Telekom Austria's H1 Revenue Up 7.7% Y/Y as Push into Eastern Europe Continues

Telekom Austria's revenue for the first half of 2008 hiked by 7.7% year-on-year (y/y) to 2.536 billion euro (US$3.727 billion), while the group's earnings before interest, income tax expense, depreciation and amortisation (EBITDA) went up by 2.7% y/y to 968 million euro. The primary driver for both of the figures was the acquisition of Velcom—a Belarusian mobile operator, erstwhile MDC—which, on the other hand, decreased net Telekom Austria's income by 18.6% y/y to 226 million euro as higher interest expenses linked to the purchase's financing kicked in.

The Austrian incumbent's fixed-line revenue showed no decline remained nearly unchanged at 1.044 billion euro but, having been achieved through aggressive pricing and marketing, came at expense of EBITDA, which were down 18.2% y/y to 313 million. The mobile sector—the group's source of growth—contributed revenue of 1.611 billion euro, up 12.4% y/y; without the consolidation of Velcom, the growth rate would have been a more modest 2.9% y/y. The mobile unit's EBITDA stood at 666 million euro, up 14.7% y/y—599 million and 3.2% y/y if excluding Velcom.

Outlook and Implications

• Eastern Promises: Austrian firms in general have been active to invest in south-eastern Europe (SEE), and Telekom Austria makes a prime example. Through its local subsidiary, Mobiltel, it is the leader in the Bulgarian mobile market, whereas Vipnet in Croatia and Si.mobil in Slovenia are the second-largest operators in their countries. Serbia's Vip Mobile and the Former Yugoslav Republic of Macedonia's Vip Operator, being recent start-ups, remain at the third position in their markets, but stand realistic chances to reshape them over the medium term. At the moment, the group's most exciting member is indeed the newest one, Velcom. With its subscriber base of 3.4 million, it is Belarus's second-largest mobile operator, claiming 44.4% of the market, and with the Belarusian penetration rate at 78.2% it still has a plenty of room to expand organically. Telekom Austria's recent push into eastern Europe—expected to continue—exposes it to risks related to potentially volatile currencies and to a varying extent unpredictable tax policies, but Global Insight sees that it is nevertheless a risk worth taking. Had it played safe and stayed home, its future would surely look less uncertain, but also very dull (see Belarus: 21 November: Telekom Austria Eyes 3G Entry for Belarusian Unit MDC, Austria-Europe: 29 November 2007: Telekom Austria Eyes Acquisitions in Eastern, South-Eastern Europe).

• Domestic Mobile Stays Strong, Fixed Set to Decline: The state of Telekom Austria's home base is not dissimilar to any other Western European market. Fixed-to-mobile substitution and intensifying competition, allowed to take off by market liberalisation, are eating into fixed-line revenues, and since the company's structures have not completely kept up with the trend there is some reform to do. Mobilkom Austria keeps performing well—perhaps even surprisingly so, given that it is challenged by hardened global players such as Deutsche Telekom, France Telecom, and Hutchison Wampoa—and enlarged its subscriber base by 13.1% y/y to 4.3 million, which to some extent was owed to the acquisition of Tele2's Austrian MVNO, completed after an approval from the competition watchdog in April 2008. As for the fixed-line segment, the market environment will remain tough and fortunes are practically set to shrink, which will lead to further cost cuts; at end-June, the fixed-line headcount was 9,514 employees, 251 less than a year earlier (see Austria: 14 July 2008:Telekom Austria to Slash 1,700 Jobs—Reports).