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Under Growing Pressure from Rivals, Telecom Giant TPSA Unable to Please Market with Q2 Results
(Polish News Bulletin Via Thomson Dialog NewsEdge) Poland's largest telecom operator earned a net ZL495m in the second quarter of 2007. This is not particularly impressive as a year earlier the figure came to ZL544m.
Operating profit also dropped. It went down to ZL688m from ZL792m, while some analysts expected it would exceed ZL800m.
Revenues amounted to ZL4,507m, while they went above ZL4,600m in Q2 2006.
As expected, the TPSA group's revenues from the mobile business rose 6.8 percent to ZL3,824bn in the first half of 2007. This was not enough, however, to balance the fall in fixed-line revenues, which worked out at 9 percent.
Table. TPSA revenues in various market segments (billion zloty)
Fixed line 5.46
Mobile 3.82
Broadband 0.60
source: Puls Biznesu"TPSA's results are in line with my expectations. I forecast net profit would reach ZL494m, while revenues would be 3 percent down. It is clear the current trends are not positive. Revenues from fixed-line telephony were falling throughout the last five quarters. Quarter to quarter they have consistently been going down by 3 percent. The tendency connected with data transmission may worry some as well. Until recently the growth in the number of clients compensated for declining ARPU (average revenue per user). This is no longer the case now. It is noticeable mobile telephony no longer balances out the decline in fixed-line revenues. I forecast that TPSA revenues will go down nearly 3 percent in the whole of 2007," said Jakub Viscardi from CDM Pekao broker.
"Revenues were in line with expectations, while operating and net results disappointed, both in comparison to our expectations and market consensus. No forecast saw the net result falling below ZL0.5bn," said Dorota Puchlew, BDM PKO BP analyst.
In her opinion, the scale of revenue slump this year will be higher than in its first half, because with time TPSA's rivals will only grow stronger.
According to TPSA CEO Maciej Witucki, the operator was hit, among others, by growing pressure from market competitors, which was the consequence of reducing rates for calls between operators, as well as the introduction of wholesale line rental (WLR) and bitstream access (to broadband Internet infrastructure).
Table. TPSA results in Q2 2007 (million zloty)
Q2 2007 Average forecast
Revenue 4,507 4,500
Operating profit 688 813
Net profit 495 550
source: Puls Biznesu- TPSA's Three-Year Strategy Does Not Inspire Confidence
The national operator is tottering. Its financial results do not lead to optimism. The giant has a plan for how to regain its old glory. The market, however, does not believe the plan will work. - Internet for Everyone
TPSA's devilish plan involves making use of the 450 Mhz frequency, inherited from Centertel. According to the group's authorities, the frequency can be used for offering fast Internet access to a few hundred thousand clients, located in spots where TPSA's regular Internet service cannot reach them, not to mention its main rivals ? Tele2 or Netia.
"The 450 Mhz frequency currently belongs to Centertel, which would be the entity providing the service within the TPSA group. That is why it will be available in our common sales network," said Orange CEO Grazyna Piotrowska-Oliwa.
Nonetheless, before the giant carries out its plans, it must persuade the Office for Electronic Communications (UKE) first. The market regulator is considering depriving Orange of the frequency. It believes it is not being fully taken advantage of.
"We are convinced that our arguments ? that is 180,000 TPSA clients using quasi-fixed-line voice services and getting Internet access thanks to the frequency ? will be positively assessed by the regulator. The plan is inscribed in the UKE's strategy in this field," explained Piotrowska-Oliwa. - Fixed-line Mobiles
Orange has another problem. Mobile revenues are not growing as fast as in the previous years.
"This is the consequence of the market being saturated with SIM cards, whose level is now above 100 percent. We are still growing faster than the market. Orange's revenues rose 6.8 percent in the first half of 2007, while the whole mobile market grew 5.8 percent," said the Orange CEO.
Data transmission is an opportunity for further development of the mobile operator. Orange intends to develop mobile Internet access (currently around 200,000 clients are using it). But not only that. The operator wants to introduce an offer of broadband fixed-line Internet, provided on TPSA's cables. It is also thinking about the introduction of fixed-line voice services. All that would come under the Orange brand.
Would not such an offer cause fratricidal fights within the group?
"Rather not. We have our clients, who are not taking advantage of TPSA services for many different reasons, but they may be interested in Orange's full offer," said the Orange CEO. - Cutting Costs
Combined sales are not everything. The TPSA group maintains that it will buy other companies, also from the IT sector.
At the same time, the giant announces it will make savings in different ways. Operating savings are to reach 10 percent by 2010. Managerial staff will be reduced by nearly 10 percent till the end of this year. The company is also getting prepared for selling its current Warsaw headquarters in Twarda Street.
