The FINANCIAL — Comments by Lars Nyberg, President and CEO
“It is encouraging to see that the organic growth rate improved further in the third quarter and that the growth is coming from many parts within our group. Both Mobility Services and Eurasia are seeing accelerated growth compared to previous quarters, the former driven by mobile data and equipment sales and the latter by macroeconomic recovery and higher mobile penetration. More importantly, we are delivering profitable growth and the EBITDA, excluding non-recurring items, in the third quarter was the highest in the company’s history.
In the Nordic region, the uptake of smart phones is boosting our mobile data revenues and equipment sales. Today, seven out of ten customers in Sweden are buying a smart phone with higher usage and average revenue per user as a result. The new iPhone 4 has been very well received by our customers and we can now see that other smart phone models based on Android and Symbian platforms are also getting a lot of traction. Our Spanish operator, Yoigo, recorded an all time-high customer intake and reached close to four percent market share and we remain confident that the operation will become EBITDA positive in the fourth quarter of 2010.
In Eurasia, we have invested significant amounts in building high-quality mobile networks in Uzbekistan and Nepal since we acquired the operations in 2007 and 2008. We can now see the result of these efforts. Both Ucell and Ncell are delivering record-high subscriber intake and we are closing the gap to the market leader in both countries. At the same time Kazakh-stan, our largest market in Eurasia, continued to grow with growth in local currency exceed-ing 20 percent in the third quarter.
In Broadband Services, the on-going transition from traditional fixed telephony services to rich content services such as IPTV and Video on Demand is gaining momentum. This strengthens our firm belief that our fixed network is a crucial and differentiating asset for the future. At the same time it poses a short term challenge as we upgrade ADSL to VDSL and provide more households and businesses with fiber connections. We believe we can man-age this difficult transition while protecting healthy margins. We are also encouraged that we now have more than 350,000 fiber/LAN customers which give us an opportunity to sell more services to our existing customers.
We have again raised our net sales outlook for the full year and we now believe our EBITDA margin will be higher in 2010 compared to last year.”
Group outlook for 2010 (revised)
Growth in net sales in local currencies and excluding acquisitions for 2010 is expected to be in line with the first nine months of 2010. Currency fluctuations may have a material impact on reported figures in Swedish krona.
TeliaSonera will continue to invest in future growth as well as in the quality of networks and services. Driven by the improved net sales outlook, we expect the addressable cost base in 2010 to be somewhat higher compared with the SEK 33.2 billion of 2009, in local currencies and excluding acquisitions. The EBITDA margin in 2010 is expected to be higher compared to 2009, excluding non-recurring items.
Capital expenditures will be driven by continued investments in broadband and mobile ca-pacity as well as in network expansion in Eurasia. The CAPEX-to-sales ratio is expected to be around 13.5 percent in 2010.
Review of the Group, third quarter 2010
"Net sales decreased 1.1 percent to SEK 26,754 million (27,053). Net sales in local curren-cies and excluding acquisitions increased 4.3 percent. The negative effect of acquisitions was 0.9 percent and the negative effect of exchange rate fluctuations was 4.5 percent," TeliaSonera informs.
In Mobility Services, net sales increased 2.6 percent to SEK 12,959 million (12,631). Net sales in local currencies and excluding acquisitions increased 9.0 percent.
In Broadband Services, net sales decreased 9.4 percent to SEK 9,772 million (10,785). Net sales in local currencies and excluding acquisitions decreased 5.8 percent.
In Eurasia, net sales increased 15.7 percent to SEK 4,288 million (3,706). Net sales in local currencies and excluding acquisitions increased 17.5 percent.
The number of subscriptions rose by 12.8 million from the end of the third quarter 2009 to 156.6 million, of which 6.5 million to 53.2 million in the consolidated operations and 6.3 mil-lion to 103.4 million in the associated companies. During the third quarter, the total number of subscriptions increased by 2.0 million in the consolidated companies and by 2.2 million in the associated companies.
EBITDA, excluding non-recurring items, increased 0.1 percent to SEK 9,776 million (9,763) and the margin increased to 36.5 percent (36.1). The increase in local currencies and ex-cluding acquisitions was 4.0 percent.
Operating income, excluding non-recurring items, increased to SEK 8,619 million (8,453). Income from associated companies increased 15.6 percent to SEK 2,082 million (1,801).
Non-recurring items affecting operating income totaled SEK 119 million (-349) including a capital gain of SEK 831 million from the sale of Telia Stofa in Denmark and impairment charges of SEK 678 million related to the operations in Cambodia.
