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briefing

The Hop Exchange 24 Southwark St. London SE1 1TY United Kingdom Tel: +44 (0) 20 7168 7680 Email: [email protected]

Web: www.themobileworld.com Issue 65: 30th

April 2007

© 2007 The Mobile World. Unauthorised reproduction and distribution prohibited. Subject to disclaimers. The Mobile World is the trading name of Silventa Ltd., registered in England No. 05065064. Registered Address c/o Baker Tilly, Mount Ephraim Road, Tunbridge Wells, Kent TN1 1ED.

onth in China

espite usage improvements

nd AMPU

2007 Results

, MTNL and IDEA Q4 2006/07 Results to 31st March

revenues reach $4.3bn

materialise

ctive business

crashing down

martcom pressure tells

t growth beginning to slow

Results

ake in Telecom Italia Effective control for less than one quarter’s EBITDA

The Mobile World Briefing

The Mobile World Briefing is designed to keep you in touch with the key trends, figures and statistics in the mobile industry as it develops. A new issue is circulated at the beginning of each week during the four financial reporting seasons of the year, and on an occasional basis at other times.

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Contents: p2 major operators p9 europe p11 asia pacific p20 north america p21 russia & central asia p22 caribbean & latin america p27 features p29 news in brief

Selected Events and Database Updates

TeliaSonera Q1 2007 Results Increasing divergence between fixed and mobile, Eurasia and elsewhere

Millicom International Cellular Q1 2007 Results Great results, but are they enough?

America Movil Q1 2007 Results Predictably, yet another record quarter – but acquisitions help

France Telecom Q1 2007 Revenues and Operating Results 100m mark reached, despite declines in both France and the UK

Tele2 Q1 2007 Results Change of emphasis

Mobistar Q1 2007 Results ARPU growth well and truly ove

Elisa Q1 2007 Results r

Revenues up 19% as Elisa closes gap on Sonera in home marke

7 Customer Numbers t

PTA Pakistan March 200One in three Pakistanis is mobile

TCA Japan March 2007 Results au Record month for W-CDMA, as MNP customers continue to choose

esults China Mobile & China Unicom Q1 2007 RNo denying trend after another record m

MobileOne Q1 2007 Results Prepaid ARPU reaches new low d

DTAC Q1 2007 Results Inclusion of incoming minutes boosts ARPU a

Taiwan Mobile Q1 Churn falls to record low

Bharti2007 Bharti ahead by all measures as

AT&T Q1 2007 Results Integration benefits beginning to

Alltel Q1 2007 Results Another solid performance from an increasingly attra

MTS March 2007 Customer Numbers Arrest in Ukraine sends Q1 growth rate

Entel Chile Q1 2007 Results Worst net additions for three years as S

Chavez’ new acquisition tops 8m, buCANTV Q1 2007 Results

lts First operating profit recorded TNL PCS Q1 2007 Resu

Brasil Telecom Q1 2007First positive EBITDA recorded

Features in this Briefing Global Handset Round Up Q1 2007 Average Revenue per Phone now below €100 – and set to go lower

News in brief Etisalat expands its empire

Acquisition of Atlantique stake confirmed on eve of Egypt launch

Telefonica Consortium takes 23.6% st

1

The Mobile World Briefing 30th April 2007 Issue 65

major operators major operators

Vodafone: Third Quarter KPIs Vodafone: Third Quarter KPIs TeliaSonera Q1 2007 Results

Increasing divergence between fixed and mobile, Eurasia and elsewhere Increasing divergence between fixed and mobile, Eurasia and elsewhere TeliaSonera has reported results for its first quarter 2007. These show a good improvement in earnings – up 8.9% year on year - which has been achieved despite some rather lacklustre performances across the group. TeliaSonera has reported results for its first quarter 2007. These show a good improvement in earnings – up 8.9% year on year - which has been achieved despite some rather lacklustre performances across the group.

Group revenues up 2.4% at SEK 25.9bn Group revenues up 2.4% at SEK 25.9bn Mobile revenues up 4.2% at SEK 10.4bn Mobile revenues up 4.2% at SEK 10.4bn Group EBITDA down 3.4% at SEK 7.65bn, lying a margin of 29.5%, down 1.8pp year on year Group EBITDA down 3.4% at SEK 7.65bn, lying a margin of 29.5%, down 1.8pp year on year Mobile EBITDA up 7.6% at SEK 3.5bn Mobile EBITDA up 7.6% at SEK 3.5bn Group EBIT up 4.2% at SEK 6.06bn Group EBIT up 4.2% at SEK 6.06bn Mobile EBIT up 26.9% at SEK 2.4bn Mobile EBIT up 26.9% at SEK 2.4bn Earnings per share up 8.9% at SEK 0.89 Earnings per share up 8.9% at SEK 0.89 Overall customers increase to 100m, 31m of these in subsidiaries Overall customers increase to 100m, 31m of these in subsidiaries Mobile subsidiary customers up 10.3% at 21.5m Mobile subsidiary customers up 10.3% at 21.5m

The table below shows the split of revenues and EBITDA across the Group’s subsidiaries. At the EBITDA level, the increase in profitability at the two main mobile businesses – Mobility Services and Eurasia – has been more than offset by a decline in the profitability of the fixed businesses, the so-called Broadband Services and Enterprise divisions. This is typical of most integrated operators, at least, most integrated operators in the developed world. In TeliaSonera’s case, the drop in profitability is not a result of reducing revenues, which are virtually unchanged year on year, but a consequence of a changing sales mix and also some additional, unanticipated costs. The analysis of EBIT shows some marked swings in profitability, with Mobility Services and Eurasia both up and the other two divisions both down. The net result at the group level is a small increase of 4.2pp, from 19.1% in Q1 2006 to 23.2% in Q1 2007.

The table below shows the split of revenues and EBITDA across the Group’s subsidiaries. At the EBITDA level, the increase in profitability at the two main mobile businesses – Mobility Services and Eurasia – has been more than offset by a decline in the profitability of the fixed businesses, the so-called Broadband Services and Enterprise divisions. This is typical of most integrated operators, at least, most integrated operators in the developed world. In TeliaSonera’s case, the drop in profitability is not a result of reducing revenues, which are virtually unchanged year on year, but a consequence of a changing sales mix and also some additional, unanticipated costs. The analysis of EBIT shows some marked swings in profitability, with Mobility Services and Eurasia both up and the other two divisions both down. The net result at the group level is a small increase of 4.2pp, from 19.1% in Q1 2006 to 23.2% in Q1 2007. TeliaSonera: Key Financials (SEK m), Q1 07 vs Q1 06 TeliaSonera: Key Financials (SEK m), Q1 07 vs Q1 06

Revenue Revenue Q1 06Q1 06 Q1 07 Change Q on Q Mobility Services 9,971 10,391 4.2% Broadband Services 10,206 10,195 -0.1% Enterprise 3,250 3,259 0.3% Eurasia 1,870 2,065 10.4% Group 25,297 25,910 2.4% EBITDA Mobility Services 3,260 3,507 7.6% Broadband Services 3,436 2,939 -14.5% Enterprise 154 58 -62.3% Eurasia 1,070 1,146 7.1% Group 7,920 7,650 -3.4% EBIT Mobility Services 1,900 2,412 26.9% Broadband Services 1,835 1,575 -14.2% Enterprise - 19 - 96 405.3% Eurasia 821 837 1.9% Group 4,537 4,728 4.2% EBITDA margin Mobility Services 32.7% 33.8% +1.1pp Broadband Services 33.7% 28.8% -4.8pp Enterprise 4.7% 1.8% -3.0pp Eurasia 57.2% 55.5% -1.7pp Group 31.3% 29.5% -1.8pp EBIT Margin Mobility Services 19.1% 23.2% +4.2pp Broadband Services 18.0% 15.4% -2.5pp Enterprise -0.6% -2.9% -2.4pp Eurasia 43.9% 40.5% -3.4pp Group 17.9% 18.2% +0.3pp

TeliaSonera is a combination of comparatively mature businesses in Sweden and Finland, maturing businesses in the Baltics, plus some high growth subsidiaries in the southern part of the former Soviet Union. It also has two high growth associates in the shape of MegaFon and Turkcell, companies (based in Russia and Turkey respectively) and it is these that allowed the Group to show a positive trend in earnings, despite the decline at the operating level. Together, TeliaSonera’s two associated added SEK 1.44bn (SEK 1.01bn) to the total profit line, which was enough to change the overall growth rate from the pedestrian to the good. Looking at the mobile businesses in more detail, we see a similar mix of results. The combined customer base of the Group’s mobile subsidiaries is up by just over 10% at 21.5m, year on year, but this headline figure includes some very varied results. At the one end,

2© 2007 The Mobile World.


Fintur’s subsidiary in Georgia grew by 43.1%, at the other, there was a decline in the Group’s Finnish base of some 6.4%. In fact, both Norway and Denmark also saw a fall in their subscriber base, though in both cases the decline was rather more modest. The three Baltic businesses continued to grow, with gains of 4.4% in Lithuania, 8.4% in Latvia and 13.0% in Estonia. The four Fintur companies – in Azerbaijan, Kazakhstan, Georgia and Moldova – once again produced the best results as far as subscriber growth is concerned, all four showing double digit year on year increases.

Fintur’s subsidiary in Georgia grew by 43.1%, at the other, there was a decline in the Group’s Finnish base of some 6.4%. In fact, both Norway and Denmark also saw a fall in their subscriber base, though in both cases the decline was rather more modest. The three Baltic businesses continued to grow, with gains of 4.4% in Lithuania, 8.4% in Latvia and 13.0% in Estonia. The four Fintur companies – in Azerbaijan, Kazakhstan, Georgia and Moldova – once again produced the best results as far as subscriber growth is concerned, all four showing double digit year on year increases. The latest quarterly figures paint a slightly different picture of the quarter on quarter comparison and this is shown in the chart below. Finland is down again, while Norway small year on year decline has become a rather larger quarter on quarter drop. Estonia is barely changed on the quarter, while Lithuania has now gone into reverse, with a net ten thousand disconnections. Only the Fintur companies show a strong and continuing upward trend.

The latest quarterly figures paint a slightly different picture of the quarter on quarter comparison and this is shown in the chart below. Finland is down again, while Norway small year on year decline has become a rather larger quarter on quarter drop. Estonia is barely changed on the quarter, while Lithuania has now gone into reverse, with a net ten thousand disconnections. Only the Fintur companies show a strong and continuing upward trend.

TeliaSonera: Net Additions in Quarter (000s), Q1 07

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Vodafone: Third Quarter KPIs


Millicom International Cellular Q1 2007 Results

Great results, but are they enough? Millicom International has had another excellent quarter, increasing its customer base by over 10% to 16.5m, while at the same time increasing revenues and profitability dramatically. As things stand, this is the best result from any operator so far this quarter. The highlights of the financial results are shown below:

Group revenues up 86% at $563m Group EBITDA up 74% at $248m, implying a margin of 44%, down from 47.2% year on year Group EBIT up 68.3% at $169.9m Earnings per share up 882% at $3.24 Mobile customers increase by 94% to 16.5m Cash balances close to $1bn

Following the sale of its Pakistan networks, Millicom has now redefined its clusters as Latin America, Africa and Asia. All three of these regional groupings have reported strong customer growth and, as noted from headlines above, this has had a dramatic impact on profits, which are up by 74% at the EBITDA level, 68% at the operating level and 67% at the pre-tax level. Thanks to a massive $258m gain from the sale of various businesses, including Paktel, earnings per share are up nearly ten fold - though on a like for like basis, the increase is a rather more modest 161% improvement. The divisional results are shown in the table overleaf.


Millicom: Key Financials ($000s), Q1 06 – Q1 07

Revenues ($000)

Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Change Q on Q

Change Y on Y

Central America 156.6 181.4 207.3 250.9 249.5 -0.6% 59.3% South America 44.8 51.6 62.3 162.3 167.4 3.1% 273.6% Africa 66.7 72.7 80.3 92.4 103.2 11.7% 54.8% Asia 34.8 35.6 38.2 38.2 42.6 11.6% 22.2% Total 302.9 341.3 388.1 543.8 562.7 3.5% 85.8% EBITDA ($000) Central America 79.0 94.1 110.9 131.4 136.3 3.7% 72.5% South America 18.5 22.3 28.4 48.9 55.8 14.2% 201.7% Africa 29.7 28.9 31.1 32.8 38.5 17.4% 29.7% Asia 15.7 14.2 15.2 16.1 17.4 8.4% 10.8% Total 142.9 159.5 185.5 229.2 248.1 8.2% 73.6% EBITDA Margin Central America 50.5% 51.9% 53.5% 52.4% 54.6% 2.3pp 4.2pp South America 41.3% 43.2% 45.6% 30.1% 33.3% 3.2pp -7.9pp Africa 44.5% 39.8% 38.7% 35.5% 37.3% 1.8pp -7.2pp Asia 45.1% 39.8% 39.6% 42.1% 40.9% -1.2pp -4.2pp Total 47.2% 46.7% 47.8% 42.1% 44.1% 1.9pp -3.1pp

As the chart shows, Millicom has enjoyed outstanding customer growth in almost all of its markets in the last year. In absolute terms, seven of its subsidiaries increased their base by six figures or more, with Honduras and Guatemala both adding more than 0.25m customers this quarter. Only Bolivia saw a drop in numbers, which probably reflects good housekeeping, rather than any decline in demand. In proportionate terms, the highest growth rate was achieved in the DRC, where Millicom saw an extraordinary 285% growth quarter on quarter, as this business came to life after several dull periods. Overall, the base grew by more than 10% on the quarter and nearly 100% on the year.