"We are planning to buy a plot this year. The group could move to a new building in three years," said CEO Witucki.
Analysts are treating TPSA's announcements with caution.
"The operator's strategy does not inspire confidence. I am not fully convinced that revenues from the so-called non-regulated services will compensate for the losses from the group's core business. Speaking of acquisitions, TPSA has frequently announced it would continue to develop with the help of takeovers, but no concrete moves followed the declarations," said Jakub Viscardi from CDM Pekao.
Pawel Puchalski of the DM BZ WBK broker publicly claims he is disappointed with TPSA's strategy. In his opinion, at least half of the 10-percent savings plan is already taken into account in the employment reduction programme.
"TPSA is also proud of its forecast showing 50 percent of revenues coming from non-regulated products by 2010, but that should not be difficult if fixed-line revenues continue to fall at the current rate," said the analyst. - Intense Rivalry for Internet Customers Now Begins
A month after introducing its broadband Internet offer Tele2 played va banque. In its summer holiday offer, it chose to provide an Internet service for free for fifteen months. The agreement must be signed for three years.
"Being the market leader in terms of low prices is the core of our strategy. If our rivals want a price war, we have to respond with a more aggressive offer," said Piotr Nesterowicz, Tele2 Polska general director.
Netia reacted instantly with an extension of its promotion. It does not seem to be afraid of Tele2 at all.
"In the coming years every third Internet connection in Poland will be sold by Netia. We have the best offer and the greatest range of possibilities among the largest alternative operators," said Miroslaw Godlewski, the operator's CEO.
Table. Comparison of broadband Internet offers ? the average price
of monthly subscription during the whole duration of agreements
2-year 3-year
Tele2 60.0 28.6
Netia 44.25 32.60
TPSA 61.80 51.30
source: Puls Biznesu- Internet without Profit Margins
Netia used to be accused of winning clients by completely resigning from its profit margin. But it brings results.
"We are observing huge interest in our most recent new service. We are sending a few hundred and sometimes even a few thousand agreements to our clients each day. We chose to extend the promotion period due to a significant increase in the number of applications in its last phase," explained Godlewski.
Around 138,000 customers are taking advantage of Netia's Internet services. They are clients of Netia, TPSA and users of local Internet networks taken over by Netia in June.
"The base of broadband Internet users will grow in line with our acquisitions. We are interested in regional providers with strong positions on local markets," said Godlewski.
Piotr Nesterowicz assures his company can provide services at lower prices than Netia and they will still be profit-making. How is that possible?
"It is about the scale. We specialise in popular, not niche services. The large scale lets us reduce prices. Furthermore, I believe we are more effective in terms of costs than Netia. We want the clients to take advantage of our offers both in Internet and voice services. Then, when one of them does not bring profits, the other will balance the total," Nesterowicz said.
He adds that Tele2's priority this and next year is to increase the loyalty of clients and economise its services.
"We are trying to improve our customer base to make sure we have such who bring higher monthly revenues. The results of these actions will be noticeable in our financial results next year," explained the Tele2 representative. - With the Will to Co-Operate
At the moment the path Tele2 took is not a steep one. Those who are using the operator's Internet services can also buy voice services. The system does not work the other way, though. Wholesale line rental (WLR) users with Tele2 cannot have access to Internet. According to Tele2, the fault is on TPSA's side, which claims that the problem is insolvable from the technical point of view. Some solution, however, is to be found in the next few weeks.
"It is very important for us. We are talking about hundreds thousands of clients," Piotr Nesterowicz emphasised.
In his opinion, co-operation with Poland's largest operator has improved in comparison to the previous year. The improvement mainly concerns the WLR. It is much worse with bitstream access. This is no surprise. TPSA is promoting its flagship service Neostrada. At the end of the first quarter 2007, it had over 1.8 million clients taking advantage of broadband Internet access and announced further hundreds thousands would be acquired throughout the year. TPSA's representatives say they are not afraid of market rivals. They believe that the broad range of services (Internet sold in packages with digital television) is their advantage.
TPSA has another ace upon its sleeve ? Orange. Telecom operators are also introducing their broadband Internet offers, while the number of their clients (in total) exceeded half a million.
"We are not afraid of mobile operators entering the broadband Internet service market. It will never become an important product for them," believes Miroslaw Godlewski.
Table. Q1 financial results (million zloty)
Revenue EBITDA
TPSA 4,440.0 1,960.0
Tele2* 85.0 2.5
Netia 204.4 49.7
* - data for Q2 2007
source: Puls Biznesu\nc 04003007
Copyright 2007 Polish News Bulletin Company, Source: The Financial Times Limited
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