European telco revenues drop as price wars heat up

Two of Europe's biggest telecom operators reported lower revenues on Wednesday, blaming the weak European economy and stiff regulation while seeing some bright spots in markets abroad.

The figures from Spain's Telefonica SA and Deutsche Telekom AG chimed with recent statements from peers such as France Telecom , Swisscom and KPN as European operators struggle with an overcrowded market, tough regulations and recession.

They complain such pressures are hampering their ability to invest in faster networks, important for future growth.

Telefonica, Europe's biggest telecom group by revenue, reported a 11.7 percent drop to 6.7 billion euros ($8.8 billion) for its European operations in the first quarter, with total revenue down 9 percent at 14.1 billion.

Deutsche Telekom said revenue in Europe shrank 6.9 percent to 3.33 billion euros, while overall revenue fell 4.5 percent to 13.8 billion.

Reflecting the pressures the sector is under, European telecom stocks are much lower valued than U.S. peers and trade at roughly 11 times prospective earnings against 19 times for U.S. peers, according to Reuters data.

Telefonica shares were down 1.4 percent by 0925 GMT, the biggest decliner in a flat European telecom sector , dragged down by an increase in its debt despite being on a debt-cutting drive, as well as a weaker-than-expected performance in Spain.

Telefonica aims to cut debt to less than 47 billion euros by year end but reported net debt of 51.8 billion at end-March, against 51.3 billion three months earlier. The company has sold all its treasury stock and 40 percent of its central American businesses to slash debt this year.

A 701 million payout for spectrum, the devaluation of the Venezuelan bolivar and seasonally more payments due in the first quarter set back progress on debt reduction, though Moody's analyst Carlos Winzer said the company was still on track to reach its debt target of 2.35 times EBITDA by year-end.

Deutsche Telekom shares were up 2.5 percent, top of the sector gainers after reporting slightly better-than-expected core earnings and the first net addition of customers in the United States since early 2009.

CASH RESERVES

While Telefonica generated cash in some Latin American countries, it depleted its cash reserves in Europe, with operational cashflow decreasing particularly in Britain, the Czech Republic and Ireland. Operational cashflow was 22 percent down on a year ago at 2.6 billion euros, with cashflow in Europe falling 40 percent to 1 billion.

European telecom operators face particular challenges at their home markets.

In Telefonica's recession-hit domestic patch, revenue fell 16 percent to 3.3 billion euros, though margins continued to improve, reaching 47 percent following Telefonica's decision to scrap costly handset subsidies last year.

"It's a tough year ... because the domestic market continues to suffer as a result of contraction in consumer spending," said Moody's Winzer.

Telefonica is the biggest shareholder in Telecom Italia , which was holding a board meeting on Wednesday on merger talks with Hutchison Whampoa <0013.HK>, a deal Telefonica is strongly opposed to, according to sources.

Deutsche Telekom meanwhile is facing a turf war at its home mobile market, the European Union's largest, where consumers are catching up with the rest of the continent by switching to smartphones from basic mobiles.

In response, Deutsche Telekom as well as Vodafone , Telefonica Deutschland and KPN's E-Plus are revamping tariffs to focus more on mobile internet and are hiking spending on advertising campaigns.

Deutsche Telekom said mobile service revenue declined 0.1 percent during the quarter. "This was the best figure since the fourth quarter of 2011 and underlines the progress Deutsche Telekom has made compared with the competition," the company said in a statement.

The decline is excluding the effect of lower so-called mobile termination fees (MTRs), that operators charge each other each time a customer ends a call on their network.

German regulators have ordered MTRs need to be nearly halved by the end of this year from last year.

In the fourth quarter, Deutsche Telekom's mobile service revenue excluding this effect was down 2.2 percent.

Earlier Telefonica Deutschland had reported a 0.5 percent rise in the first quarter, while KPN's E-Plus said mobile service revenue was down 2.5 percent from the previous year.

Telekom Austria said on Tuesday it expected price competition to intensify in its major markets, rather than diminish as had been hoped by Austrian carriers after a consolidation of the market.

(Editing by Noah Barkin and David Holmes)