Millicom: Venture Customers, EOP (000s), Q1 05 - Q1 07

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Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07

CambodiaLaosSri LankaChadDRCGhanaMauritiusSenegalSierra LeoneTanzaniaBoliviaColombiaEl SalvadorGuatemalaHondurasParaguay

The last year or two has been a triumph for the company, after many years of struggling. But what does it do next? Yes, it is well-positioned with 16 markets, all of which are growing and all of which have considerable potential. It has nearly $1bn in cash and cash equivalents and profitability, as we have seen, is improving sharply. But compared with some of the other companies featured in this issue of The Mobile World Briefing, it is still comparatively small and this lack of scale – and indeed, lack of real focus – could be a problem. The sale of Paktel and, before that, Pakcom, plus the acquisition of Colombia Movil suggest that Millicom is looking to address these issues, but in our view, it can’t keep a presence in all three regions indefinitely. Its 16m customers may suggest it is a convincing second tier operator, but on average, it only has just over 1m customers per country… and that is not enough.



Vodafone: Third Quarter KPIs America Movil Q1 2007 Results

Predictably, yet another record quarter – but acquisitions helped Predictably, yet another record quarter – but acquisitions helped America Movil has, once again, produced record results in its first quarter 2007. Customer numbers were up both year on year and quarter on quarter at every regional business, with revenues following suit. Remarkably, margins improved in every business except at Claro in Chile, where a massive increase in net additions generated significant one-off costs. The highlights of the financial results are shown below:

America Movil has, once again, produced record results in its first quarter 2007. Customer numbers were up both year on year and quarter on quarter at every regional business, with revenues following suit. Remarkably, margins improved in every business except at Claro in Chile, where a massive increase in net additions generated significant one-off costs. The highlights of the financial results are shown below:

Group revenues up 28% at MX$67.7bn Group revenues up 28% at MX$67.7bn Group EBITDA up 51.4% at MX28.9bn, implying a margin of 42.7%, up 6.5pp year on year Group EBITDA up 51.4% at MX28.9bn, implying a margin of 42.7%, up 6.5pp year on year Group EBIT up 66.1% at MX$21.4bn Group EBIT up 66.1% at MX$21.4bn Earnings per share up 56.4% at MX$0.45 Earnings per share up 56.4% at MX$0.45 Overall customers increase by 5.9% to 135.1m on a like for like basis Overall customers increase by 5.9% to 135.1m on a like for like basis Mobile customers increase by 5.2%, to 131.2m on a like for like basis Mobile customers increase by 5.2%, to 131.2m on a like for like basis Mobile network customers (excluding Tracfone) up by 4.7% to 123m Mobile network customers (excluding Tracfone) up by 4.7% to 123m

In total, America Movil added 8.26m new mobile network customers, which is a new record, beating the second quarters of 2005 and 2006, when 8.22m new connections were made. However, the number this quarter would have been slightly less impressive but for the acquisition of two new businesses, in the Dominican Republic and Puerto Rico, which boosted the total by 2.27m and 0.56m respectively. On an organic basis, the first quarter saw just 5.57m net adds, which is one of the lower growth rates this company has produced recently.

In total, America Movil added 8.26m new mobile network customers, which is a new record, beating the second quarters of 2005 and 2006, when 8.22m new connections were made. However, the number this quarter would have been slightly less impressive but for the acquisition of two new businesses, in the Dominican Republic and Puerto Rico, which boosted the total by 2.27m and 0.56m respectively. On an organic basis, the first quarter saw just 5.57m net adds, which is one of the lower growth rates this company has produced recently. The table below shows the Group’s basic financial metrics, expressed first in their reported currency and then in US dollars, the currency that is used to report the results of several of these subsidiaries. Double digit revenue gains were seen in each reporting region except Central America, which comprises El Salvador, Guatemala, Honduras and Nicaragua. That result appears somewhat anomalous, given the strong subscriber growth in each of those markets (+40%, +189%, +68% and +58%) and the initial assumption is that it must be currency related. But no, all four currencies appreciated against the dollar, so it points to a material reduction in ARPU. The company’s data shows that on average, this declined from $14 to $11 per month. Elsewhere, revenue growth tracked customer growth rather more closely: Mexico’s 20% customer growth has produced 15% revenue growth, Brazil’s 27% customer growth has resulted in 21% revenue growth, Colombia’s 26% customer growth has led to 30% revenue growth… and so on. The one stand-out performer on the upside was Chile, where 31% customer growth produced an increase in the top line of 56%.

The table below shows the Group’s basic financial metrics, expressed first in their reported currency and then in US dollars, the currency that is used to report the results of several of these subsidiaries. Double digit revenue gains were seen in each reporting region except Central America, which comprises El Salvador, Guatemala, Honduras and Nicaragua. That result appears somewhat anomalous, given the strong subscriber growth in each of those markets (+40%, +189%, +68% and +58%) and the initial assumption is that it must be currency related. But no, all four currencies appreciated against the dollar, so it points to a material reduction in ARPU. The company’s data shows that on average, this declined from $14 to $11 per month. Elsewhere, revenue growth tracked customer growth rather more closely: Mexico’s 20% customer growth has produced 15% revenue growth, Brazil’s 27% customer growth has resulted in 21% revenue growth, Colombia’s 26% customer growth has led to 30% revenue growth… and so on. The one stand-out performer on the upside was Chile, where 31% customer growth produced an increase in the top line of 56%. America Movil: Key Financials, 2007 America Movil: Key Financials, 2007

Financials as Reported Financials as Reported Financials in US$ Financials in US$ Revenues 2006 2007 Change 2006 2007 Change Mexico 25,380 29,165 14.9% 2,318 2,632 13.6% Brazil 1,780 2,155 21.1% 820 1,051 28.2% Argentina, Paraguay, Uruguay

964 1,284 33.2% 313 414 32.3%

Chile 42,730 66,702 56.1% 81 124 52.3% Colombia 1,037,000 1,349,000 30.1% 453 626 38.2% Ecuador 169 211 24.9% 169 211 24.9% Peru 295 405 37.3% 88 127 44.6% Central America 360 376 4.4% 360 376 4.4% Dominican Republic n/a 7,722 n/a n/a 233 n/a EBITDA Mexico 12,697 15,770 24.2% 1,160 1,423 22.7% Brazil 239 590 146.9% 110 288 161.3% Argentina, Paraguay, Uruguay

207 333 60.9% 67 107 59.8%

Chile 7,402 1,127 -84.8% 14 2 -85.1% Colombia 284,000 651,000 129.2% 124 302 143.6% Ecuador 40 89 122.5% 40 89 122.5% Peru 94 135 43.6% 28 42 51.3% Central America 176 199 13.1% 176 199 13.1% Dominican Republic n/a 3,378 n/a n/a 102 n/a Operating Profit Mexico 10,984 13,810 25.7% 1,003 1,246 24.3% Brazil - 155 168 -208.4% - 71 82 -214.7% Argentina, Paraguay, Uruguay

141 237 68.1% 46 76 67.0%

Chile 1,171 - 6,066 NM 2 - 11 NM Colombia 147,000 500,000 240.1% 64 232 261.4% Ecuador 24 67 179.2% 24 67 179.2% Peru 45 86 91.1% 13 27 101.3% Central America 125 133 6.4% 125 133 6.4% Dominican Republic n/a 2,501 n/a n/a 75 n/a

Note: Mexico, Brazil, Chile, Colombia, Peru and the Dominican Republic report in local currency. All others report in US$.



Looking at the customer numbers, which we reproduce graphically below, the main point is, perhaps, the reducing dependence on Mexico. This is still by far the biggest business in the Group, with 44.9m customers, but that number now only equates to 36.5% of the total. By contrast, just two years ago, it accounted for something nearer 50% of the total – 30.6m out of 63.9m. Elsewhere, the largest change in shape has been the relative decline of Brazil – from 22.4% of the whole, down to 20% over the same period – and the rise in Colombia’s weighting, from 11% of the total to more than 16%. Colombia passed the 20m mark in this quarter, with a total of 521k adds. Argentina, the Group’s fourth largest market, has seen a similar improvement, but from a much lower base. It added more than 0.85m customers in the quarter and now accounts for nearly 9% of Group subscribers. None of the other mobile businesses accounts for more than 5% of the base, though Ecuador, with 5.9m customers is close. The remaining ten businesses have a total of 16.5m customers, or 13.4% of the total.

America Movil: Venture Customers (000s), Q1 05 - Q1 07

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The other event during the quarter, or rather, non-event, was the ending of negotiations with Verizon about the sale of its stake in CANTV, the Venezuelan national carrier. This is the Group’s single largest gap in its Latin America footprint and the one market of real size where Telefonica has a presence and America Movil does not. It is tempting to conclude that America Movil will look to buy Digitel, the former TIM subsidiary to fill this gap, but with President Chavez looking to nationalise “strategic” businesses, this may not happen until certain assurances have been obtained. Readers may also speculate about what action America Movil will take to fill its second largest Latin American hole, in Bolivia. There are three operators there, of which Entel Movil is the market leader. That company is partly owned by Telecom Italia, which could well be interested in selling, given its financial difficulties, although re-nationalisation might again be on the cards. Alternatively, there are NuevaTel PCS (the former Western Wireless subsidiary) or Telefonica Cellular, a company which is, in fact, controlled by Millicom, rather than Telefonica of Spain. NuevaTel is now controlled by private investors (through Trilogy, a vehicle controlled by WWI executives) while following China Mobile’s attempt to buy Millicom last year, there is the sense that the Luxembourg based business is still “in play”. M&A has been a major cornerstone in America Movil’s development to date and we expect this to continue. For the record, the other markets where America Movil has yet to establish a presence are Costa Rica, Panama and the three former Guianas (for those with a colonial turn of mind and a long memory) – now known as Guyana, French Guiana and Suriname. The Caribbean may also beckon, where Digicel looks to be an increasingly attractive proposition.



Vodafone: Third Quarter KPIs France Telecom Q1 2007 Revenues and Operating Results

100m mark reached, despite declines in both France and the UK 100m mark reached, despite declines in both France and the UK France Telecom has produced a first glimpse of its Q1 2007 results, with the publication of headline revenues and customers numbers. The first impression is that the Group has reached the magic 100m mark, for which many congratulations. However, this initial reaction soon gives way to a rather more measured response, as it seems the company is struggling to achieve much in the way of growth in its main markets, whether this is measured by reference to customers or to financials.

France Telecom has produced a first glimpse of its Q1 2007 results, with the publication of headline revenues and customers numbers. The first impression is that the Group has reached the magic 100m mark, for which many congratulations. However, this initial reaction soon gives way to a rather more measured response, as it seems the company is struggling to achieve much in the way of growth in its main markets, whether this is measured by reference to customers or to financials. Taking the customer numbers first, the year on year figures don’t look too bad – the Group result is up 15.8%, thanks to powerful increases in Poland and the Rest of the World, in particular. These two businesses accounted for 12.8m and 37.9m of the Group’s 100.1m total, up 22.7% and 35.0% year on year, respectively. The other three large national markets produced less impressive gains. In France, the total grew 3.4% to reach 23.2m, while in the UK, an even more modest 0.9% was registered, to take the total to 15.1m, while Spain added a further 5% to end with 11.1m.

Taking the customer numbers first, the year on year figures don’t look too bad – the Group result is up 15.8%, thanks to powerful increases in Poland and the Rest of the World, in particular. These two businesses accounted for 12.8m and 37.9m of the Group’s 100.1m total, up 22.7% and 35.0% year on year, respectively. The other three large national markets produced less impressive gains. In France, the total grew 3.4% to reach 23.2m, while in the UK, an even more modest 0.9% was registered, to take the total to 15.1m, while Spain added a further 5% to end with 11.1m. Looking at the results on a quarter by quarter basis confirms the view that life in the mature markets of Western Europe is not especially easy. In France, customer numbers have in fact dropped, albeit only marginally, by 42,000 (excluding MVNOs). In the UK, there was also a decline, in this case, of 237,000. Spain was still up, but only by 221k. But it isn’t all bad news – Poland produced another excellent quarter, adding over 1m new customers and the Rest of the World contributed a further 5.6m.

