Wednesday, August 23, 2017

Telia narrows focus on Nordics and Baltics

The summer break is now well past its peak for many regions. For telecom operators, traffic must be carried whether the whole country is on holiday or not, and this is surely the case for Telia Company. The recent news from Stockholm was not good. A disappointing financial report for Q2 2017 issued on July 20th forced the company to announce a 3% cut in employment, or roughly 850 people, just before the summer holidays and precisely the time many new graduates are looking for opportunities. Telia is a major employer for Sweden and has a local payroll of about 21,000 employees.

For those unfamiliar with the company, Telia was once the state telephone monopoly of Sweden with roots back to 1853. After privatisation, Telia was merged with Sonera, the Finnish incumbent operator, in 2002 and the company was known for a while as Telia-Sonera, before eventually simplifying to just Telia. The government of Sweden still owns a 37% stake in Telia, while the government of Finland is believed to hold a 3% stake.

The disappointing news - flat to declining

Key numbers for Q2 include:

·         For Q2 2017, Telia's net sales in local currencies, excluding acquisitions and disposals, fell 0.4%. In reported currency, net sales fell 6.3% to SEK 19,801 million (21,130). Service revenues in local currencies, excluding acquisitions and disposals, fell 0.6%.

·         The number of subscriptions decreased from 26.7 million from the end of the second quarter of 2016 to 23.4 million. During the quarter, the total number of subscriptions increased by 0.2 million to 23.4 million.

·         Adjusted EBITDA declined 3.3% in local currencies, excluding acquisitions and disposals. In reported currency, adjusted EBITDA fell 4.6% to SEK 6,095 million (6,389). Adjusted EBITDA margin improved to 30.8% (30.2).

·         Capex increased to SEK 5,180 million (3,773) and the capex-to-service revenue ratio to 30.3% (20.9). Capex excluding license and spectrum fees increased to SEK 4,718 million (3,773) and capex-to-service revenue ratio, excluding license and spectrum fees, increased to 27.6% (20.9).

Several factors are putting stress on the business. First, Telia's FTTH business in Sweden is starting to 'reach the end of the fibre rollout potential'. The company says it is struggling with red tape in connecting new households to its fibre network. Specifically, 45,000 new fibre households were connected in the quarter of which 12,000 were single home, down from 22,000 a year earlier. The lower number of single home campaigns resulted in declining installation revenues of SEK 164 million compared to the corresponding quarter last year. At 1.6 million homes passed, Telia is the nation’s largest player. On a positive note in Sweden, Telia's mobile subscriptions grew by 77,000, of which 31,000 were for machine-to-machine services. Meanwhile, fixed broadband subscriptions fell by 1,000 in the quarter. The number of TV subscriptions increased by 10,000 in the quarter, largely driven by the acquisition of C-Sam.

Secondly, management has concluded that operational costs are simply too high. Sweden is an expensive country to do business and to employ large numbers of people. Thirdly, there is the long-term problem impacting nearly all former incumbents – legacy telephony services continue to decline at faster rate than new services are growing.

Telia's job cuts impact 650 positions in Sweden, equal to 8% of the company's Swedish employees. These cuts are expected to yield a 5% reduction in expenses for the second half of 2017. Further structural initiatives are being planned to achieve a reduction of the targeted cost base of at least 3% in 2018.

While Telia is experiencing problems in Sweden, its other Nordic markets are doing better. Revenues in Finland are growing and there is double-digit growth in Norway. Revenues in Lithuania grew 13.5% year over year, but there was a 1.5% revenue decline in Denmark. Revenue is Estonia was stable.

Finally exiting the Eurasian entanglement

Telia also now believes that by the end of 2017 it will have completely disposed of its Eurasian assets, including the disposal of its stake in Tcell in Tajikistan, and the sale of its shares in Turkcell Iletism Hizmetleri (Turkcell).

The controversies regarding the company’s alleged illegal activities in Eurasia, including bribery and money laundering in Uzbekistan, now date back over a decade and have yet to be fully resolved, despite the resignation of Lars Nyberg as CEO in 2013 along with the dismissal of involved employees. Telia still has pending legal cases with the U.S. Department of Justice, the U.S. Securities and Exchange Commission and with the Swedish and Dutch authorities. Most likely there will be a financial sanction to pay. In its Q1 2017 report, Telia said it was looking for a likely settlement to be in the range of US$1 billion.

The longer term strategy

Along with the divestiture or disposal of its businesses in Uzbekistan, Tajikistan and Turkey, Telia has also sold its 77% interest in the Spanish operator Yoigo to MASMOVIL, bringing in Euro 479 million. Telia also sold its 100% stake in Sergel Group, a debt collection company, to Marginalen for SEK 2.1 billion. Its new strategy is to transform itself into a next generation telco focused on the Nordic and Baltic regions. New areas of interest include IoT, IT services, media and content. This week, Telia announced the acquisition of Data Logistics Center, one of the biggest data logistics operators in Lithuania, from  Lietuvos Energija (Lithuania Energy) and Litgrid for an undisclosed sum. The deal includes a state-of-the-art Tier III data centre. Telia owns eight other data centres in the Baltics.