TAKING THE PULSE: European telecom operators' mobile revenue
trends are expected to continue to improve in the second quarter as
growth in mobile data could offset declining voice revenue, while
fixed telephony operations remain under pressure in many
countries.
Mobile service revenue started to recover at many operators
during the first quarter and analysts expect this trend to continue
throughout the rest of the year.
The second quarter is also the first quarter to benefit from
easier comparables and should thus lay the basis for a recovery
throughout the year, analysts say. Due to telecoms' late cyclical
nature, earnings didn't really start to come under pressure amid
the financial and economic crisis until the first quarter of
2009.
However, fears of austerity-led slowdowns in Southern Europe
will be an issue and analysts generally prefer stocks with a larger
exposure to Northern Europe and are cautious on operators with a
larger exposure to markets such as Spain, Portugal and Italy, such
as Telecom Italia (TI).
Nordic and German stocks offer the greatest near-term upside
potential, according to analysts, while for the longer-term, they
generally prefer stocks that have committed to dividend growth,
such as Telefonica SA (TEF) and Vodafone Group PLC (VOD).
Indeed, Stockholm-based telecom operator TeliaSonera AB
(TLSN.SK) on Tuesday kicked-off the European telecoms earning
season with a 17% rise in second-quarter net profit. The operator
said macroeconomic conditions improved in key markets such as
Kazakhstan, and that there were early signs of recovery in
Estonia.
Citigroup's top picks for the quarter include Deutsche Telekom
AG (DT) and Norway's Telenor ASA (TEL.OS). Telecom Italia, Telekom
Austria AG (TKA.VI) and Belgacom ( BELG.BT), on the other hand,
could disappoint with second-quarter results, the bank said in a
research note.
COMPANIES TO WATCH:
---Vodafone Group PLC (VOD) 1Q results--- (July 23)
MARKET EXPECTATIONS: Vodafone is expected to report a 0.1% fall
in underlying service revenue to GBP10.39 billion for the first
quarter ended June 30 from a year earlier, according to six
analysts. That would be a slight improvement on the 0.2% fall in
the fourth quarter of fiscal 2010.
MAIN FOCUS: Underlying service revenue will come under close
scrutiny by investors following improving trends in the previous
quarter, underpinned by growth in mobile data and fixed broadband.
In May, Vodafone said it expects to return to underlying service
revenue growth in the year ending March 31, 2011. The market will
be keen to hear whether Vodafone plans to increase its existing 67%
stake in Vodafone Essar, its Indian venture with Essar Group,
following media reports Essar is considering reducing or selling
its 33% stake.
---France Telecom (FTE) 2Q results --- (July 29)
MARKET EXPECTATIONS: Analysts expect France Telecom's second
quarter to be relatively weak, as was the first quarter, mainly due
to ongoing pressure in its domestic broadband market. It will take
a few more quarters for the group to see a sustained stabilization
in French fixed-line trends but market share should improve
slightly in the second quarter and more during the second half of
the year as the group has taken action to fight the tough
competition, analysts say.
The group is expected to reiterate its free cash flow target for
this year and next, after it already confirmed these earlier in the
month when laying out its new five-year plan. However, some
analysts say they are worried France Telecom will have trouble
reaching its cash-flow target in 2011.
MAIN FOCUS: Analysts will closely eye the performance of French
operations, where intense pricing competition and regulatory
decisions have been weighing on results. The second major focus
will be on comments on shareholder remuneration after management
recently alluded to an interest in share buybacks, analysts say.
Any cut to the current EUR1.4 a share dividend could be seen
negatively by the market, according to analysts. The market will
also look out for any new comments on cost cutting amid some
concern that cost cutting has been delayed as the group has focused
on improving worker morale.
--- Telefonica SA (TEF) 2Q results --- (July 29)
MARKET EXPECTATIONS: A poor macroeconomic scenario in its key
Spanish market continues to be one of Telefonica's weak spots and
analysts will be watching to see whether customers in Spain have
scaled back their spending after the country's government ushered
in a new austerity plan. Other European markets like Germany and
the UK are growing and making an increasingly larger contribution
to the company's total revenue.