Looking at the results on a quarter by quarter basis confirms the view that life in the mature markets of Western Europe is not especially easy. In France, customer numbers have in fact dropped, albeit only marginally, by 42,000 (excluding MVNOs). In the UK, there was also a decline, in this case, of 237,000. Spain was still up, but only by 221k. But it isn’t all bad news – Poland produced another excellent quarter, adding over 1m new customers and the Rest of the World contributed a further 5.6m. The chart below shows the year on year net additions by technology. This goes some way to explaining the flat performances of the Western European markets. It seems that in France, the UK and Spain, some customers are taking the opportunity to upgrade to a new service as an opportunity to switch to a new service provider. Thus, the good news of an extra 2.87m mobile “broadband” customers in France is offset to a large part by the loss of 2.06m GSM users. Only Poland, where EDGE/W-CDMA technologies are in their absolute infancy, has FT seen an increase in both technologies.

The chart below shows the year on year net additions by technology. This goes some way to explaining the flat performances of the Western European markets. It seems that in France, the UK and Spain, some customers are taking the opportunity to upgrade to a new service as an opportunity to switch to a new service provider. Thus, the good news of an extra 2.87m mobile “broadband” customers in France is offset to a large part by the loss of 2.06m GSM users. Only Poland, where EDGE/W-CDMA technologies are in their absolute infancy, has FT seen an increase in both technologies.

FT: Annual Net Additions (000s) by Technology and Market, year to 31st March 2007

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France UK Spain Poland

Broadband

GSM

Inevitably, this kind of static performance gets reflected in the financials. The table below shows the headline revenue figures, year on year and also the proportion of the group total that these activities now account for. Total mobile revenues are only up 4.3%, the flat performances seen in Western Europe being offset, to a degree, by faster growth elsewhere. However, 4.3% is a good result when compared to the fixed line and enterprise businesses, both of which have seen declines.



France Telecom: Revenues (€m), Q1 07 France Telecom: Revenues (€m), Q1 07

Mobile Mobile Q1 06 Q1 06 Q1 07Q1 07 Change % total Q1 06 % total Q1 07 France 2,391 2,388 -0.1% 16.9% 16.6% UK 1,478 1,489 0.7% 10.4% 10.3% Spain 803 821 2.2% 5.7% 5.7% Poland 446 479 7.4% 3.1% 3.3% Rest of World 1,573 1,801 14.5% 11.1% 12.5% Eliminations -48 -47 -2.1% -0.3% -0.3% Total Mobile 6,643 6,931 4.3% 46.9% 48.1% Fixed France 4,367 4,405 0.9% 30.8% 30.6% Poland 776 707 -8.9% 5.5% 4.9% Rest of World 497 517 4.0% 3.5% 3.6% Eliminations -43 -55 27.9% -0.3% -0.4% Total Fixed 5,597 5,574 -0.4% 39.5% 38.7% Enterprise 1,928 1,890 -2.0% 13.6% 13.1% Gross Revenues 14,168 14,395 1.6% 100.0% 100.0% Intergroup -1,551 -1,551 0.0% Total Revenues 12,617 12,844 1.8%

Vodafone: Third Quarter KPIs Tele2 Q1 2007 Results

A Change of emphasis Tele2 announced its first quarter results last week. The company has, as usual, been somewhat parsimonious when it comes to operating details, but the financials are presented clearly enough. Like its sister company Millicom which also reported this week there have been marked shifts in profitability, quarter on quarter, but in this case they are not for the better. The financial and operating headlines are as follows:

Group revenues up 5% at SEK 12,837m including SEK 5.2bn in mobile revenue, up 29% Group EBITDA up 22% at SEK 1,488m, implying a margin of 11.6%, against last year’s 10% Group EBIT up from SEK 254m to SEK 380m.

These results came on the back of marked increases in the company’s mobile customer base and a more modest improvement in the fixed line operations. The former showed an overall increase of 32%, to 16.47m, while the total, including indirect access Internet customers and unbundled local loop customers rose to 29.22m, an 8% increase. Those of you who like happy endings should stop reading at this point and skip on to the next article. Unfortunately, at least as far as Tele2’s financials are concerned, it is downhill all the way after the Operating Profit line. First, the Group’s interest bill jumped from SEK 130m to SEK 201m. Next, its “Other Financial Items” changed from a deficit of SEK 3m, to a deficit some 25 times that size. This left profits before tax from continuing operations down on the year, at SEK 82m, after SEK 143m. The “continuing operations” is significant, unfortunately, as 2005’s gain of SEK 87m gave way to an almost equal loss of SEK 88m in 2006. This, on top of the swing in financial factors, was enough to leave a pre-tax shortfall of SEK 6m, against 2005’s SEK 230m profit. Remarkably, all of the loss – and more – is attributable to the shareholders in those Group businesses that are not wholly owned, so that in fact, even after the pre-tax loss, earnings emerge as positive. Heavily down, year on year, but still positive at SEK 0.08, compared with SEK 0.59. Essentially, the company is going through a major change as it reduces its exposure to fixed line reselling and increases its investments in both mobile and broadband services. In particular, the company is looking to raise the proportion of its revenues that are generated from its own infrastructure. As Lars-Johan Jarnheimer, the president and CEO notes “during 2007, we expect to see the majority of our revenue being generated within our own infrastructure based mobile and broadband services”. Does this imply further divestments? We think it likely, though in fact, the target should be achieved even without any disposals. Tele2’s various European MVNOs might feature in any future restructuring. These showed reasonably healthy growth up until nine months ago, but this side of the business now appears to have stalled. The overall customer base has remained essentially unchanged over the last four quarters, while other parts of the business have gone from strength to strength, most especially, the Russian mobile activities. Tele2 now operates in 17 regions and eleven of these businesses are now EBITDA positive. This part of Tele2 has been a huge success, but we wonder what the next step might be. It looks like a binary decision – buy more businesses, or sell out to one of the big three. The recent 3G licence bids, where Tele2 teamed with SMARTS suggest a third way, to build up the business through alliances, but any attempt to create a fourth force in Russia will be fraught with difficulties – Tele2 is less than one quarter the size of the next smallest operator – TeliaSonera’s MegaFon associate – and needs another 72 regional licences for a full national footprint. Even in conjunction with SMARTS it is little more than one third MegaFon’s size and not much more than one fifth the size of MTS. With penetration now over 100%, selling out might make more sense. The problem then is where does Tele2 go for growth? The Russian company has grown at more than 20% per quarter for the last two years, while the second fastest growing MNO (in Latvia) has only managed 5%.



europe europe


OO2 – Q3 results to December 2005 2 – Q3 results to December 2005 Mobistar Q1 2007 Results belgium

ARPU growth well and truly over ARPU growth well and truly over In previous issues of The Mobile World Briefing we have remarked upon Belgian operator Mobistar’s apparent ability to continually raise ARPU whilst most other figures were fluctuating of falling. However, in Q4 2006 Mobistar suffered its first major drop in average spending levels in its history, a result which was clearly no aberration as the rate has fallen again in Q1 2007. The €38.17 per customer per month which Mobistar enjoyed in the first three months of this year is back down to the level seen at the very beginning of 2006, although (to put things in some sort of perspective) it is only 2.5% or €1 down on the high of €39.14 recorded in Q3 2006. That said, it should be noted that Mobistar states its ARPU figures on a rolling annual average basis – a method which makes for smoother trends, but can also mask the real pace of change, particularly when things are changing quickly.

In previous issues of The Mobile World Briefing we have remarked upon Belgian operator Mobistar’s apparent ability to continually raise ARPU whilst most other figures were fluctuating of falling. However, in Q4 2006 Mobistar suffered its first major drop in average spending levels in its history, a result which was clearly no aberration as the rate has fallen again in Q1 2007. The €38.17 per customer per month which Mobistar enjoyed in the first three months of this year is back down to the level seen at the very beginning of 2006, although (to put things in some sort of perspective) it is only 2.5% or €1 down on the high of €39.14 recorded in Q3 2006. That said, it should be noted that Mobistar states its ARPU figures on a rolling annual average basis – a method which makes for smoother trends, but can also mask the real pace of change, particularly when things are changing quickly. The conclusion to draw in this case is that the actual decline is much worse at a quarterly level than the rolling annual average figures would suggest. Not only will the quarterly average rate for the high point in Q3 2006 be higher than the €39.14 stated by Mobistar, but the rate for Q1 07 will also be much lower than the rolling annual average of €38.17 as this calculation is still taking into account figures from the high point six months ago. Without any of the quarterly figures reverse-engineering rolling annual averages is a hazardous business, so we will not proceed to attempt do that here. However, calculating simple quarterly averages from Mobistar’s Service Revenue figures indicates a drop from around €42.67 per customer per month in Q2 2006 to around €37.66 per customer per month in Q1 2007 – a decline of €5.

The conclusion to draw in this case is that the actual decline is much worse at a quarterly level than the rolling annual average figures would suggest. Not only will the quarterly average rate for the high point in Q3 2006 be higher than the €39.14 stated by Mobistar, but the rate for Q1 07 will also be much lower than the rolling annual average of €38.17 as this calculation is still taking into account figures from the high point six months ago. Without any of the quarterly figures reverse-engineering rolling annual averages is a hazardous business, so we will not proceed to attempt do that here. However, calculating simple quarterly averages from Mobistar’s Service Revenue figures indicates a drop from around €42.67 per customer per month in Q2 2006 to around €37.66 per customer per month in Q1 2007 – a decline of €5.

Mobistar: ARPU per Month, Rolling Annual Average (€), Q2 02 - Q4 06

28.0

30.0

32.0

34.0

36.0

38.0

40.0

Q202

Q302

Q402

Q103

Q203

Q303

Q403

Q104

Q204

Q304

Q404

Q105

Q205

Q305

Q405

Q106

Q206

Q306

Q406

Q107

AR

PU

per

Mo

nth

(€

)

Mobistar’s customer numbers and customer mix continued to improve in the first three months of 2007, but with considerably less momentum than in 2006. Contract customers were up 42k in the quarter to 1.655m at the end of March, improving the portion of the total base made up of contract customers to 52.3% - an increase of 0.9pp in the quarter, against an average of almost 2pp per quarter 2006. Fuelling this improvement in the mix was the fact that prepaid customer numbers were down for the ninth successive quarter by 16k to leave net additions at 26k – just 60% of the number recorded a year earlier Q1 2006. However, these figures exclude Mobistar’s new MVNO, Telenet, from the mix: adding this in, net additions were a more respectable 41k for the first quarter – only marginally down year on year.


Mobistar: Net Additions & Customer Base Mix, Q1 03 - Q1 07

0.00

20.00

40.00

60.00

80.00

100.00

120.00

Q103

Q203

Q303

Q403

Q104

Q204

Q304

Q404

Q105

Q205

Q305

Q405

Q106

Q206

Q306

Q406

Q107

Net

Ad

dit

ion

s (

00

0s)

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

% C

usto

mers

Co

ntr

act,

EO

P

Net Additions, Retail Net Additions, MVNO % Customers Contract, EOP As Mobistar itself points out, the company is facing unprecedented competitive pressure in the Belgian market and this is telling in its financials. Despite promising 8% customer growth in 2006 – and an improvement of almost 8pp in the prepaid/contract mix – service revenue growth arrested in the third quarter of last year and has fallen back in the two quarters since. The €358.5m seen in Q1 2007 was 1.2% up on the €354.3 recorded a year earlier, so some of the annual customer base growth is at least showing through at the revenue level. However, in the absence of any other financial metrics, it is difficult to tell what the effect of all of this is on the underlying profitability of the company.

Turkcell – Customer numbers up 4.5% in Q4 Elisa Q1 2007 Results finland, estonia

Revenues up 19% as Elisa closes gap on Sonera in home market Finnish based operator Elisa added almost 46k customers at its two mobile businesses in Q1 2007 to reach a total of 2.535m customers at the end of March. The two operating companies, in Finland and Estonia, posted similar proportionate customer growth rates in the first quarter, of 1.9% and 1.7% respectively, although the Finnish business is 7.5 times the size of its smaller sibling and so contributed the majority of the growth in absolute terms. On an annual view, Elisa Finland managed to add over quarter of a million new customers to its base between 1st April 2006 and 31st March 2007 – an increase of 12.7%. This achievement is all the more important for the fact that arch-rival TeliaSonera lost 163k customers over the same period, leaving Elisa just 130k customers behind at the end of March 2007, the deficit having been cut from 544k a year earlier. One does not have to look hard through Elisa’s recent operational data to find out the reason for its success: in the last 18 months, following the acquisition of Saunalahti, the company has managed to cut contract churn dramatically, and although it has crept up gradually in the last two quarters it was still a commendably low 14.2% on an annualised basis in Q1 2007. Of course, these figures do not take into account the prepaid part of the base, but we believe this to be sufficiently small so as not to have a significant bearing on blended figures.



