EARNINGS PREVIEW: European Telcos To Continue Improving In 2Q

By Ruth Bender Of DOW JONES NEWSWIRES TAKING THE PULSE: European telecom operators' mobile revenue trends are expected to continue to improve in the second quarter as growth in mobile data could offset declining voice revenue, while fixed telephony operations remain under pressure in many countries. Mobile service revenue started to recover at many operators during the first quarter and analysts expect this trend to continue throughout the rest of the year. The second quarter is also the first quarter to benefit from easier comparables and should thus lay the basis for a recovery throughout the year, analysts say. Due to telecoms' late cyclical nature, earnings didn't really start to come under pressure amid the financial and economic crisis until the first quarter of 2009. However, fears of austerity-led slowdowns in Southern Europe will be an issue and analysts generally prefer stocks with a larger exposure to Northern Europe and are cautious on operators with a larger exposure to markets such as Spain, Portugal and Italy, such as Telecom Italia (TI). Nordic and German stocks offer the greatest near-term upside potential, according to analysts, while for the longer-term, they generally prefer stocks that have committed to dividend growth, such as Telefonica SA (TEF) and Vodafone Group PLC (VOD). Indeed, Stockholm-based telecom operator TeliaSonera AB (TLSN.SK) on Tuesday kicked-off the European telecoms earning season with a 17% rise in second-quarter net profit. The operator said macroeconomic conditions improved in key markets such as Kazakhstan, and that there were early signs of recovery in Estonia. Citigroup's top picks for the quarter include Deutsche Telekom AG (DT) and Norway's Telenor ASA (TEL.OS). Telecom Italia, Telekom Austria AG (TKA.VI) and Belgacom ( BELG.BT), on the other hand, could disappoint with second-quarter results, the bank said in a research note. COMPANIES TO WATCH: ---Vodafone Group PLC (VOD) 1Q results--- (July 23) MARKET EXPECTATIONS: Vodafone is expected to report a 0.1% fall in underlying service revenue to GBP10.39 billion for the first quarter ended June 30 from a year earlier, according to six analysts. That would be a slight improvement on the 0.2% fall in the fourth quarter of fiscal 2010. MAIN FOCUS: Underlying service revenue will come under close scrutiny by investors following improving trends in the previous quarter, underpinned by growth in mobile data and fixed broadband. In May, Vodafone said it expects to return to underlying service revenue growth in the year ending March 31, 2011. The market will be keen to hear whether Vodafone plans to increase its existing 67% stake in Vodafone Essar, its Indian venture with Essar Group, following media reports Essar is considering reducing or selling its 33% stake. ---France Telecom (FTE) 2Q results --- (July 29) MARKET EXPECTATIONS: Analysts expect France Telecom's second quarter to be relatively weak, as was the first quarter, mainly due to ongoing pressure in its domestic broadband market. It will take a few more quarters for the group to see a sustained stabilization in French fixed-line trends but market share should improve slightly in the second quarter and more during the second half of the year as the group has taken action to fight the tough competition, analysts say. The group is expected to reiterate its free cash flow target for this year and next, after it already confirmed these earlier in the month when laying out its new five-year plan. However, some analysts say they are worried France Telecom will have trouble reaching its cash-flow target in 2011. MAIN FOCUS: Analysts will closely eye the performance of French operations, where intense pricing competition and regulatory decisions have been weighing on results. The second major focus will be on comments on shareholder remuneration after management recently alluded to an interest in share buybacks, analysts say. Any cut to the current EUR1.4 a share dividend could be seen negatively by the market, according to analysts. The market will also look out for any new comments on cost cutting amid some concern that cost cutting has been delayed as the group has focused on improving worker morale. --- Telefonica SA (TEF) 2Q results --- (July 29) MARKET EXPECTATIONS: A poor macroeconomic scenario in its key Spanish market continues to be one of Telefonica's