Swisscom's Q1 EBITDA Down 7% on Fastweb Legal Provisions

Swisscom has announced its first-quarter earnings (EBITDA) fell 7.1% year-on-year (y/y) to 1.06 billion Swiss francs (US$967 million), chiefly due to risk provisions set aside for its Italian unit Fastweb. Adjusted for the provision, Swisscom said its first-quarter EBITDA increased by 1.8% y/y.

The Swiss incumbent operator reported a 22% y/y fall in first-quarter net profit to 377 million francs, as it set aside risk provisions for Fastweb. However, Swisscom also announced its first-quarter revenues had risen 1.3% y/y to 2.95 billion francs, boosted by some early signs of recovery in the Swiss economy.

Swisscom said its revenue increase was boosted by the trend towards bundled offerings and higher ARPU price models such as flat-rate tariffs. The operator announced the number of XDSL broadband access lines in Switzerland increased by 0.7% y/y to 1.8 million connections, while the number of Swisscom TV customers almost doubled during the year to reach 275,000 at the end of March 2010. Meanwhile, the number of unbundled fixed lines more than tripled year-on-year (y/y) from 57,000 to 192,000, as competition in the broadband sector flourished.

Elsewhere, the number of mobile subscribers in Switzerland increased 4.4% y/y to 5.7 million, and Swisscom announced it had sold around 300,000 mobile devices in the quarter, of which around a half were smartphones, with the iPhone being the most successful, at 85,000 devices being sold. Mobile data revenue in Switzerland rose 30% y/y to 91 million francs; however, mobile ARPU dropped by 4.1% to 47 francs as a result of price reductions and new tariff models.

Swisscom was able to reiterate its business outlook for the full year and said it expects net revenue of around 9.15 billion francs in 2010.

Outlook and Implications

• Swisscom Says Fastweb Provision is Sufficient: Swisscom has stated it does not expect to have to increase the 100-million-franc provisions it has made for the ongoing legal proceedings against its Italian broadband unit Fastweb. The unit is embroiled in a tax fraud and money-laundering investigation; allegations include the evasion of some 38 million euro (US$51 million) in value-added taxes between 2003 and 2007, and the suspected money laundering of 2 billion euro, via the alleged fabrication of international phone-service purchases and sales between 2003 and 200, alleged to have been carried out with the knowledge of top executives at Fastweb and rival Telecom Italia's cable unit Sparkle (see Italy: 30 April 2010: Telecom Italia Could Face US$962-mil. Fines over Sparkle Money-Laundering Allegations). Swisscom, Fastweb, and Telecom Italia have repeatedly denied the allegations, with Swisscom saying it is "100% sure" Fastweb hasn't engaged in any illegal activity since it acquired the operator in 2007. Despite the legal probe, Fastweb recently reported first quarter earnings up 4%, as it benefited from some multi-year public administration and corporate contracts (see Italy: 30 April 2010: Fastweb Q1 EBITDA Up 4% on Corporate Customer Growth).

• Signs of Growth in Stagnant Swiss Markets: Swisscom has reported some encouraging signs of early recovery in its home markets, with not only modest growth in the mobile sector, but also some green shoots in the stagnant fixed-line markets, with XDSL and unbundled connections notably rising. The incumbent has long relied on Fastweb to maintain sales growth, but has announced net revenue excluding the Italian unit rose by 1.4% in the first quarter—one of Swisscom's best home performances for many quarters. Meanwhile, a 333-million-franc fine levied against Swisscom for alleged abuse of its dominant market position in relation to mobile termination rates has recently been overturned (see Switzerland: 10 March 2010: Federal Court Overrules Swisscom US$310-mil. Mobile Termination Fine), while the operator has announced the takeover of the operating and service business of Siemens Enterprise Communications to further expand its network business services (see Switzerland: 19 April 2010: Swisscom Acquires Operating and Service Business of Siemens Enterprise Communications). The proposed merger of mobile rivals Orange Switzerland and Sunrise has also recently been blocked by the Swiss regulator, which feared damage to competition in the country by the creation of a duopoly with Swisscom (see Switzerland: 22 April 2010: Swiss Competition Watchdog Blocks Orange-Sunrise Merger). However, this is likely to have little effect on Swisscom, which had been nervous of the larger market power of a merged rival, but still holds well over half of the mobile market.

• Signs of Swiss Recovery as Europe Looks for Green Shoots: Swisscom is the third of the major European incumbents to release its first-quarter results, following France Telecom's disappointing disclosure last week, which saw earnings fall and blamed increased regulation (see France: 29 April 2010: France Telecom's Q1 EBITDA Down 4.8%, Sees Few Signs of Recovery), and KPN's announcement that its EBITDA had risen 7.2% y/y, albeit chiefly down to successful cost-cutting rather than any growth. The Nordic operators TeliaSonera and Tele2 have also reported higher first-quarter operating profits boosted by cost cutting, with the latter particularly benefitting from its Russian investments—however, neither operators saw much growth in mature Western European markets. While Swisscom benefits from under-developed competition at home, the signs of recovery in the stagnant Swiss markets are somewhat encouraging.