Elisa Finland: Net Additions in Year vs Annualised Churn, 03/05 - 03/07

-

50.0

100.0

150.0

200.0

250.0

300.0

31/03/05 30/06/05 30/09/05 31/12/05 31/03/06 30/06/06 30/09/06 31/12/06 31/03/07

Net

Ad

dit

ion

s i

n Y

ear

to d

ate

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

Ch

urn

per

Year

- Q

uart

erl

y A

vera

ge,

An

nu

ali

sed

Net Additions in Year Annualised Churn The trend in usage at Elisa has been positive, with increases in AMPU in each of the last eight quarters to an all-time high of 216 minutes per customer per month in Q1 2007. This is still below the 280 minutes which the average TeliaSonera customer uses every month, but the gap has been considerably closed. The trend in ARPU has been less defined at Elisa, with a degree of oscillation over the last year to 18 months, although on a rolling average basis the picture would be one of relatively stability, rather than any marked increase or decrease. The average revenue per contract customer in Q1 2007 was €29.70, which decrease compared to the Q4 2006 average of €30.80 and the 2006 full-year average of €30.20, and expected one at that, due to the lower interconnection rates which came into effect at the beginning of 2007. Nevertheless, even given the impact of the cut in interconnect, the Q1 2007 average was still an improvement on the €28.00 recorded in Q1 2006. The combination of the relative stability in ARPU, a 15.5% increase in AMPU and the growth in the customer base gave rise to 19% increase in mobile communications revenue at Elisa between Q1 2006 and Q1 2007. This strong performance was somewhat mitigated by a 9% decrease in fixed network revenues over the same period, but top line growth for the group as a whole was still a reasonably positive 9%. Mobile EBITDA performed even better, increasing 26% year on year, although this only yielded a small improvement in the margin between the first quarters of 2006 and 2007, from 27.6% to 29.3%. Depreciation and amortisation charges were flat year on year, however, meaning that the annual increase in first quarter EBIT was even stronger, at 46%.

asia pacific SK Telecom reports 2005 results

PTA Pakistan March 2007 Customer Numbers pakistan

One in three Pakistanis is mobile The latest figures from the Pakistan Telecommunications Authority show that March 2007 was the best month for proportionate growth in the mobile market in Pakistan since the sudden change of gear in November 2006. The monthly growth rate in the first ten months of last year averaged almost 7.5% but dropped to below 5% in the final two months, a trend which continued into January and February 2007. Whilst growth in March did not reach the heights seen last year, the rate was back over 5% - 5.2% to be precise – as customer numbers climbed to 55.6m. It is testament to how fast the market has grown over the last year that the 2.73m net additions recorded in the month of March were the second highest ever in the history of the market. Overall, customer growth amounted to 104% between March 2006 and March 2007, down from 124% in the 2006 calendar year.



Pakistan: Customers, EOP (m) by Operator, 03/06 - 03/07

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10.0

20.0

30.0

40.0

50.0

60.0

03/06 04/06 05/06 06/06 07/06 08/06 09/06 10/06 11/06 12/06 01/07 02/07 03/07

Cu

sto

mers

, E

OP

(m

)

Telenor

Warid

Ufone

Mobilink

Paktel

Pakcom

The trends in operator market share seen in Pakistan in 2006 continued in Q1 2007. Market leader Mobilink, owned by Egypt-based Orascom Telecom, lost another 2.1pp of market share in the first three months of this year, as its customer base swelled to almost 25m and its monthly average growth rate declined to 3.1%. The principal beneficiaries were the two newest operators, Telenor and Warid Telecom, which both entered the market in 2005. Despite a three month head-start, Telenor fell behind Warid in market share terms in Q3 2005 after only three months of operation and remained behind for the next year and a half – until last month, when it finally overtook Warid for third place in the market. With just 0.2pp of market share and 114k customers separating them, however, the battle will undoubtedly remain closely fought. Both operators will have second placed Ufone, with 20.9% of the market, in their sights, although Pakistan Telecom’s mobile unit did gain market share for the first time in five quarters in Q1 2007. China Mobile acquisition Paktel remained in a distant fifth place with just over 1m customers at the end of March, having lost almost 0.3m connections in the quarter. China Mobile this week promised another US$400m of investment for its fledgling overseas mobile business, to add to the US$460m it claims it has already spent. US$400m is almost exactly the amount of money which Telenor spent on its Pakistani mobile network last year, adding to the US$600m the Norwegian giant had already injected in the previous two years, bringing its total investment in the market to date to well over US$1bn. The level of investment at least shows that China Mobile is serious about turning round Paktel’s fortunes, and injecting the necessary capital – of which there is clearly no shortage – in order to make the operator competitive.

Telenor Pakistan: Cumulative Revenue and CapEx (US$m) since 2004

-

200.0

400.0

600.0

800.0

1,000.0

1,200.0

2004 2004-05 2004-06

CumulativeRevenues

CumulativeCapEx



However, three concerns remain for China Mobile. Firstly is the amount of time it will take to achieve the coverage and network quality necessary to compete effectively. The Pakistani mobile market stood at 33% penetration at the end of March 2007 – one connection for every three heads of population – and we forecast the rate to climb to close to 50% by the end of the year. In such an environment, if a piece of the action is to be had, it is best had sooner rather than later. The second concern is that even with a world class network, China Mobile still has to compete against at least three very well funded and well run competitors, in the form of Orascom, Telenor and Warid who will all have comparable if not superior network assets of their own. As well as throwing the necessary funds at the problem it must also throw good management and marketing in order to succeed. Thirdly, with capital intensity for the years 2004-2006 at over 400% at Telenor Pakistan, how long will the road be to profitability, even assuming competitiveness?

However, three concerns remain for China Mobile. Firstly is the amount of time it will take to achieve the coverage and network quality necessary to compete effectively. The Pakistani mobile market stood at 33% penetration at the end of March 2007 – one connection for every three heads of population – and we forecast the rate to climb to close to 50% by the end of the year. In such an environment, if a piece of the action is to be had, it is best had sooner rather than later. The second concern is that even with a world class network, China Mobile still has to compete against at least three very well funded and well run competitors, in the form of Orascom, Telenor and Warid who will all have comparable if not superior network assets of their own. As well as throwing the necessary funds at the problem it must also throw good management and marketing in order to succeed. Thirdly, with capital intensity for the years 2004-2006 at over 400% at Telenor Pakistan, how long will the road be to profitability, even assuming competitiveness? Whilst these are undoubtedly issues which China Mobile’s management must at least give thought to, they are perhaps not concerns which have the same gravity as they might if we were talking about almost any other international investor. The China Mobile chairman was reported this week as saying that the company hopes to gain valuable “experience” from the Pakistani market which it could use to its benefit in other overseas ventures. We can’t think of many developing markets in the world where it could gain better experience, but whether the experience will ultimately be a postive one is far from certain. Then again, one could argue that in China Mobile’s position, and with the ambition it must undoubtedly have, all experience is good experience. With the kind of resources at its disposal which many international players can only dream of, China Mobile as a multi-national operator is likely to prove a law unto itself. Whilst it is certainly not a sustainable strategy, in the case of Pakistan the potential for valuable experience may well prove much more important than the potential for profitability, or indeed any other conventional benchmark for success.

Whilst these are undoubtedly issues which China Mobile’s management must at least give thought to, they are perhaps not concerns which have the same gravity as they might if we were talking about almost any other international investor. The China Mobile chairman was reported this week as saying that the company hopes to gain valuable “experience” from the Pakistani market which it could use to its benefit in other overseas ventures. We can’t think of many developing markets in the world where it could gain better experience, but whether the experience will ultimately be a postive one is far from certain. Then again, one could argue that in China Mobile’s position, and with the ambition it must undoubtedly have, all experience is good experience. With the kind of resources at its disposal which many international players can only dream of, China Mobile as a multi-national operator is likely to prove a law unto itself. Whilst it is certainly not a sustainable strategy, in the case of Pakistan the potential for valuable experience may well prove much more important than the potential for profitability, or indeed any other conventional benchmark for success.


KKT Freetel T Freetel

japanTCA Japan March 2007 Results

Record month for W-CDMA, as MNP customers continue to choose au Record month for W-CDMA, as MNP customers continue to choose au

A couple of weeks ago, as The Mobile World Briefing focused on regional roundups for 2006, the Telecommunications Carriers Association in Japan published Q1 2007 customer numbers for the Japanese mobile industry. Despite the tardiness of this comment on those numbers, there are couple of key trends worth highlighting. The first is the growth of W-CDMA technology in the market. Net W-CDMA additions were over 2m for the first time in March 2007 as the pace of conversion to the technology accelerated to an unprecedented level. Almost 45% of Japan’s 96.7m mobile customers at the end of March were connected through W-CDMA networks, up from 40% at the end of 2006.

A couple of weeks ago, as The Mobile World Briefing focused on regional roundups for 2006, the Telecommunications Carriers Association in Japan published Q1 2007 customer numbers for the Japanese mobile industry. Despite the tardiness of this comment on those numbers, there are couple of key trends worth highlighting. The first is the growth of W-CDMA technology in the market. Net W-CDMA additions were over 2m for the first time in March 2007 as the pace of conversion to the technology accelerated to an unprecedented level. Almost 45% of Japan’s 96.7m mobile customers at the end of March were connected through W-CDMA networks, up from 40% at the end of 2006.

Japan: W-CDMA net additions (m), by month, 03/02 - 03/07

-

0.50

1.00

1.50

2.00

2.50

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2

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2

09/0

2

12/0

2

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3

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3

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3

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4

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4

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The second prevalent trend in the market is the net flow of customers to KDDI’s “au” CDMA service, as the Japanese number two so confidently predicted, following the introduction of mobile number portability (MNP) in the latter part of 2006. Market leader DoCoMo has lost 0.2pp of market share in each of the first three months of 2007; KDDI has picked up almost four fifths of this, with Softbank taking the remainder. The result was customer growth of 5.9% in Q1 2007 at KDDI, compared to 2.7% at Softbank and just 0.8% at DoCoMo. Overall the Japanese mobile customer market grew by 1.9% in the first quarter, compared to an average of 1.3% per quarter in 2006.


China Mobile – December Quarter Customer Numbers China Mobile & China Unicom Q1 2007 Results china

No denying trend after another record month in China No denying trend after another record month in China

March 2007 was another record month for net additions in the Chinese mobile market, as China Mobile recorded over 5m new connections for the first time, and Unicom also broke records with almost 1.7m new connections of its own. There is little doubt that the pace of growth – at least in absolute terms – is accelerating, perhaps in expectation of the widening of competition in the 3G licensing process which is due to take place later this year. Indeed monthly proportionate growth also improved for the seventh successive month to hit 1.49% in March - the strongest month-on-month increase seen since December 2004, when the Chinese market was only just over two thirds its current size.

March 2007 was another record month for net additions in the Chinese mobile market, as China Mobile recorded over 5m new connections for the first time, and Unicom also broke records with almost 1.7m new connections of its own. There is little doubt that the pace of growth – at least in absolute terms – is accelerating, perhaps in expectation of the widening of competition in the 3G licensing process which is due to take place later this year. Indeed monthly proportionate growth also improved for the seventh successive month to hit 1.49% in March - the strongest month-on-month increase seen since December 2004, when the Chinese market was only just over two thirds its current size.

China: Net Additions (m) vs Proportionate Customer Growth, 03/06 - 03/07

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Net Adds - China Mobile Net Adds - China Unicom Proportionate Growth - Market In total, a net 6.81m new mobile connections were established in China in March, leaving the first quarter total at 19.44m. March CDMA figures have still not been released in India, due to the recent conclusion of the customer “reverification” procedure, but indications from Reliance are that they will show a significant drop. This may be a one-off event – and had it not taken place India would have comfortably beaten China – but, all the same, it will mean that China reclaims the status of the world’s fastest growing market in Q1 2007. First quarter results also showed ARPU figures having fallen to their lowest ever levels at both companies. At China Mobile average monthly expenditure fell to RMB85 per customer in the first three months of 2007, from RMB90 in Q4 2006 and RMB86 in Q1 2006. As ARPU was falling, so minutes were rising, from 399 per customer per month in the last quarter, to 422 this: the result was a significant quarterly drop in the effective average revenue per minute earned by China Mobile, down from RMB0.233 to RMB0.202 per minute. At China Unicom, GSM ARPU was also down, by 5% on both the first quarter and full year averages, to RMB46.80 per customer per month – just 55% of what China Mobile achieves. CDMA ARPU fared even worse, off 14.5% year on year and 11% quarter on quarter, at RMB58.60 per customer per month. Nevertheless, the erosion in pricing was less severe for the CDMA unit as minutes were actually down 6% on a per-customer basis, leaving the average revenue per minute off RMB0.012 in the quarter at RMB0.228. In the GSM base the fall in ARPM was also less severe than at China Mobile: the rate of RMB0.197 per minute recorded in Q1 2007 was RMB0.010 off quarter on quarter, the 5% decline being driven entirely by the decline in ARPU since minutes were flat quarter on quarter.



