JV defends ‘artificial quarter’ as profits slump

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Administrative savings outrun by regulatory, restructuring and acquisiion activity; 2.5 million T-Mobile customers eliminated in harmonisation of prepay bases
Everything Everywhere chief financial officer Richard Moat (pictured) defended its performance in an “artificial quarter” and said profitability and revenue growth will return when it is done integrating Orange UK and T-Mobile UK.

The pair, as joint venture Everything Everywhere, saw revenue fall 4.8 per cent, profit 18.5 per cent and profit margin three per cent in the second quarter of 2010, compared with the year-ago period.

Moat said specifically its £70 million fall in EBITDA was a result of a £40 million impact of regulatory measures (reduced termination rates in the main), a £10 million fee from restructuring and increased commercial activity of £87 million, offset by savings of £87 million in indirect costs and overheads.

Moat remarked: “Revenue and earnings were impaired by regulation, but our underlying revenue was up – we went back into positive growth territory. But it’s a transition year, and this is not a sprint, it’s a marathon. For most of this quarter, the companies operated separately – they were not being run as one.

“The legal signing was April 1, but we were required to wait three months to consult with staff before putting the businesses together. Staff were only transferred on July 1. Really, it was two businesses running parallel courses in the period, and we have effectively put their results together.

“We have now got senior management, vice presidents and directors in place, but we have still got to integrate the two businesses and their back-office functions. So the cost of integrating all of that will affect results also. So it is not a straightforward year.”

Moat went on: “Another thing is that during the period we came to the very end of the process where the two companies operated very separate commercial policies – where Orange was very active in the contract market and T-Mobile was itself going through a period of restructuring.

“We now have a unified strategy into the third and fourth quarters. So it is a slightly artificial quarter in that respect. It is not the same as operating an integrated business with a single direction.”

Everything Everywhere posted revenue of £1.721 billion in the period, compared with £1.808 billion a year ago. EBITDA was down 18.5 per cent to £309 million, from £379 million, and EBITDA margin was 18 per cent, down from 21 per cent.

In profit terms, the gap to market-leader O2 UK grew, with O2 claiming profit of £410 million for the second quarter, a jump for it of around £43 million. O2’s Q2 revenue was £1.521 billion, a way short of Everything Everywhere, but analysts noted it is underperforming competitors at a rate that, if sustained, could see O2 regain the lead by June 2011 (see Business Watch).

A major part of the reduction in revenue is down to the cut to mobile termination rates, the inter-network charges between operators for terminating calls on others’ networks, as well as other regulatory intervention, the company remarked. It said like-for-like revenue was up one per cent, in fact.

At the same time, Orange continued its aggressive acquisition of contract customers. Combined with T-Mobile activity on contract, the company added 267,000 customers in the period, a jump of 84 per cent.

“The key to take from it is the strong commercial momentum – 267,000 net contract additions and a reduction in churn. Our churn is not market-leading yet, but it is our mission to get there,” said Moat

“We have been quite active commercially in the quarter. We have been prepared to invest to win business.”

He said 90 per cent of the firm’s new business is on two-year contracts, and 42 per cent of its base is on contract.

Prepay customer losses, meanwhile, numbered 195,000, from 147,000 in the year-ago quarter. But the fall in prepay figures included harmonisation of the two operations’ bases.

Moat explained: “There is no right or wrong, but T-Mobile counted prepay numbers according to 180-day activity and Orange counted according to 90-day activity. That has been standardised around the Orange measure now, and it has knocked out about 2.5 million from T-Mobile’s base in the second quarter pro forma.”

Everything Everywhere’s total base stood at 27.931 million at the end of the second quarter, up 8.6 per cent from 27.025 million for the two separate units a year ago. In customer terms, it has consolidated its position as UK number one, with O2 claiming 20.7 million customers at the end of the second quarter.

Its consolidated monthly churn was 1.4 per cent, down from 1.7 per cent a year ago.

But Everything Everywhere showed improved acquisition costs. Acquisition cost on contract was £148 per customer in the quarter, down from £152. For prepay, it was just £14, down from £28 in the quarter in 2009.

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