weak spots and analysts will be watching to see whether customers in Spain have scaled back their spending after the country's government ushered in a new austerity plan. Other European markets like Germany and the UK are growing and making an increasingly larger contribution to the company's total revenue. The Venezuelan government's decision to devalue its currency has hit Telefonica's revenue in the country, but analysts say currency fluctuations in other Latin American countries may boost revenue for the region. MAIN FOCUS: Telefonica's second-quarter financial results are likely to be overshadowed by the company's ongoing attempts to take over Brazil's Vivo Telecomunicacoes SA (VIV). Telefonica has made multiple offers for Portugal Telecom SGPS SA's (PT) stake in Vivo and recently broke off negotiations with PT after months of talks. A person close to the situation has said Telefonica is now pursuing a legal settlement to break up Brasilcel, the joint venture both companies own that controls Vivo. ---BT Group PLC (BT.A.LN) 1Q results --- (July 29) MARKET EXPECTATIONS: BT's first quarter results are expected to show further cost savings as revenue remains under pressure due to the tough economic environment. Revenue is expected to be down 5.5% to GBP4.95 billion from GBP5.24 billion a year earlier, while adjusted earnings before interest, tax, depreciation and amortization is seen flat at GBP1.37 billion from a year ago, according to 10 analysts. "BT will continue the clear trend of earnings beats from the past four quarters, with continued revenue pressures more than offset by cost cutting," according to Barclays Capital. MAIN FOCUS: The key for investors remains cost savings, revenue mix and the outlook. In May, BT forecast annual revenue of about GBP20 billion, underlying operating-cost savings of around GBP900 million and debt of less than GBP9 billion. BT also expects free cash flow to be around GBP1.8 billion. BT's exposure to UK government spending cuts will also come under close scrutiny. ---Telecom Italia (TI) 2Q results--- (August 5) MARKET EXPECTATIONS: Analysts expect a similar operational performance to the first quarter, with strong cost-cutting partially offsetting domestic top-line pressure. Improving trends in the company's domestic fixed line business and Brazil are expected and analysts noted that the appreciation of the Brazilian Real should help boost the group's EBITDA forecasts by 1%. The mobile business is expected to make some progress towards stabilization by the fourth quarter. Analysts will focus on signs of economic pressure that could hinder a return to mobile growth. MAIN FOCUS: The market will watch out for the implementation of the 2010-2012 strategic plan, focusing on cost-cutting and debt reduction. Eyes will also be on any update of Telecom Italia's investment plans in high-speed broadband, after competitors announced a rival fiber project, and any possible financial impact from a temporary freeze of 3,700 planned job cuts due to ongoing negotiations with the Italian government and unions. The group plans to cut 3,700 jobs by June 2011 and a total of 6,800 positions as part of its 2010-2012 strategy. ---Deutsche Telekom AG (DT) 2Q results---(August 5) MARKET EXPECTATIONS: Deutsche Telekom should benefit in the second quarter from a strong performance in its German home market, especially from its mobile operations. Deutsche Bank expects mobile service revenue in Germany to rise more than 5% year-on-year and margins to be above 40%. Closely-watched U.S. operations will remain weak in the quarter to the end of June, Barclays said. Deutsche Telekom's bottom line will be affected by a currency-related book effect due to the deconsolidation of T-Mobile in the U.K., which is now part of a 50:50 joint venture with France Telecom. MAIN FOCUS: Investors will continue to focus on Deutsche Telekom's operations in the U.S.; most of the analysts expect a recovery in the second half. The weak euro against the U.S. dollar should put Deutsche Telekom "comfortably on track to meet or beat its full year guidance for operating profit", Deutsche Bank says. -By Ruth Bender, Dow Jones Newswires; +33 1 40 17 17 54; ruth.bender@dowjones.com (Lilly Vitorovich in London, Jason Sinclair in Madrid, Archibald Preuschat in Duesseldorf and Giada Zampano in Rome contributed to this report.) (END) Dow Jones Newswires July 20, 2010 10:24 ET (14:24 GMT)