O2 – Q3 results to December 2005 MobileOne Q1 2007 Results singapore

Prepaid ARPU reaches new low despite usage improvements Prepaid ARPU reaches new low despite usage improvements Despite disconnections last year associated with the conclusion of Singapore’s prepaid customer registration programme, the country’s smallest operator MobileOne managed to connect over 100k new customers on a net basis in the year to 31st March 2007, which is an improvement on the 84k it recorded in the previous 12 month period. Q1 2007 was a moderate quarter as far as the operator’s recent history is concerned, with 41k net additions and proportionate growth of 3.1%, but it was an improvement on both counts compared with the first quarter in 2006 and 2005. However, the proportion of prepaid customers in the mix has been steadily increasing, and reached an all-time high of 40% at the end of March 2007. This trend, combined with the fact that prepaid ARPU in Q1 2007 fell to the lowest level in MobileOne’s recorded history, meant that only 2.9% of the 8.0% customer base increase in the year showed through at the operating revenue level, Q1 on Q1. It appears that the drop in ARPU was precipitated by continued pricing pressure, as prepaid AMPU in the quarter rose to 163 per customer per month – almost back to the levels seen prior to the cull of unregistered customers in Q2 2006.

Despite disconnections last year associated with the conclusion of Singapore’s prepaid customer registration programme, the country’s smallest operator MobileOne managed to connect over 100k new customers on a net basis in the year to 31st March 2007, which is an improvement on the 84k it recorded in the previous 12 month period. Q1 2007 was a moderate quarter as far as the operator’s recent history is concerned, with 41k net additions and proportionate growth of 3.1%, but it was an improvement on both counts compared with the first quarter in 2006 and 2005. However, the proportion of prepaid customers in the mix has been steadily increasing, and reached an all-time high of 40% at the end of March 2007. This trend, combined with the fact that prepaid ARPU in Q1 2007 fell to the lowest level in MobileOne’s recorded history, meant that only 2.9% of the 8.0% customer base increase in the year showed through at the operating revenue level, Q1 on Q1. It appears that the drop in ARPU was precipitated by continued pricing pressure, as prepaid AMPU in the quarter rose to 163 per customer per month – almost back to the levels seen prior to the cull of unregistered customers in Q2 2006.

MobileOne: Prepaid ARPU vs % Customers Prepaid, Q1 03 - Q1 07

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Q206

Q306

Q406

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PU

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Mo

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, P

rep

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$)

25.0%

27.0%

29.0%

31.0%

33.0%

35.0%

37.0%

39.0%

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ARPU per Month, Prepaid (S$) % Customers Prepaid, EOP Despite the small increase in the top line in the first quarter – a positive result given the drop recently reported by MobileOne in its annual figures – earnings on these revenues were harder to come by than last year. EBITDA fell 12.3% on an absolute basis and the EBITDA margin retreated from 50.4% in Q1 2006 to 43.4% in Q1 2007. Costs were up in all departments, not least in the customer acquisition department, where the company spent an average of S$194 on each new customer in the quarter – up from S$130 last year and S$150 in Q4 2006. Retention costs per customer also stood at S$138 in Q1 2007, marginally down on Q4 2006 but a significant increase on the S$100 spent in Q1 2006.

Turkcell – Customer numbers up 4.5% in Q4 DTAC Q1 2007 Results thailand

Inclusion of incoming minutes boosts ARPU and AMPU Thailand’s second largest operator DTAC grew the size of its active customer base to 13.33m at the end of March 2007 from 11.87m at the end of December 2006. The 1.46m net additions imply proportionate growth of 12.3% in the quarter – the best rate achieved by DTAC since Q1 2006, when its registered customer numbers rose by 13.2%. The move to stating active customers by DTAC has brought with it a number of restatements of the company’s KPIs – in fact, Q1 2007 saw the fourth different set of ARPU figures published by the company in five quarters. However, as much as this makes historical comparability difficult, it does get us closer to the “real” figures.



For instance, the recent move to active customers boosted Q4 2006 ARPU by Bht8 from Bht326 per month to Bht 334 – a truer indication of the actual level of spend by DTAC customers. For instance, the recent move to active customers boosted Q4 2006 ARPU by Bht8 from Bht326 per month to Bht 334 – a truer indication of the actual level of spend by DTAC customers. The latest definitional change sees incoming minutes from AIS and TrueMove incorporated into AMPU figures and the interconnect charges associated with these minutes included in ARPUs for the first time. This move further boosts the ARPU by around 27% to Bht408 per customer per month gross of interconnect, compared to Bht322 per month in Q1 2007 on the old “net” basis. DTAC’s minutes are also boosted by approximately 26% in all departments on the inclusion of incoming minute volumes from DTAC’s two largest competitors – from 324 to 409 per customer per month on a blended basis in Q1 2007. We can only assume that DTAC has made these moves in order not only to give a fairer reflection of its own revenues and minute volumes, but moreover to give greater comparability with the metrics stated by its competitors. We will, hopefully, be able to perform such a comparison when AIS and TrueMove release first quarter results in the coming weeks.

The latest definitional change sees incoming minutes from AIS and TrueMove incorporated into AMPU figures and the interconnect charges associated with these minutes included in ARPUs for the first time. This move further boosts the ARPU by around 27% to Bht408 per customer per month gross of interconnect, compared to Bht322 per month in Q1 2007 on the old “net” basis. DTAC’s minutes are also boosted by approximately 26% in all departments on the inclusion of incoming minute volumes from DTAC’s two largest competitors – from 324 to 409 per customer per month on a blended basis in Q1 2007. We can only assume that DTAC has made these moves in order not only to give a fairer reflection of its own revenues and minute volumes, but moreover to give greater comparability with the metrics stated by its competitors. We will, hopefully, be able to perform such a comparison when AIS and TrueMove release first quarter results in the coming weeks.

TuTurkcell – Customer numbers up 4.5% in Q4 rkcell – Customer numbers up 4.5% in Q4 Taiwan Mobile Q1 2007 Results taiwan

Churn falls to record low Churn falls to record low Customer growth at Taiwan Mobile continued to gradually accelerate in Q1 2007 as another 24k customers were added to its base, although this represented just 0.4% growth in the quarter. As customers bases were rationalised 18 months or so ago Taiwan Mobile’s customer base dropped to 6.079m, but since then the company has managed to add almost 100,000 customers, reaching a total of 6.176m by the end of March 2007. W-CDMA customers made up 13.5% of this total at the end of March 2007, versus 5.1% a year earlier, after 170% growth in the year. At the current rate, Taiwan Mobile’s 3G customer numbers are likely to top 1m in mid-June, giving a 3G penetration rate within the customer base of around 17% by the end of Q2 2007.

Customer growth at Taiwan Mobile continued to gradually accelerate in Q1 2007 as another 24k customers were added to its base, although this represented just 0.4% growth in the quarter. As customers bases were rationalised 18 months or so ago Taiwan Mobile’s customer base dropped to 6.079m, but since then the company has managed to add almost 100,000 customers, reaching a total of 6.176m by the end of March 2007. W-CDMA customers made up 13.5% of this total at the end of March 2007, versus 5.1% a year earlier, after 170% growth in the year. At the current rate, Taiwan Mobile’s 3G customer numbers are likely to top 1m in mid-June, giving a 3G penetration rate within the customer base of around 17% by the end of Q2 2007.

Taiwan Mobile: Customers, EOP (m) by Technology, 03/05 - 03/07

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Whilst the contribution of Taiwan Mobile’s data revenue to overall revenues reached an all time high of 7.6% in Q1 2007, the increased penetration of 3G services within its customer base does not appear to be having any discernible effect on overall levels of spending. Blended ARPU was down NT$8 on the quarter and NT$14 on the year to NT$779 per month in Q1 2007, although these did only represent decreases of 1.0% and 1.8% respectively on a proportionate basis. Average minutes per user at Taiwan Mobile fell to their lowest level in two years in Q1 2007, but at 190 the metric was only down by one minute compared with Q4 2006 and by three minutes compared with Q1 2006, variations which are all within the natural “noise” level. The most remarkable aspect of Taiwan Mobile’s KPI disclosure in Q1 2007 was its churn rate, which fell to its lowest level in the company’s recorded history of 1.6% per month. The monthly customer retention rate was in fact at a record high in both the prepaid and contract sectors, at 95.5% and 98.6% in the two parts respectively.



Taiwan Mobile: Churn per Month (%), Q1 05 - Q1 07

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Turkcell – Customer numbers up 4.5% in Q4 Bharti, MTNL and IDEA Q4 2006/07 Results to 31st March 2007 india

Bharti ahead by all measures as revenues reach $4.3bn Three Indian mobile companies released results for the full year ending 31st March 2007 this week, and they make for an interesting comparison – especially given that this is the first ever financial disclosure from newly listed IDEA Cellular. Bharti is India’s largest mobile company by customer numbers with a base of 37.1m at the end of March 2007, spread across all 23 Indian telecom circles. The company recorded customer growth of 90% in the year to 31st March 2007 and was of course the favoured vehicle of Vodafone for exposure to growth on the sub-continent, before the British company bought Hutch. IDEA Cellular is India’s fifth largest mobile firm – a “second tier” operator, if you like – with operations in 11 circles and a customer base of 14.0m at the end of the first quarter, also up 90% year on year. Finally, state-owned MTNL, which released results this week for its GSM and CDMA mobile businesses in Delhi and Mumbai, had a customer base of 2.9m at the end of March, after growth of 40% in the year.

Bharti, IDEA and MTNL: Customers, EOP (m), 03/05 - 03/07

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Relative to their peers, the three companies featured here generally performed well. In the year to 31st March 2007, Bharti’s tier-one competitors in the GSM market, BSNL and Hutch, recorded annual growth rates of 60% and 72% respectively – well below its own 90% improvement. India’s second largest company Reliance Communications would have topped this rate, had it not been for the cull of CDMA customers associated with the customer re-verification programme which terminated at the end of March. The magnitude of this cull has still not been confirmed, but it will without doubt leave Reliance way off the pace set by Bharti. Since IDEA Cellular registered an identical growth rate to Bharti, it too outperformed relative to its other larger competitors. IDEA has only one competitor which is similarly sized, in the form of TATA Communications, and another smaller one in the form of Telekom Malaysia’s Aircel which is seeking to join the ranks, having extended its number of operational circles to nine in March. Both of these tier-two companies grew faster than IDEA in the year, although we expect TATA to have suffered a similar cull to that at Reliance, which will reduce its growth rate. As for MTNL, it was on a par with Spice Communications, which also operates in two circles, whilst annual growth rates at both companies comfortably exceeded those registered by the three small one-circle companies – BPL, Shyam and HFCL.

Bharti, IDEA and MTNL: ARPU per Month (Rs), Q2 06 - Q1 07

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Figures from all three companies here exhibited similar trends in ARPU, with the average spend falling steadily quarter on quarter. In fact, this is not quite true – there was a small increase at MTNL in the third quarter last year, although this did not stop a decline of 17% in the average at the state-owned company over the last three quarters. At IDEA the decline was 12.4%, although the newly floated company managed to restrict the decline in Q1 2007 to just 1.6%. Bharti fared the best of the three, overall, restricting the decrease in ARPU over the last three quarters to 7.9% and maintaining an average spend 28% higher than IDEA, and 103% higher than MTNL’s GSM base. On the negative side for Bharti, the majority of the decline over the last year came in Q1 2007 however, with a 4.9% drop worth Rs21 per month. Increases in minute volumes across the board indicate that there is continuous pressure on pricing – as one would expect as competition intensifies and the mass-market growth phase in the Indian market comes ever closer. It is in the financials that the true difference in scale between the three Indian mobile businesses we consider here can be seen. Bharti Airtel collected revenues of Rs185 billion (US$4.3bn) in the year ending 31st March, which is more 4.4 times as much as IDEA (Rs42 billion), and almost 23 times as much as MTNL’s cellular unit (Rs8 billion). By comparison, Bharti’s customer base was 2.7 times the size of IDEA’s and 13 times the size of MTNL’s at the end of the period. In terms of profitability, Bharti was even further ahead of IDEA, with an EBITDA 4.9 times that of its smaller rival for the year ending 31st March 2007 – an improvement on a premium of just under 4.0 in the previous 12 month period. This implies that the EBITDA margins of the companies diverged further during the year, which indeed they did – from almost identical ratios of 37.3% and 36.5% in 2005/06 to 40.2% and 35.8% in 2006/07 at Bharti and IDEA respectively. For its part, in terms of profitability MTNL remains ahead of both of its larger competitors despite a decline in between 2005/06 and 2006/07, with a margin of 43.7% for the year ending 31st March at its cellular business. The charts below summarize the key financials of the three businesses.



