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Author: Dan Bieler
Telekom Austria reported its H1 2006 results this morning. Operating revenues increased by 15.9% to €2.3bn - driven primarily by the contribution from Mobiltel. Adjusted EBITDA increased by 18% to €831m, lifting the margin by 0.8 percentage points to 42.2%. As in the past, mobile acted as the main growth engine, with revenues up 33%. Excluding Mobiltel, wireless revenues grew by 6.7% and mobilcom Austria by 2.7%. Net debt decreased by 0.6% to €3.1bn since year-end 2005 (1.6x net debt/annualised EBITDA). Telekom Austria also reported an upward revision of expected growth of operating income and net income.
In a separate development, Telekom Austria announced - as expected - that the contract of its CFO, Stefano Colombo, will not be renewed. The contract runs until April 2007, but an earlier departure has not been excluded. Possible successors are Raiffeisen investment banker Gerhard Grund and Thomas Winkler
Comment: Once again, Telekom Austria has reported a solid set of financial results. There are very few weak areas. We are particularly impressed with the steady management of its domestic operations. Its domestic performance compares well with its peers, with fixed sales off only 0.5% and mobile up 2.7%, although impairment charges and mobile termination rate cuts weighed on EBITDA, dragging it down by 4% in fixed and keeping it flat at mobilcom Austria.
Our real concern regards its reliance on overseas growth drivers to lift group results. With mobile penetration rates reaching 91% in Bulgaria (Mobiltel), 91% in Croatia (Vipnet) and 83% in Slovenia (Si.mobil), a slowdown in growth can be expected over the medium term. The focus will then have to shift towards exploiting the existing asset base more effectively. Given that Mobiltel and Vipnet are already losing market share and feeling margin pressure, this task will not be easy. Si.mobil, meanwhile, faced higher material expenses and other operating expenses, such as dealer commissions and marketing expenses, weighing on its results.
However, it is reassuring that Telekom Austria is not falling into the trap of buying growth at any price. In July, Telekom Austria announced its withdrawal from the tender for the acquisition of a stake in the Serbian mobile operator Mobi 63 once the tender price exceeded the amount that the management believed justified. Similarly, in August Telekom Austria was outbid in the tender for the third mobile licence in Slovakia.
But Telekom Austria's international divisions have already begun to prepare for the challenges ahead. For example, in April Vipnet became the first operator to launch a HSDPA network in Croatia. In June, Vipnet launched the no-frills prepaid brand “tomato”.
As for many other incumbents, the focus on the domestic market is likely to move centre stage. Telekom Austria has put in place the right building blocks to tackle the challenges ahead, having introduced IPTV, naked DSL, flat-rate offers and effective bundles. As a result, it managed to actually increase its fixed line market share and keeping mobile churn stable.A more domestic focus might be less exotic. But it should help boost cash generation. In H1 2006, operating free cashflow came in at €709m, an increase of 22%, not least due to the increase of cash efficiency of its domestic fixed line division to 27.2%. This cash will show through in dividend payments - or be available for the right acquisition.
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