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Author: Dan Bieler
Swisscom has reported its H1 2006 results, with revenues down 2.8% to SFr 4.8bn. The top line was impacted by the Belgacom wholesale joint-venture (negative SFr 110m), cuts in mobile termination rates (negative SFr 128m) and SFr 180m in additional provisions for interconnection proceedings. EBITDA declined 17.5% to SFr 1.8bn and EBIT by 26% to SFr 1.1bn.
Excluding what Swisscom calls 'one-off effects', revenues increased by 1% but EBITDA was down 5.4%. EBITDA margin declined to 38% (from 44.8%), whilst EBIT margin decreased to 23.3% (from 30.4%). An increase in cash tax, higher capex and acquisitions contributed to a decline in equity free cashflow from SFr 1.5bn to SFr 476m. Operating free cashflow declined by 27% from SFr 1.8bn to SFr 1.3bn in light of higher capex on VDSL rollout and other initiatives.
Comment: Swisscom's results do not make for pleasant reading. However, the markets were somewhat prepared for these results, with Swisscom highlighting most challenges in advance. Our main problem with the results is that a number of the "exceptionals" could potentially become quite repetitive; for example, mobile termination rate and roaming cuts.
So what is "business as usual" in Switzerland? To us it seems that Swisscom is moving away from its historic self-image of a "solid-as a rock" business. For a start, competition is clearly causing damage: in terms of sales nearly all divisions were down - Fixnet by 7.9%, Mobile by 7%, Solutions by 6.5% and Corporate by 3.2%, although Other was up 27%. A similar picture applies to EBITDA - Fixnet down 20%, Mobile down 11%, Solutions down 24% and Other down 68%, with Corporate reporting positive figures after negatives last year.
The key reasons for these declines are ongoing pricing pressure, cuts in mobile termination rates and provisions for potential fines. These headline numbers must be disappointing. But excluding these extraordinary effects Swisscom's performance has been "relatively" stable, both on a revenue and margin basis. With ongoing xDSL growth and the contribution from recent acquisitions coming online, the financial picture should improve going forward. Also new services will contribute to stem the revenue losses. For example, Swisscom plans to have 70% VDSL coverage by end 2007 (and to launch IPTV in H2 2006). Similarly, Mobile is defending its market share well with new packages, and keeping churn very low at 0.8%. In addition, the integration of Siemens Enterprise CH into Solutions should position Swisscom to better cater for convergent offerings.
But it is the migration towards a next-generation platform that should contribute significantly to opex savings. By merging networks the company expects savings of around SFr 100m from 2009 and additional benefits of SFr 200m from a shared sales organisation, better marketing etc. Swisscom also plans to phase out GSM by 2012/2013 to save opex.
Over the near and medium-term, it is politics and regulation, however, which largely define Swisscom's performance, in particular the issues of privatisation, interconnect, unbundling, bit-stream, mobile termination rates and roaming. The events in the last few quarters have shown that both politics and regulation have significantly restricted Swisscom's room for manoeuvre.
However, as KPN and BT have demonstrated, even companies that face very tough competition and a harsh regulatory environment can produce impressive financial results. Amongst European peers, it is those telcos that have fully embraced the reality of convergence and prepared for the IP revolution ahead of others that have outperformed the market.
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