Bharti, IDEA and MTNL: Revenue (Rs bn), 2007 vs 2006

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north america north america C esults Cingular reports 4ingular reports 4th Quarter Operating Rth Quarter Operating Results


AT&T Q1 2007 Results united states

Integration benefits beginning to materialise Integration benefits beginning to materialise

AT&T has completed its acquisition of BellSouth and is now integrating the business and beginning to drive the synergies that it hopes will arise. The first quarter figures that the company has just reported suggest that this process is already well under way but also indicate that there is much more to come. From an accounting point of view, the largest change as a result of the acquisition has been the full consolidation of the former Cingular Wireless, which has now been rebranded as AT&T. The year on year comparatives show revenues up 84% at $28.9bn, within which Voice revenues are up 21.4% at $10.46bn, Data up 25.6% at $5.66bn, while wireless provides a $9.07bn contribution. This excludes some $1bn in handset revenues.

AT&T has completed its acquisition of BellSouth and is now integrating the business and beginning to drive the synergies that it hopes will arise. The first quarter figures that the company has just reported suggest that this process is already well under way but also indicate that there is much more to come. From an accounting point of view, the largest change as a result of the acquisition has been the full consolidation of the former Cingular Wireless, which has now been rebranded as AT&T. The year on year comparatives show revenues up 84% at $28.9bn, within which Voice revenues are up 21.4% at $10.46bn, Data up 25.6% at $5.66bn, while wireless provides a $9.07bn contribution. This excludes some $1bn in handset revenues. For the moment at least, until we see whether Verizon Wireless has overtaken it, AT&T remains the largest mobile operator in the USA, with a total of 62.2m customers, up 1.2m on the quarter and up 6.4m on the year. This growth has been helped by reductions in churn, with the headline figure falling from 1.9% one year ago to 1.8% in the December quarter and 1.7% in this. The contract element within this is now at an even lower level, falling from 1.5% to 1.3% quarter on quarter, to come close to the level achieved by Verizon. ARPUs, meanwhile, have been holding up well, thanks to increased usage, fairly stable pricing and increasing use of data. Over the year, usage has risen from 698 minutes to 725 per customer per month, while Voice ARPU has dropped from $43.31 per month to $41.33, a decline of 4.6%. This drop has been more than offset by a 51% rise in Data ARPU, from $5.22 to $7.88 and the net result is that overall ARPUs are 1.4% higher, at $49.21.

For the moment at least, until we see whether Verizon Wireless has overtaken it, AT&T remains the largest mobile operator in the USA, with a total of 62.2m customers, up 1.2m on the quarter and up 6.4m on the year. This growth has been helped by reductions in churn, with the headline figure falling from 1.9% one year ago to 1.8% in the December quarter and 1.7% in this. The contract element within this is now at an even lower level, falling from 1.5% to 1.3% quarter on quarter, to come close to the level achieved by Verizon. ARPUs, meanwhile, have been holding up well, thanks to increased usage, fairly stable pricing and increasing use of data. Over the year, usage has risen from 698 minutes to 725 per customer per month, while Voice ARPU has dropped from $43.31 per month to $41.33, a decline of 4.6%. This drop has been more than offset by a 51% rise in Data ARPU, from $5.22 to $7.88 and the net result is that overall ARPUs are 1.4% higher, at $49.21.

AT&T Wireless: Voice & Data ARPU ($), Q2 05 - Q1 07

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These good operational results have been reflected in the division’s financial performance. The revenue figure of $9.1bn is in fact 13.5% above the figure reported for the first quarter of 2006, while the operating margin is up by some 700bp year on year, to 38.9%. As a consequence, overall wireless EBITDA has jumped from $808m to $1.523bn, an increase of 88.5%. Cingular reports 4th Quarter Operating Results Alltel Q1 2007 Results united states

Another solid performance from an increasingly attractive business

Alltel, the largest of the US independent mobile operators, has produced another solid operational performance, which has led to a strong financial outcome. For the first time in a year Alltel has not had the benefit of an acquisition but has, nonetheless, increased its customer base from 11.8m in December to 12.1m at the end of Q1 2007. Alltel’s rate of gross connections appears to be growing – this


quarter’s 867k comparing favourably with the 805k seen one year earlier, and this, together with a reduced churn rate – down from 2.0% to 1.77% - has helped net adds increase from 165k in Q1 06 to 237k in Q1 07. At the same time, both usage and ARPUs are nudging upwards. Minutes per month have risen to 651, from 610 one year earlier, while ARPU is a few pennies higher, at $52.49, against $51.23.

quarter’s 867k comparing favourably with the 805k seen one year earlier, and this, together with a reduced churn rate – down from 2.0% to 1.77% - has helped net adds increase from 165k in Q1 06 to 237k in Q1 07. At the same time, both usage and ARPUs are nudging upwards. Minutes per month have risen to 651, from 610 one year earlier, while ARPU is a few pennies higher, at $52.49, against $51.23.

Alltel: Building the Customer Base - additions by type, Q1 06 - Q1 07

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As a result of these improvements, revenues have risen by 13%, year on year, to $2.09bn. Of this, the vast majority - $1.88bn – comes from service revenues, which grew by 14%. Apart from depreciation and amortisation, every part of the cost base increased more slowly than this, such that overall operating income was up by 21%, at $354m. A one-off gain of $56.5m helped the income before tax line jump to $377m, up 74%, but this increase failed to materialise at the earnings level, as last year’s $162m income from discontinued activities was also, unhappily, a one off.

russia & central asia MTS– December Quarter Customer Numbers MTS March 2007 Customer Numbers russia, turkmenistan, ukraine,

uzbekistan

Arrest in Ukraine sends Q1 growth rate crashing down Russian giant MTS has operations in five countries, including its home market and its associate in Belarus. The importance of the markets outside Russia – Belarus, Ukraine, Uzbekistan and Turkmenistan – has grown in every month in the recent past as Russia becomes increasingly saturated, except for March 2007 when it declined from 33.62% to 33.57%. Whilst this shift may be of negligible importance, the force behind it is not, as it was caused by the almost total arrest of growth in Ukraine between February and March, as just 1,000 customers were added to the base. Belarus too suffered from a dramatic deceleration in growth, with an increase of just 0.1% in March, whilst Russia managed only 0.5% - although this was an improvement on both January and February. Uzbek company Uzdunrobita has outperformed its three larger sister businesses (although not its smaller sibling in Turkmenistan) in terms of proportionate growth in the first three months of the year, with increases of 4.8%, 7.2% and 4.3% in January, February and March, respectively. It has also been the top performing company in the last three quarters. This is unsurprising, however, given the company’s size and the level of development of the Uzbek mobile market – and is scant compensation for the slow-down in the larger markets. Overall, the MTS customer base grew in size by just 0.36m customers in March, leaving proportionate growth at 0.47% – the worst monthly MTS Group performance ever, in proportionate terms. What is more, February’s customer growth was almost as weak,



which left first quarter growth at just 1.93%, or 1.47m customers – again by far and away the weakest performance in recent history. The chart below clearly demonstrates the monthly trend, and, by implication, the quarterly result. which left first quarter growth at just 1.93%, or 1.47m customers – again by far and away the weakest performance in recent history. The chart below clearly demonstrates the monthly trend, and, by implication, the quarterly result.

MTS Group: Net Additions vs Proportionate Growth, 03/06 - 03/07

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caribbean & latin america Brazil’s December Customer Numbers Entel Chile Q1 2007 Results chile

Worst net additions for three years as Smartcom pressure tells

The second largest of Chile’s three mobile operators, Entel Movil, recorded proportionate customer base growth of 2.4% in Q1 2007, equivalent to 119k customers in absolute terms. The result saw Entel’s total customer base climb to 5.129m, and left annual net additions at over 800k, but in itself was the worst performance recorded by the company for three years, since Q1 2004. The penetration rate in Chile exceeded 80% in Q4 2006 and is the highest in Latin America, so perhaps it is no surprise that Entel’s net additions figures have dropped. Whilst inactivity and multiple SIM ownership are undoubtedly playing their part in inflating the figure, there must come a time new additions begin to become more difficult to come by. However, counter to this theory is the performance of America Movil’s Smartcom, which grew by 7.5% in Q1 2007 with the addition of 178k customers - its second best ever performance. In the absence of Q1 2007 results from market leader Telefonica Moviles, a definitive conclusion cannot be drawn, but it would appear from the available historical figures that Entel, like Telefonica, is suffering at the hands of America Movil’s increased traction in the Chilean market to a greater extent than it is suffering from the effects of market saturation.



Chile: Net Additions (000s) by Operator, Q1 04 - Q1 07

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Telefonica Movilde Chile, S.A.Entel TelefoniaMovil, S.A.Smartcom, S.A.

It seems that the problem at Entel (if one can call it that) has been in both the customer acquisition and retention departments. Churn was up quarter on quarter from 1.48% to 1.62% per month – which equates to about 30,000 more disconnections in Q1 than in Q4 in absolute terms – but even if churn had stayed flat net additions would still have fallen to a six-quarter low. Both ARPU and AMPU were up for the third successive quarter at Entel after both metrics fell to respective lows in Q2 2006. The result was a year on year improvement in first quarter AMPU of 6.3%, and in ARPU of 2.2%, implying a very marginal decrease in average revenue per minute (ARPM). The increases in ARPU and AMPU were at least in part the consequence of continuous improvement in the quality of the customer base from 19.3% postpaid at the end of March 2006, to 21.6% postpaid a year later. In this respect Smartcom has again trumped its larger competitor, improving the quality of its own base to 21.8% contract at the end of March from less than 13% a year earlier, helping the Mexican-owned company’s ARPU to a 17% year-on-year increase. Brazil’s December Customer Numbers CANTV Q1 2007 Results venezuela

Chavez’ new acquisition tops 8m, but growth beginning to slow

Venezuelan incumbent CANTV has recorded over 2.5m net additions in the year ending 31st March 2007, its customer base exceeding 8m in Q1 2007 to end the quarter at 8.13m. More than 45% of these annual additions were registered in Q4 2006, however, the first quarter of 2007 bringing only 0.2m of the total. The trend in net additions figures in recent years has been turbulent, as CANTV has vied for market share with it’s similarly sized – but larger – competitor, Telcel, owned by Spain’s Telefonica. The disproportionately strong performance in Q4 2006 helped CANTV close the gap with Telefonica to around 900k customers, but it is unclear whether the moderate number of additions made in Q1 2007 will be enough to maintain or close the divide.



CANTV: Annual Net Additions (m) vs Telcel, Q1 04 - Q1 07

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Penetration in Venezuela, having stood at 72.5% at the end of December 2006, is expected to comfortably enter the fourth quartile when all first quarter results are counted; sooner or later in Venezuela, as in Chile, the high penetration rate must begin to have a bearing on growth rates – both absolute and proportionate. Indeed, the chart above of absolute growth, in the form of annual net additions, would suggest that numbers of new customers are now beginning to fall, or at least to plateau. First quarter figures from Telefonica in early May will do more to confirm the trend, and also to establish whether CANTV has outstripped it in terms of annual net additions for the sixth quarter running. Meanwhile, the percentage growth trend shown in the graph below would seem to indicate that on a proportionate basis the slow-down has already begun, and that a further deceleration is on the cards for 2007.

CANTV: Annual Proportionate Customer Growth (%) vs Telcel, Q1 04 - Q1 07

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Telcel



Of course, this analysis is just a back-story to the main source of interest in the Venezuelan market at the moment – the renationalisation of CANTV by Venezuelan president Hugo Chavez. Whilst there are cases in other industries, the move in Venezuela is the first instance of any privatised national telecom company in the world being taken back into government hands. It may, in fact, be swiftly followed by a second instance, as Bolivia considers taking a similar course of action with Telecom Italia’s struggling Entel business. All eyes on CANTV then, and how it performs once the government takes control. Given political sympathies in Venezuela the company is unlikely to face any PR problems as a result of renationalisation – indeed, it could even provide a boost to its popularity. However, it is change at a managerial and administrative level – which may be gradual – that could affect the company’s long term fortunes. Of course, it may be that no such changes are made, the company is run at arm’s length from the government and Chavez’s motivation for renationalisation is simply to ensure that the Venezuelan people, not Carlos Slim, stand to benefit from CANTV’s success. A commendable idea in theory, perhaps, but we do not think the reality will be quite so simple.

Of course, this analysis is just a back-story to the main source of interest in the Venezuelan market at the moment – the renationalisation of CANTV by Venezuelan president Hugo Chavez. Whilst there are cases in other industries, the move in Venezuela is the first instance of any privatised national telecom company in the world being taken back into government hands. It may, in fact, be swiftly followed by a second instance, as Bolivia considers taking a similar course of action with Telecom Italia’s struggling Entel business. All eyes on CANTV then, and how it performs once the government takes control. Given political sympathies in Venezuela the company is unlikely to face any PR problems as a result of renationalisation – indeed, it could even provide a boost to its popularity. However, it is change at a managerial and administrative level – which may be gradual – that could affect the company’s long term fortunes. Of course, it may be that no such changes are made, the company is run at arm’s length from the government and Chavez’s motivation for renationalisation is simply to ensure that the Venezuelan people, not Carlos Slim, stand to benefit from CANTV’s success. A commendable idea in theory, perhaps, but we do not think the reality will be quite so simple. BBrazil’s December Customer Numbers razil’s December Customer Numbers


TNL PCS Q1 2007 Results brazil

First operating profit recorded First operating profit recorded

TNL PCS, trading as Oi, is the fourth largest mobile operator in Brazil, behind Vivo, Claro and TIM. It has managed this, despite the fact that it only operates in one of the country’s three PCS licence regions. The Q1 07 results show a 2.1% increase in mobile customers, quarter on quarter, to 13.358m, which equates to growth of just over 19% year on year. TNL claims a 27.2% market share, which is marginally down on the quarter, but unchanged year on year.