Financial items totaled SEK -487 million (-541) of which SEK -487 million (-416) related to net interest expenses. Financial items were positively affected by a capital gain from the divestiture of shares in Digitel in the Philippines of SEK 67 million.
Income taxes decreased to SEK 1,776 million (1,885). The effective tax rate decreased to 21.5 percent (24.9) due to reduced provisions for withholding taxes related mainly to Azer-cell and a tax exempt capital gain realized in the disposal of Telia Stofa in Denmark, partly offset by non tax-deductible impairment charges in the Cambodian operations.
Non-controlling interests in subsidiaries decreased to SEK 487 million (635), of which SEK 628 million (494) was related to operations in Eurasia and SEK 70 million (95) to LMT and TEO.
Net income attributable to owners of the parent company increased to SEK 5,988 mil-lion (5,043) and earnings per share to SEK 1.33 (1.12).
CAPEX decreased to SEK 2,941 million (3,238) and the CAPEX-to-sales ratio to 11.0 per-cent (12.0).
Free cash flow decreased 37.4 percent to SEK 3,857 million (6,160) due to higher paid taxes of SEK 989 million, mainly related to the Swedish operations, and lower dividends from associated companies. In the third quarter of 2009, a dividend of SEK 1,153 million was received from Turkcell Holding.
Net debt decreased to SEK 47,553 million at the end of the third quarter (52,387 at the end of the second quarter 2010).
The equity/assets ratio was 50.5 percent (51.2 at the end of the second quarter 2010).
Acquisitions and divestitures
• On July 8, 2010, TeliaSonera announced that it had signed an agreement on the sale of its Danish subsidiary Telia Stofa to Ratos, a listed private equity company with Nordic focus. The sales price was DKK 1.1 billion on a cash and debt free basis. In the third quarter of 2010, TeliaSonera recognized a capital gain of SEK 831 million. Telia Stofa’s revenues in 2009 were DKK 1,024 million, EBITDA was DKK 166 million and operating income was DKK 92 million. Telia Stofa has approximately 500 employees. Telia Stofa was deconsolidated as of August 1, 2010.
• TeliaSonera divested the remaining 7.8 percent of its holding in Digitel in the Philippines during the third quarter of 2010. The transaction value was SEK 112 million and re-sulted in a capital gain of SEK 67 million.
Significant events in the third quarter
• On September 23, 2010, TeliaSonera AB issued a 15 year Eurobond of EUR 500 mil-lion under its existing EUR 9 billion EMTN (Euro Medium Term Note) program. The Re-offer yield was set at 3.928 percent p.a. equivalent to Euro Mid-swaps + 100 bp for a 15 year deal maturing in October 2025.
• TeliaSonera has conducted a SEK 678 million write-down of the carrying value of its Cambodian operations in the third quarter of 2010. In 2008, TeliaSonera acquired Appli-fone in Cambodia (brand name Star-Cell) as part of the acquisition of Spice Nepal in Nepal. Applifone is today the number seven out of nine mobile operators in Cambodia. In general, the market is characterized by fierce competition and high churn rates. In the first quarter of 2010, it was clear that TeliaSonera’s ambition related to the Cambodian market had to be reviewed and the segment responsibility was transferred from busi-ness area Eurasia to TeliaSonera Holding within Other operations. Following further analysis of the market position, the value of Applifone was reassessed during the third quarter of 2010. After the write down there is no goodwill related to the Cambodian op-erations as per September 30, 2010.
• The strong demand for mobile broadband and smart phones in the Nordic countries continues to drive increased data usage and equipment sales. New mobile broadband offerings were launched in both Sweden and Norway during the quarter to better reflect customers’ demand for higher speed and usage patterns. The 4G roll-out continues with launches in 28 cities in Sweden and four in Norway during 2010. TeliaSonera will begin selling Samsung's Android-powered tablet device, called Galaxy Tab, in the Nordic and Baltic markets in the fourth quarter.
• TeliaSonera’s Spanish mobile operator, Yoigo, continues to benefit from its price lead-ership and no-frills tariffs and its market share reached close to four percent. The aver-age monthly gross subscription intake was at all time high in the third quarter. Revenue trends in the Baltic countries are improving due to equipment sales and mobile data but the development on net sales compared to last year is still negative. Regulation has also had a significant impact on revenues in Latvia and Lithuania.
• Net sales increased 2.6 percent to SEK 12,959 million (12,631). Net sales in local cur-rencies and excluding acquisitions increased 9.0 percent. The negative effect of ex-change rate fluctuations was 6.4 percent.