The Venezuelan government's decision to devalue its currency has
hit Telefonica's revenue in the country, but analysts say currency
fluctuations in other Latin American countries may boost revenue
for the region.
MAIN FOCUS: Telefonica's second-quarter financial results are
likely to be overshadowed by the company's ongoing attempts to take
over Brazil's Vivo Telecomunicacoes SA (VIV). Telefonica has made
multiple offers for Portugal Telecom SGPS SA's (PT) stake in Vivo
and recently broke off negotiations with PT after months of talks.
A person close to the situation has said Telefonica is now pursuing
a legal settlement to break up Brasilcel, the joint venture both
companies own that controls Vivo.
---BT Group PLC (BT.A.LN) 1Q results --- (July 29)
MARKET EXPECTATIONS: BT's first quarter results are expected to
show further cost savings as revenue remains under pressure due to
the tough economic environment. Revenue is expected to be down 5.5%
to GBP4.95 billion from GBP5.24 billion a year earlier, while
adjusted earnings before interest, tax, depreciation and
amortization is seen flat at GBP1.37 billion from a year ago,
according to 10 analysts. "BT will continue the clear trend of
earnings beats from the past four quarters, with continued revenue
pressures more than offset by cost cutting," according to Barclays
Capital.
MAIN FOCUS: The key for investors remains cost savings, revenue
mix and the outlook. In May, BT forecast annual revenue of about
GBP20 billion, underlying operating-cost savings of around GBP900
million and debt of less than GBP9 billion. BT also expects free
cash flow to be around GBP1.8 billion. BT's exposure to UK
government spending cuts will also come under close scrutiny.
---Telecom Italia (TI) 2Q results--- (August 5)
MARKET EXPECTATIONS: Analysts expect a similar operational
performance to the first quarter, with strong cost-cutting
partially offsetting domestic top-line pressure. Improving trends
in the company's domestic fixed line business and Brazil are
expected and analysts noted that the appreciation of the Brazilian
Real should help boost the group's EBITDA forecasts by 1%. The
mobile business is expected to make some progress towards
stabilization by the fourth quarter. Analysts will focus on signs
of economic pressure that could hinder a return to mobile
growth.
MAIN FOCUS: The market will watch out for the implementation of
the 2010-2012 strategic plan, focusing on cost-cutting and debt
reduction. Eyes will also be on any update of Telecom Italia's
investment plans in high-speed broadband, after competitors
announced a rival fiber project, and any possible financial impact
from a temporary freeze of 3,700 planned job cuts due to ongoing
negotiations with the Italian government and unions. The group
plans to cut 3,700 jobs by June 2011 and a total of 6,800 positions
as part of its 2010-2012 strategy.
---Deutsche Telekom AG (DT) 2Q results---(August 5)
MARKET EXPECTATIONS: Deutsche Telekom should benefit in the
second quarter from a strong performance in its German home market,
especially from its mobile operations. Deutsche Bank expects mobile
service revenue in Germany to rise more than 5% year-on-year and
margins to be above 40%. Closely-watched U.S. operations will
remain weak in the quarter to the end of June, Barclays said.
Deutsche Telekom's bottom line will be affected by a
currency-related book effect due to the deconsolidation of T-Mobile
in the U.K., which is now part of a 50:50 joint venture with France
Telecom.
MAIN FOCUS: Investors will continue to focus on Deutsche
Telekom's operations in the U.S.; most of the analysts expect a
recovery in the second half. The weak euro against the U.S. dollar
should put Deutsche Telekom "comfortably on track to meet or beat
its full year guidance for operating profit", Deutsche Bank
says.
-By Ruth Bender, Dow Jones Newswires; +33 1 40 17 17 54;
ruth.bender@dowjones.com
(Lilly Vitorovich in London, Jason Sinclair in Madrid, Archibald
Preuschat in Duesseldorf and Giada Zampano in Rome contributed to
this report.)
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