TNL PCS, trading as Oi, is the fourth largest mobile operator in Brazil, behind Vivo, Claro and TIM. It has managed this, despite the fact that it only operates in one of the country’s three PCS licence regions. The Q1 07 results show a 2.1% increase in mobile customers, quarter on quarter, to 13.358m, which equates to growth of just over 19% year on year. TNL claims a 27.2% market share, which is marginally down on the quarter, but unchanged year on year. Although the KPIs don’t differ much from those of prior quarters, this has been a milestone quarter for Oi. The company reported a small drop in operating revenues, from R$1.021bn to R$1.00bn, but a sharp reduction in the cost of goods sold, together with a more modest drop in SG&A, left EBITDA up by 90% at R$183m (R$96m) which was enough to allow the company to produce its first operating profit. This totalled R$4.4m, which compares with a loss of R$62m in Q1 2006 and another loss of R$79.4m in Q4 2006. As for the KPIs, they continue to give cause for optimism. Churn dropped in the quarter to 7.7%, from 8.8% in the prior quarter. ARPU has also dropped, from R$22.1 to R$21.6, which we suspect is due to seasonal considerations as much as anything. The figure is well ahead of the R$17.9 seen in the same quarter of 2006, but that can be attributed to a change in billing arrangements, which has boosted ARPUs across the entire industry.

Although the KPIs don’t differ much from those of prior quarters, this has been a milestone quarter for Oi. The company reported a small drop in operating revenues, from R$1.021bn to R$1.00bn, but a sharp reduction in the cost of goods sold, together with a more modest drop in SG&A, left EBITDA up by 90% at R$183m (R$96m) which was enough to allow the company to produce its first operating profit. This totalled R$4.4m, which compares with a loss of R$62m in Q1 2006 and another loss of R$79.4m in Q4 2006. As for the KPIs, they continue to give cause for optimism. Churn dropped in the quarter to 7.7%, from 8.8% in the prior quarter. ARPU has also dropped, from R$22.1 to R$21.6, which we suspect is due to seasonal considerations as much as anything. The figure is well ahead of the R$17.9 seen in the same quarter of 2006, but that can be attributed to a change in billing arrangements, which has boosted ARPUs across the entire industry. The chart below shows the recent trend in quarterly additions. This shows a healthy enough overall increase in customers, but, at the same time, the proportion of customers connected through contracts has been declining. Up until recently, TNL was close to the national average in terms of contract/prepaid mix, but these last two quarters have seen the overall blend worsen quite significantly to the point where it is now 260bp below average.

The chart below shows the recent trend in quarterly additions. This shows a healthy enough overall increase in customers, but, at the same time, the proportion of customers connected through contracts has been declining. Up until recently, TNL was close to the national average in terms of contract/prepaid mix, but these last two quarters have seen the overall blend worsen quite significantly to the point where it is now 260bp below average.

TNL PCS: Net Additions by Type, Q1 05 - Q1 07

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O2 – Q3 results to December 2005 Brasil Telecom Q1 2007 Results brazil

First positive EBITDA recorded First positive EBITDA recorded Brasil Telecom (BrT) is, like TNL, a subsidiary of one of Brazil’s three large landline companies. It too only operates in one region in Brazil and is substantially smaller than its north-eastern counterpart. BrT began operating rather later than TNL and hence is smaller, less profitable and has less market share. However, it is moving in very much the same direction and, in fact, this quarter saw it become EBITDA positive for the first time, with a surplus of R$4.4m on revenues of R$541m. After depreciation and amortisation, this became a deficit of R$90m, but the rate of progress suggests that the company will be generating a positive cash flow later this year.

Brasil Telecom (BrT) is, like TNL, a subsidiary of one of Brazil’s three large landline companies. It too only operates in one region in Brazil and is substantially smaller than its north-eastern counterpart. BrT began operating rather later than TNL and hence is smaller, less profitable and has less market share. However, it is moving in very much the same direction and, in fact, this quarter saw it become EBITDA positive for the first time, with a surplus of R$4.4m on revenues of R$541m. After depreciation and amortisation, this became a deficit of R$90m, but the rate of progress suggests that the company will be generating a positive cash flow later this year. In the latest quarter, it added some 261k new customers, an increase of 7.7% quarter on quarter, 47.8% year on year. This is a good headline figure as BrT has nearly managed to add the same number of new connections as TNL, but the news is not all good, as during the quarter, there was a marked drop in the proportion of customers connected through contracts. This change in the shape of the base is reflected in the KPIs, which show a number of divergent trends. Looking at churn first, we find that the overall level of disconnections is down, from 28.6% to 21.2% quarter on quarter, but that within this contract churn has jumped from 23.4% to 37.5%. The larger pre-paid base (2.67m of the total 3.64m) has moved in the opposite direction in an even more marked fashion, with a drop from 30.9% to 14.9%. This, in part, probably reflects the decision to spend less on customer acquisition, as SACs have dropped from R$123 to R$97.8 over the same period. ARPUs have declined by 10% during the quarter, from R$37.0 to R$33.4, which while being in part due to seasonality is also a reflection of the decline in the number of contract customers.

In the latest quarter, it added some 261k new customers, an increase of 7.7% quarter on quarter, 47.8% year on year. This is a good headline figure as BrT has nearly managed to add the same number of new connections as TNL, but the news is not all good, as during the quarter, there was a marked drop in the proportion of customers connected through contracts. This change in the shape of the base is reflected in the KPIs, which show a number of divergent trends. Looking at churn first, we find that the overall level of disconnections is down, from 28.6% to 21.2% quarter on quarter, but that within this contract churn has jumped from 23.4% to 37.5%. The larger pre-paid base (2.67m of the total 3.64m) has moved in the opposite direction in an even more marked fashion, with a drop from 30.9% to 14.9%. This, in part, probably reflects the decision to spend less on customer acquisition, as SACs have dropped from R$123 to R$97.8 over the same period. ARPUs have declined by 10% during the quarter, from R$37.0 to R$33.4, which while being in part due to seasonality is also a reflection of the decline in the number of contract customers. The chart below highlights the loss of contract customers in the most recent quarter, but also provides the historical context – contract adds peaked five quarters ago and have been in decline ever since. Given the continuing growth in market share the company is enjoying, this may not be a major problem for the company, but ultimately, it is something management will want to reverse if it is to preserve the quality of the base.

The chart below highlights the loss of contract customers in the most recent quarter, but also provides the historical context – contract adds peaked five quarters ago and have been in decline ever since. Given the continuing growth in market share the company is enjoying, this may not be a major problem for the company, but ultimately, it is something management will want to reverse if it is to preserve the quality of the base.

Brasil Telecom: Net Additions by Type, Q1 05 - Q1 07

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features features BBrazil’s December Customer Numbers razil’s December Customer Numbers


Global Handset Round Up Q1 2007

Average Revenue per Phone now below €100 – and set to go lower Average Revenue per Phone now below €100 – and set to go lower The five largest mobile phone vendors have all now reported their first quarter sales. In aggregate, they have sold 208.9m handsets during the quarter, or slightly more than 81% of the (estimated) global total of 257m. Taken as a whole, the market has enjoyed its second best quarter ever in absolute terms, after Q4 2006, when an estimated 293m units were sold. Year on year, sales are up by over 14%, or 30m units.

The five largest mobile phone vendors have all now reported their first quarter sales. In aggregate, they have sold 208.9m handsets during the quarter, or slightly more than 81% of the (estimated) global total of 257m. Taken as a whole, the market has enjoyed its second best quarter ever in absolute terms, after Q4 2006, when an estimated 293m units were sold. Year on year, sales are up by over 14%, or 30m units. If that suggests a uniformly healthy industry think again. The performance of the five companies varied quite dramatically, at all levels. This quarter saw some material shifts in market share, most especially at Motorola and Samsung. The American leader indicated that it was not enjoying life much in late March, when it “revised guidance” for analysts and forecast a loss of market share - and also a financial loss. For some, this came as a shock. Motorola was on a roll throughout most of 2005 and 2006, as sales of its RAZR boomed, driving its market share from just 16.7% at December 2004 to 22.5% in December 2006. Unfortunately, as Motorola did not (and still doesn’t) have anything appropriate in its pipeline by way of an encore, it took a beating in the first three months of the New Year, giving back all but one percentage point of that two year gain.

If that suggests a uniformly healthy industry think again. The performance of the five companies varied quite dramatically, at all levels. This quarter saw some material shifts in market share, most especially at Motorola and Samsung. The American leader indicated that it was not enjoying life much in late March, when it “revised guidance” for analysts and forecast a loss of market share - and also a financial loss. For some, this came as a shock. Motorola was on a roll throughout most of 2005 and 2006, as sales of its RAZR boomed, driving its market share from just 16.7% at December 2004 to 22.5% in December 2006. Unfortunately, as Motorola did not (and still doesn’t) have anything appropriate in its pipeline by way of an encore, it took a beating in the first three months of the New Year, giving back all but one percentage point of that two year gain. For Samsung, it was the other way round. In the June 2004 quarter, it hit a peak 15.8% share, a level it has not matched since. 2005 and 2006 were not kind to the larger of the two Korean giants, and by the December quarter it had fallen back to just 10.9% as sales – 32m units – barely managed to exceed Q3’s 30.7m. The first quarter of this year has seen a huge resurgence, as Samsung took a 13.5% share of the market, selling more than it did in the last quarter of 2006 – something no other vendor managed, or even came close to managing.

For Samsung, it was the other way round. In the June 2004 quarter, it hit a peak 15.8% share, a level it has not matched since. 2005 and 2006 were not kind to the larger of the two Korean giants, and by the December quarter it had fallen back to just 10.9% as sales – 32m units – barely managed to exceed Q3’s 30.7m. The first quarter of this year has seen a huge resurgence, as Samsung took a 13.5% share of the market, selling more than it did in the last quarter of 2006 – something no other vendor managed, or even came close to managing. Can it be any surprise that these changes have been magnified in the company’s financial statements? Samsung doesn’t strip out profits from handsets from the rest of its Telecom division, but quarter on quarter, that saw a 71% improvement in returns, while handsets account for 93% of its total revenues. Motorola has gone in the other direction. After several quarters of double digit profit margins, it faltered in Q4 2006 before plunging into the red in Q1 2007. It reported an operating loss of $260m, which equates to just under $5.73 for each and every one of the 45m units it sold during the quarter. At the other end of the spectrum, Nokia is still enjoying double digit margins – and high teen margins at that. Its Mobile Phone unit reported profits of €936m on sales of €5.58bn, while Multimedia, its high end phone division, came in with €424m from €2.25bn. Those numbers give margins of 16.8% and 18.8% respectively, implying a blended 16.24% on revenues of €8.2bn once the loss making sales in the Enterprise segment are included. This is much the highest return in the industry.

Can it be any surprise that these changes have been magnified in the company’s financial statements? Samsung doesn’t strip out profits from handsets from the rest of its Telecom division, but quarter on quarter, that saw a 71% improvement in returns, while handsets account for 93% of its total revenues. Motorola has gone in the other direction. After several quarters of double digit profit margins, it faltered in Q4 2006 before plunging into the red in Q1 2007. It reported an operating loss of $260m, which equates to just under $5.73 for each and every one of the 45m units it sold during the quarter. At the other end of the spectrum, Nokia is still enjoying double digit margins – and high teen margins at that. Its Mobile Phone unit reported profits of €936m on sales of €5.58bn, while Multimedia, its high end phone division, came in with €424m from €2.25bn. Those numbers give margins of 16.8% and 18.8% respectively, implying a blended 16.24% on revenues of €8.2bn once the loss making sales in the Enterprise segment are included. This is much the highest return in the industry. Nokia’s only rival, at least as far as profitability is concerned, is the Sony Ericsson joint venture. For our money, this has been the only successful handset merger, Ericsson bringing technology and Sony design, marketing and its own technological excellence. Sony Ericsson is still far from the finished article, but in its five year existence, it has developed an entirely convincing range of products, addressing each key market segments. Contrast this with Motorola, which tries to produce handsets for every possible segment, using every possible technology, however unattractive some of these niches might be. Sony Ericsson’s reward for this focus is that it has the highest profit per unit in the industry, its $21.16 bettering Nokia’s $14.51 by nearly 50%.

