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By Clare Kane and Harro Ten Wolde
MADRID/BARCELONA Feb 28 Spain's Telefonica
, Europe's biggest telecoms provider, showed signs of a
turnaround on Thursday in its battered home market after a
painful restructuring and thousands of layoffs.
The carrier, which has been battling recession for over a
year in one of the euro zone's poorest countries, boosted its
Spanish operating cash flow for the first time in four years as
it successfully targeted customers with value-for-money deals.
In contrast to Deutsche Telekom, the euro zone's
second-biggest telecoms company - which disappointed investors
with the scale of its investments to hang on to customers in its
home market Germany - Telefonica has gone down a different path.
Instead of spending furiously on subsidising smartphones to
keep its more affluent customers tied into multi-year contracts,
Telefonica, faced with impoverished consumers abandoning mobile
contracts altogether, stopped smartphone subsidies last year.
A new offering packaging fixed-line, mobile, broadband and
TV services has attracted 1.5 million customers since its launch
in October and is already persuading subscribers to upgrade to
extra services in large numbers, the company said.
Executive Chairman Cesar Alierta said a "deep transformation
process at Telefonica" was starting to bear fruit, and forecast
revenue growth and lower operating margin erosion for 2013.
Many rivals in Europe's crowded and mature mobile markets
are adopting a more defensive approach, hoping to squeeze more
money out of the data services that smartphone users
increasingly favour over their former cash cow, voice calls.
Deutsche Telekom, whose German domestic market is the euro
zone's strongest major economy, is stepping up investments to
shore up its customer base in Germany, which accounts for 39
percent of its revenues.
The company posted a drop in fourth-quarter core profit that
missed analysts' expectations, although it said it still
expected an increase in core profit this year.
"We are going on the offensive - with extensive investments
in networks and in the market," outgoing Chief Executive Rene
Obermann said in a statement.
Telekom Austria, which reported better-than-feared
results, has also said it will need to make substantial
investments to defend its market share at home, despite a
consolidation of the Austrian market to three in January.
Europe remains a tough market, with three or four telecoms
operators in most countries, a prolonged economic crisis and
active pro-consumer regulation that has been forcing carriers to
cut prices and fees.
Telefonica's Latin American sales overtook its European
sales for the first time last quarter, while the only two of
Deutsche Telekom's European markets to grow, excluding its
British joint venture, were Poland and Hungary.
Telefonica reported lower-than-expected net profit due to a
surprise writedown of 527 million euros ($691 million) on its
Irish unit, earning 3.9 billion euros in 2012 instead of the
expected 4.4 billion euros.
Its overall operating income before depreciation and
amortisation (OIBDA) grew 5 percent to 21.2 billion euros and
sales slipped 1 percent to 62.4 billion in 2012, broadly in line
The company reiterated it would pay a dividend of 0.75 euros
per share for 2013 after scrapping it last year for the first
time since the Spanish Civil War as part of a cash-raising drive
as it grapples with net debt of 51.3 billion euros.
Telefonica narrowly missed its net debt to operating income
target ratio of 2.35 for 2012 - although not by enough to
endanger its prized investment-grade rating.
But investors focused on the faster-than-expected Spanish
turnaround, sending Telefonica shares up 1.7 percent to 9.96
euros by 1136 GMT in a flat European telecoms sector.
"Spain comes as the big surprise, reinforces the credibility
of Telefonica's domestic strategy and suggests stabilisation
could be closer than expected," BBVA analysts wrote in a note.
Telefonica said it expected revenue to grow this year, and
operating profit margin erosion to slow, while capital
expenditure should be stable as a proportion of sales.
In neighbouring Portugal, also hit hard by the euro zone
crisis, Portugal Telecom's fourth-quarter sales fell 7
percent amid a deepening recession. It posted a 10 percent rise
in profit, beating forecasts, thanks to disposals and cost cuts.
Investors were less convinced by the strategy of Deutsche
Telekom, whose earnings before interest, tax, depreciation and
amortisation (EBITDA) excluding special items fell 13 percent to
4.03 billion euros ($5.28 billion), missing an average forecast
of 4.19 billion in a Reuters poll.
The company said it still expected EBITDA to grow to around
18.4 billion euros this year, above the Reuters poll average
estimate of 17.5 billion euros.
But the scale of investments in Germany - although they had
been flagged - combined with weakness in the United States
worried some investors, sending the company's shares down 0.7
percent to 8.17 euros.
Jefferies analysts wrote: "Results now show this coming
through... mainly in German mobile where market investments
(opex) have been increased by 0.2 billion euros in 4Q alone.
This remains the main reason for our caution on the stock."
Telekom Austria also reported a drop in core
profits as its two biggest markets, Austria and Bulgaria,
struggled with competition and regulation.
The company that is 26 percent owned by Carlos Slim and his
America Movil group said competition remained fierce.
Still, quarterly core profit of 319 million euros and flat
sales of 1.12 billion euros beat low expectations, sending its
shares up 7 percent. Telekom Austria reiterated its forecast for
2013 sales to fall to about 4.1 billion euros from 4.4 billion.
It continued to decline to provide a profit forecast.
Outside of the euro zone, Russian operator MegaFon
showed its domestic market is approaching that of mature
European ones. MegaFon said revenue grwoth would likely slow
this year and it would focus on mobile data rather than voice
services to drive future growth.
($1 = 0.7628 euros)
(Additional reporting and writing by Georgina Prodhan; Editing
by Sophie Walker)