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By Clare Kane and Harro Ten Wolde
MADRID/BARCELONA, Feb 28 (Reuters) - 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 with estimates.
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)