Nokia’s only rival, at least as far as profitability is concerned, is the Sony Ericsson joint venture. For our money, this has been the only successful handset merger, Ericsson bringing technology and Sony design, marketing and its own technological excellence. Sony Ericsson is still far from the finished article, but in its five year existence, it has developed an entirely convincing range of products, addressing each key market segments. Contrast this with Motorola, which tries to produce handsets for every possible segment, using every possible technology, however unattractive some of these niches might be. Sony Ericsson’s reward for this focus is that it has the highest profit per unit in the industry, its $21.16 bettering Nokia’s $14.51 by nearly 50%.

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Which brings us to the really interesting bit. Each quarter, much is made of the trend in average selling prices (ASPs), but we have a couple of difficulties with the way this figure is generally presented. First, there is a problem reconciling vendor’s stated ASPs with their statements about units shipped and revenues booked. Usually, the numbers come close, but they don’t always match. Then of course, there’s the question of currency. We saw one comment that said Motorola was focusing on higher margin products because its ASP was up from $118.27 to $119.21. Frankly, the 0.8% increase doesn’t provide a huge support for this assertion, not least because the improvement disappears altogether if we translate it into Euros… or most other currencies for that matter. This is how we look at the numbers at The Mobile World. We take the reported divisional revenues, take the stated unit sales and divide one by the other to derive a figure which is the average revenue generated for each handset sold. Because the revenue total includes accessories and replacement batteries and suchlike it isn’t necessarily the same as an ASP… but it has two huge advantages. First, it’s directly comparable from one company to the next. Second, it’s based on numbers which if not exactly audited do have to pass muster with the relevant financial authorities. (Fancy overstating your numbers to the SEC? We don’t think so.) We then take those numbers and translate them into a common currency, in this case Euros. We then multiply that number by the number of units shipped to generate a total and from that, an average – an average average selling price if you like. And what we find is intriguing.

Average Revenue per Handset by Manufacturer, relative to Industry Average

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Over the last five quarters, our average has dropped consistently, from €115 to €111 to €106, to €100 and now €98, a decline of some 4.0% per quarter compound. This is despite the best efforts of Sony – down just 2.7% - and LG – up 0.6%. Three of the five are now below this average – Nokia, consistently – Motorola in the last three quarters and Samsung in the latest period. In fact, in each of the five quarters, Nokia has been 8% or more below our average average, which suggests that it is, in fact, looking to lower prices sequentially and continuously as a competitive weapon. It knows that with over one third of the market and (once more) with twice as much of the market as its largest competitor and the best margins in the industry, it can survive and even prosper at price points that others can’t get close to. This, of course, leaves it extraordinarily well-positioned to take the lion’s share of the developing world market – the low cost handset market – which will be the industry’s principal growth driver for the next five years. It could be that Motorola is, for once, ahead of the trend and that what it suffers today may be visited on Nokia’s other competitors in the future.



news in brief news in brief BBrazil’s December Customer Numbers razil’s December Customer Numbers


Etisalat expands its empire

Acquisition of Atlantique stake confirmed on eve of Egypt launch Acquisition of Atlantique stake confirmed on eve of Egypt launch The United Arab Emirates’ Etisalat is very much the dark horse of the telecoms scene in the Middle East & Africa and has been quietly expanding its empire for some time. Today came the news that the telco has purchased another 20% of Atlantique Telecom, the Ivory Coast based multi-national, to take its total holding to 70%. Etisalat already has management control of Atlantique’s seven majority owned subsidiaries, in Ivory Coast, Benin, Burkina Faso, Gabon, Niger, Togo and the Central African Republic and this deal now gives it majority ownership too. Six of the seven businesses were formerly part of the Telecel group, and still operate under this brand name, the exception being MOOV Cote D’Ivoire – a new business launched after the sale of Atlantique’s remaining equity in Loteny Telecom to majority owner MTN. However, as we have commented in the past, the other units are being prepared for rebranding under the “MOOV” name, which will establish more of an international identity for Etisalat’s portfolio.

The United Arab Emirates’ Etisalat is very much the dark horse of the telecoms scene in the Middle East & Africa and has been quietly expanding its empire for some time. Today came the news that the telco has purchased another 20% of Atlantique Telecom, the Ivory Coast based multi-national, to take its total holding to 70%. Etisalat already has management control of Atlantique’s seven majority owned subsidiaries, in Ivory Coast, Benin, Burkina Faso, Gabon, Niger, Togo and the Central African Republic and this deal now gives it majority ownership too. Six of the seven businesses were formerly part of the Telecel group, and still operate under this brand name, the exception being MOOV Cote D’Ivoire – a new business launched after the sale of Atlantique’s remaining equity in Loteny Telecom to majority owner MTN. However, as we have commented in the past, the other units are being prepared for rebranding under the “MOOV” name, which will establish more of an international identity for Etisalat’s portfolio. As we write, that portfolio is about to be further expanded by the launch of “Etsalat Misr” in Egypt tomorrow, 1st May 2007. The launch represents Etisalat’s third major expansion outside its home market after Mobily in Saudi Arabia and CanarTel in Sudan, although growth in this latter market has yet to match that seen in the Middle East and North Africa. Then, of course, there is the operator’s greenfield operation in Afghanistan which is due to launch this year, as well as its interests in Pakistan Telecom – and, by extension, its Ufone mobile unit – Zantel in Tanzania, Sudatel in Sudan (which in fact competes with CanarTel) and a 1% stake in Qatar’s Qtel, which recently bought Wataniya. There is no doubt that Etisalat has an empire to be reckoned with, and with the launch of the Egypt business it must be taken seriously by its better known competitors.

As we write, that portfolio is about to be further expanded by the launch of “Etsalat Misr” in Egypt tomorrow, 1st May 2007. The launch represents Etisalat’s third major expansion outside its home market after Mobily in Saudi Arabia and CanarTel in Sudan, although growth in this latter market has yet to match that seen in the Middle East and North Africa. Then, of course, there is the operator’s greenfield operation in Afghanistan which is due to launch this year, as well as its interests in Pakistan Telecom – and, by extension, its Ufone mobile unit – Zantel in Tanzania, Sudatel in Sudan (which in fact competes with CanarTel) and a 1% stake in Qatar’s Qtel, which recently bought Wataniya. There is no doubt that Etisalat has an empire to be reckoned with, and with the launch of the Egypt business it must be taken seriously by its better known competitors. OO2 – Q3 results to December 2005 2 – Q3 results to December 2005 Telefonica Consortium takes 23.6% stake in Telecom Italia

Effective control for less than one quarter’s EBITDA Effective control for less than one quarter’s EBITDA After weeks of speculation about the future of Pirelli’s investment in Telecom Italia, it seems that we now have a resolution. Telefonica has formed a consortium with some of Telecom Italia’s existing shareholders to acquire the 18% stake in Telecom Italia owned by Olimpia, the Pirelli-Benetton joint venture that has effective control of TI. In all, the new consortium will own 23.6% of Telecom Italia’s shares, the extra equity coming from Generali (4.1%) and Mediobanca (1.5%) both of which were existing investors in TI, outside the Olimpia consortium but allied with it.

After weeks of speculation about the future of Pirelli’s investment in Telecom Italia, it seems that we now have a resolution. Telefonica has formed a consortium with some of Telecom Italia’s existing shareholders to acquire the 18% stake in Telecom Italia owned by Olimpia, the Pirelli-Benetton joint venture that has effective control of TI. In all, the new consortium will own 23.6% of Telecom Italia’s shares, the extra equity coming from Generali (4.1%) and Mediobanca (1.5%) both of which were existing investors in TI, outside the Olimpia consortium but allied with it. Telefonica will own 42.3% of the consortium, which gives it an effective 10% interest in TI. It will be granted two seats on the TI board, proportionate with its equity interest and will also enjoy rights of veto, covering ownership changes, divestitures and dividend policy. It states that the two businesses will co-operate, but will continue to be run as separate and sometimes competing entities.

Telefonica will own 42.3% of the consortium, which gives it an effective 10% interest in TI. It will be granted two seats on the TI board, proportionate with its equity interest and will also enjoy rights of veto, covering ownership changes, divestitures and dividend policy. It states that the two businesses will co-operate, but will continue to be run as separate and sometimes competing entities. Telefonica’s fellow shareholders are the insurance company Generali (28.1%), Italy’s largest investment bank Mediobanca (10.7%), the largest Italian retail bank, Intesa Sanpaolo (10.7%) and the Benetton Group, which was already a shareholder in Telecom Italia through its 20% interest in Olimpia. This deal represents a partial divestment for Benetton, as its 8.2% interest in the new company will give it a 1.9% economic interest in TI, compared to its earlier 3.6% holding.

Telefonica’s fellow shareholders are the insurance company Generali (28.1%), Italy’s largest investment bank Mediobanca (10.7%), the largest Italian retail bank, Intesa Sanpaolo (10.7%) and the Benetton Group, which was already a shareholder in Telecom Italia through its 20% interest in Olimpia. This deal represents a partial divestment for Benetton, as its 8.2% interest in the new company will give it a 1.9% economic interest in TI, compared to its earlier 3.6% holding. The deal with Olimpia has been struck at €2.82, which was apparently, the lowest price Pirelli would accept. If the value of a dividend Pirelli will receive is included, the price is effectively €2.97, which will reduce to a manageable €44m the amount Pirelli will have to write off as a result of the sale – the TI stake is on its books at €3. The remaining 5.6% stake has been acquired at a price of €2.53, implying a total cost of €6,015m, of which Telefonica’s share is €2.3bn.

The deal with Olimpia has been struck at €2.82, which was apparently, the lowest price Pirelli would accept. If the value of a dividend Pirelli will receive is included, the price is effectively €2.97, which will reduce to a manageable €44m the amount Pirelli will have to write off as a result of the sale – the TI stake is on its books at €3. The remaining 5.6% stake has been acquired at a price of €2.53, implying a total cost of €6,015m, of which Telefonica’s share is €2.3bn. We have seen the suggestion that the complex structure of the deal will not appeal to the financial markets, but frankly, its hard to take that seriously. Olimpia was controlled by Pirelli SpA, which was in turn controlled by Pirelli & C., which in turn was controlled by Camfin. This was a subsidiary of GPI, which was the private vehicle of the Tronchetti Provera family. This deal cuts four links out of the chain and while the resulting structure is still not ideal, it is a huge improvement.

We have seen the suggestion that the complex structure of the deal will not appeal to the financial markets, but frankly, its hard to take that seriously. Olimpia was controlled by Pirelli SpA, which was in turn controlled by Pirelli & C., which in turn was controlled by Camfin. This was a subsidiary of GPI, which was the private vehicle of the Tronchetti Provera family. This deal cuts four links out of the chain and while the resulting structure is still not ideal, it is a huge improvement. But structure apart, just think of the numbers. Telefonica has obtained effective control of the Italian company for just €2.3bn. That’s not much more than one fifth of last year’s operating free cash flow or if you like, less than one quarter’s EBITDA at TI. Moreover, Telefonica has just received substantially more than that - €2.98bn – from the recent Airwaves disposal. That company was sold at 21.8x EBITDA incidentally, or more than eight times the ratio here. The Airwaves sale also allows Telefonica to restate its commitment to its investors that it will limit its net financial investments this year to €1.5bn. It now has some leeway!

But structure apart, just think of the numbers. Telefonica has obtained effective control of the Italian company for just €2.3bn. That’s not much more than one fifth of last year’s operating free cash flow or if you like, less than one quarter’s EBITDA at TI. Moreover, Telefonica has just received substantially more than that - €2.98bn – from the recent Airwaves disposal. That company was sold at 21.8x EBITDA incidentally, or more than eight times the ratio here. The Airwaves sale also allows Telefonica to restate its commitment to its investors that it will limit its net financial investments this year to €1.5bn. It now has some leeway! All in all, this investment makes a huge amount of sense. It gives Telefonica an ally in Italy, the key market in Southern Europe and it raises the possibility of further alliances in Brazil and elsewhere. It stops the possibility that TI might sell its Brazilian subsidiary to America Movil, which would have been a body blow for Vivo, had it happened. It stretches the company’s tentacles into other parts of the world where it has not previously ventured, such as Turkey and South Africa. Most importantly, it has stopped someone else getting control of a business which by any standards, is strategic in Europe. All in all, Telefonica is to be congratulated.

All in all, this investment makes a huge amount of sense. It gives Telefonica an ally in Italy, the key market in Southern Europe and it raises the possibility of further alliances in Brazil and elsewhere. It stops the possibility that TI might sell its Brazilian subsidiary to America Movil, which would have been a body blow for Vivo, had it happened. It stretches the company’s tentacles into other parts of the world where it has not previously ventured, such as Turkey and South Africa. Most importantly, it has stopped someone else getting control of a business which by any standards, is strategic in Europe. All in all, Telefonica is to be congratulated.

briefing - siemens nv / sa - corporate website siemens belgium · earnings per share up 8.9% at sek...

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