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European telcos cut costs to fight competition

European telephone operators are trying to eke benefits from cost cutting while earnings and revenue remain under pressure due to increased competition and regulatory scrutiny.

Many telecos have slimmed down to gain traction in a fierce fight for dominance in the competitive European mobile and broadband market and as national and European regulators force down the cost to consumers of voice calls, text messaging and data.

But while cost-cutting moves have strengthened many operators, results at France Telcom and Spain's Telefonica SA showed the industry is still vulnerable to economic swings.

Telefonica's net profit declined 6.1% in the second quarter due to the slowdown in some of its mature European markets and after asset sales boosted the year-ago figure.

Telefonica, Europe's largest telecommunications company by market capitalization, said net profit for the quarter ended Jun. 30 fell to EUR1.93 billion. In the first quarter last year, it booked a combined EUR257 million gain from the sale of radio operator Airwave and a stake in Spanish pay-TV firm Sogecable.

In May, Telefonica said it was reducing expenses and capital expenditure in response to the weak European market and to preserve cash flow and honor dividend commitments. Telefonica's operating expenses fell 6.6% in the second quarter to EUR8.47 billion.

"Our capital expenditure and operating expenditure cuts are focused on the right areas," Telefonica's Chief Executive for Europe, Matthew Key, said in an interview with Dow Jones Newswires."We always said 2008 would be our peak for capital expenditures."

The extra cash helps Telefonica mitigate the impact of falling revenue on its bottom line and free up cash for dividends.

Telefonica has been forced to lower rates as competition grows and consumers look for cheaper alternatives for mobile and Internet services. The shift is particularly evident in Spain, where unemployment is higher than in most of Europe and low-cost competition has increased recently.

In addition, European Commission telecommunications chief Viviane Reding has pushed to reduce the fees operators charge each other to connect calls, which directly hurts the revenue of mobile carriers.

To be sure, Telefonica has benefited from its exclusive contract to sell Apple Inc's iPhone, which helped to cement its top spot in the intensely competitive U.K. market.

Telefonica earlier this month also won the exclusive contract to sell Palm Inc.'s new "Pre" smartphone in its European markets, alongside the iPhone, giving it another unique selling point. The iPhone has been sold by Telefonica in the U.K., Spain and Ireland since November 2007.

France Telecom, which also faces pressure in key European markets, plans to cut costs in the second half of the year after lowering general expenses in the first half,in an effort to limit the erosion of its operating margins and to maintain its dividend policy and strong cash position.

A strong cash position can also help companies maintain their credit ratings.

Net profit for the first six months ended June 30 fell 4.3% to EUR2.56 billion from EUR2.68 billion last year, also beating analysts' forecast of EUR2.4 billion.

Second quarter revenue fell 3.8% to EUR12.77 billion from EUR13.28 billion last year, as all regions declined amid the economic downturn, except France, Africa and the Middle East.

France Telecom closed up 3.3%, or 57 euro cents, at EUR17.56; Telefonica closed up 2.1% or 37 euro cents, at EUR17.84.

European telecoms groups have come under pressure due to lower mobile termination rates - the fees operators charge each other to connect calls on their networks - and higher competition.

Dutch telecommunications company Royal KPN NV last week lowered its revenue guidance for the full year and for 2010, despite posting higher second-quarter net profit due mainly to lower demand from businesses.

But the effects of the global downturn are not affecting all companies equally. Vodafone Group PLC, the world's largest mobile operator by revenue, last week reported a 9.3% rise in first quarter revenue and reiterated its full-year guidance, despite the steady decline in European revenue.

Источник: Total Telecom

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