In local currencies, net sales grew in Spain, Sweden, Finland and Norway. Net sales in Sweden rose 8.3 percent to SEK 3,849 million (3,553), of which two thirds explained by mobile data and one third by an increase in equipment sales. In Spain, net sales in local currency rose 81.6 percent to the equivalent of SEK 1,694 million (1,036).
In Finland, net sales in local currency increased 8.4 percent, of which higher equipment sales and mobile data revenues contributed equally to the rise. In Norway, net sales in local currency grew 0.4 percent, the first increase since the second quarter of 2008. The decline in voice revenues, as a result of subscribers migrating to cheaper price plans, was compensated for by higher equipment sales and mobile data revenues. In Den-mark, net sales in local currency decreased 5.9 percent as a result of lower voice reve-nues and a reduction in interconnect fees from May 1, 2010.
The revenue trend improved compared to the previous quarter in all three Baltic coun-tries. Net sales in local currency decreased 2.0 percent in Estonia. Net sales in local currencies in Latvia and Lithuania fell by 7.0 percent and 13.8 percent, respectively, compared to the corresponding quarter last year. Lower interconnect tariffs had a sig-nificant negative impact in these two countries and explain one third of the decline in Latvia and almost half of the decline in net sales in Lithuania.
• The number of subscriptions rose by 1.5 million from the end of the third quarter 2009 to 18.1 million. Growth was strongest in Spain with an increase of 0.8 million to
2.1 million subscriptions. Finland followed with 0.3 million new subscriptions and Swe-den with 0.2 million. During the quarter the total number of subscriptions rose by 0.5 million.
• Interconnect fees that TeliaSonera receives from other mobile operators were lowered in Sweden on July 1, 2010, from SEK 0.32 to SEK 0.26. On July 1, 2009, fees in Nor-way were lowered from NOK 0.60 to NOK 0.50 and will be lowered further to NOK 0.30 on January 1, 2011. In Lithuania, interconnect fees were reduced from LTL 0.266 to LTL 0.148 on January 1, 2010. On April 1, 2010, fees in Spain were lowered from EUR 0.061 to EUR 0.055. In Latvia, interconnect fees were reduced from LVL 0.062 to LVL 0.047 from April 1, 2010 and from August 1, 2010, lowered further to LVL 0.04. In Den-mark, interconnect fees were lowered from DKK 0.54 to DKK 0.44 on May 1, 2010. In Estonia, interconnect fees were reduced from EEK 1.36 to EEK 1.22 on July 1, 2010.
• EBITDA, excluding non-recurring items, decreased 1.0 percent to SEK 3,926 million (3,966). The EBITDA margin fell to 30.3 percent (31.4). Margins improved in Sweden, Denmark, Latvia and Spain. In local currencies, EBITDA, excluding non-recurring items, increased 3.3 percent.
In Sweden, EBITDA, excluding non-recurring items, increased 12.9 percent to SEK 1,682 million (1,490). The EBITDA margin improved to 43.7 percent (41.9) due to in-creased revenues and improving gross margin. In Finland, the EBITDA margin fell to
29.9 percent (33.8), as a result of lower gross margin, increased sales and marketing costs as well as activities related to improved customer and dealer support.
In Spain, the EBITDA loss narrowed to SEK -131 million (-209) despite a record-high gross intake of subscriptions. The forecast that Yoigo will become EBITDA positive in the fourth quarter of 2010 remains.
In Denmark, reduced personnel and sales and marketing costs compensated for the decline in sales and the EBITDA margin increased to 23.4 percent (22.4). In Norway, the EBITDA margin fell to 35.9 percent (37.6) due to increasing sales of high ARPU post-paid subscriptions with higher subsidies and continued growth in mobile broad-band.
In Latvia, operating costs were successfully reduced and the EBITDA margin improved to 40.2 percent (38.6). In Estonia, improved gross margin compensated for the decline in sales and the EBITDA margin remained unchanged at 39.0 percent (38.8) compared to the corresponding quarter last year. The EBITDA margin in Lithuania fell to 31.4 per-cent (33.8), mostly due to increased sales and retention activities.
• CAPEX was unchanged at SEK 728 million (722) and the CAPEX-to-sales ratio was 5.6 percent (5.7). Cash flow, measured as EBITDA, excluding non-recurring items, minus CAPEX, was also at the same level as the corresponding quarter last year at SEK 3,198 million (3,244).
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