, revenue stagnation, and margin compression, paints a pretty ugly picture for what may be in store.

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