Business Watch: Grim analysis of JV quarter

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It was not the maiden investor day Tom Alexander would have dreamt of when he agreed to oversee the merger of Orange and T-Mobile’s UK operations

The big strategy day was overshadowed by a poor set of quarterly figures from the Orange/T-Mobile JV, which goes by the slightly silly corporate name Everything Everywhere.

As the largest UK operator, the JV bore the brunt of termination rate cuts. Underlying profits plunged by 18.5 per cent to £309 million in the quarter months to June 31. Revenues went backwards too, down 5.3 per cent to a worse-than-expected £1.5 billion, a worsening from a 4.8 per cent fall last quarter.

At that rate, pointed out Enders Analysis, the company is underperforming its competitors by seven percentage points. “The UK market as a whole is improving substantially, with growth moving from -2.2 per cent in Q1 to -0.9 per cent in Q2 driven by the general economic recovery,” wrote Enders’ James Barford. “At current relative growth rates, O2 will retake its lead [by revenue] by June 2011.”

It’s not that Orange and T-Mobile failed to attract new customers. The JV confirmed its position as the number one by customers, with 27.9 million of them, an increase of 3.4 per cent. But the money it makes from each customer each month dropped 6.6 per cent to £35.50.

Average revenues per user slid for Vodafone and O2 too but they only reported falls of 4.4 per cent.

Alexander nevertheless declared “we are well on our way”, as he confirmed the company’s cost savings target of at least £3.5 billion and its ambition for double-digit cashflow growth from 2010-14.

But some analysts were less positive. “In the meeting itself, management credibility was probably tarnished by the somewhat rose tinted spin applied to the company’s position and historic performance,” wrote Barford.

He pointed to one particularly bold example, a slide claiming ‘growing revenues’. “A bit rich when revenues actually declined five per cent,” quipped Barford.

He added: “Overspin aside, the combined management team is a strong one, who have extensive experience in and understanding of the UK market, and is well aware of the peculiarities and pitfalls in it, reducing execution risk considerably.”

It is true that Alexander and his team, most of which helped him turn Virgin Mobile into a major success, are highly-regarded, not to add well-liked.The merger integration work has doubtless been a distraction and may partly explain the disappointing results.

The distraction is to continue because the company is to cut 1,200 more jobs as part of its plan to hit that closely-watched £3.5 billion cost savings target.

The cuts amount to about 7.5 per cent of the 16,000-strong workforce and will be felt hardest at head offices in London, Hatfield and Bristol.

Alexander explained: “We have an opportunity to deliver an unrivalled experience and unparalleled value. We need to ensure we are operating with maximum efficiency, serving our two brands, removing unnecessary duplication and making sure we are set to deliver for the future. It is regrettable some roles will be removed.”

Added to the 2,500 jobs losses across both businesses since the merger plans were announced a year ago, it takes the total cuts to 3,700. Alexander has already sliced out 30 senior management roles since the company was officially formed in July.

It will come as no consolation for the unfortunates, about to enter a 90-day-consultation that they will lose their jobs before Christmas. But Alexander is not cutting frontline staff in high street stores or call centres.

That is a sensible move as the company needs as many people as possible right now serving customers. Indeed, Alexander plans to expand the JV’s retail footprint so it can rely less on Carphone Warehouse and Phones 4U.

He also plans to invest further in network. The idea is to cash in on booming demand for smartphones by offering the best coverage by far.

When the JV was unveiled last year, the duo said the combined company would have a 3G network based on 16,000 sites for towers and base stations. Now Alexander says Everything Everywhere will have at least 18,000 sites, and that by 2014 the company’s 3G network would cover 99.6 per cent of the population.

That would be considerably greater than O2 or Vodafone, whose 3G networks at present cover 84 per cent and 85 per cent of the population.

But will it really help Alexander to sell more mobiles? I’m not convinced. People, especially 16-to-35 year-olds tend to buy mobiles based on the coolness of the gadget, the price of the plan and the amount of data on offer. Nationwide network coverage is close to the bottom of their must-have list.

Perhaps the investment would be better spent on marketing, subsidies and promotions to refresh the brands?

Particularly, when you consider that Everything Everywhere only managed to generate an underlying margin of 18 per cent in the June quarter. O2, in contrast, enjoyed a 26.4 per cent margin.

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