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European economic conditions hit Telefónica and France Telecom

Telefonica and France Telecom blame difficult market conditions in Europe for drop in net profit

Two of Europe’s biggest operators, Telefónica and France Telecom, have announced their quarterly results, both reporting declines in net profit as they battle with market conditions in the region.

Spanish operator group Telefónica saw its net profit fall by 34.4 per cent year-on-year for the half-year, to reach €2.08bn, down from €3.2bn in the same period a year ago. This is despite the operator’s consolidated first-half revenues totalling €30.98bn; a 0.3 per cent increase year-on-year.

As a result of the performance, the firm has cancelled its plans to pay a dividend to shareholders in 2012, enforce pay cuts on senior management and update its revenue guidance and now expects to deliver “flat to positive” revenue growth for the year.

“To show the Company’s determination to effectively defuse potential financial risks that are being exacerbated by unprecedented exogenous factors in the current extremely challenging economic and financial environment, the Board of Directors has decided…it is in the best interest of all Telefónica’s stakeholders that the dividend and share buyback program corresponding to 2012 are cancelled as a one-time exceptional measure,” said executive chairman César Alierta.

He added that the firm will resume its shareholder remuneration in 2013 by paying a dividend of €0.75 per share. In addition, top managers’ total compensation will be slashed by 30 per cent, and board members have agreed to take a 20 per cent pay cut.

Rival European operator group France Telecom (although not its executive management) suffered a similar plight as it also saw an 8.9 per cent drop in profit to post €1.9bn, down from €2.1bn in the same period of 2011. Like Telefonica, consolidated revenue remained relatively flat, with the firm seeing a 0.1 per cent year-on-year decline to generate €21.84bn for the half, down from €22.57bn.

CEO Stéphane Richard also blamed a difficult economic environment in Europe for the poor performance, but pointed out that the firm’s French operation recovered from a slow first quarter to return to growth in its postpaid customer base in the second quarter.

“We are continuing the deployment of our very fast broadband and 4G networks, the engines of our future growth,” he said. “The latest results from our internal employee satisfaction survey testify to the improved work environment and greater cohesion within the Group, without which this financial performance could not have been achieved,” he added.

Emeka Obiodu, principal analyst, telco strategy at Ovum said that the results released by both France Telecom and Telefonica are not surprising, as an underlying weakness in the European market had encouraged telcos to see opportunities in emerging markets.

“As was evident with Vodafone’s results and now, emerging markets are no longer sufficiently covering poor performance in Europe. And that is why these telcos are all reporting poor performance at the group level,” he explained.

“But it is not just about the economy. In Spain where both France Telecom and Telefonica operate, France Telecom grew its revenues for the quarter by 2.4 per cent organically. In contrast, Telefonica’s revenues fell by 12.7 per cent and Vodafone by 17.8 per cent. Clearly, France Telecom has managed its business in Spain better than others.”

He added that with revenues falling, the emphasis is likely to shift to cuts to help stabilise margins.

“As such, the challenge for telcos is to extract additional value from their businesses despite the difficult circumstance. This is not going to be easy. There is still growth in broadband. But while new wave revenues from M2M, health services etc. are promising, they will not provide imminent relief.”

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