Business Watch: Everything Everywhere face up to a tough year

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Dominic White says that although there were encouraging signs from the company’s Q1 results, much hard work lays ahead for the remainder of the year

Six months into his new strategy for Everything Everywhere, Tom Alexander (pictured) has much still to prove.

There were some encouraging signs in the company’s first quarter results, particularly on cost cutting.

But there is no escaping the fact that the results were weak relative to those expected to be reported by O2 and Vodafone.

Everything Everywhere, you will remember, is the rather silly name for the combined Orange UK and T-Mobile UK.

Its service revenue, which excludes handset sales, grew by just 0.4 per cent in the first three months of the year, to £1.56 billion.

In contrast, analysts at Citigroup predict that Vodafone and O2 will report growth of 6.3 per cent and six per cent respectively.

It continues the trend that saw Vodafone and O2 outperform Everything Everywhere in the key Christmas quarter, although the disparity this time would be slightly less.

Turnover was also down at Everything Everywhere, by 1.7 per cent, excluding regulatory imposed rate cuts, partly reflecting the weak consumer environment for handset sales.

The good news was the group added almost a million contract customers year-on-year, boosting the proportion of subscribers within the overall base to 45 per cent, from 41 per cent.

Post-paid churn was also stable at 1.3 per cent, down from 1.9 per cent in the first quarter of 2009.

Smartphone sales now account for 84 per cent of contract sales too, up from just 62 per cent a year ago.

Almost two-thirds of customers are now locked into 24-month contracts, almost twice the amount this time last year.

But it was disappointing that, even with all these smartphones in circulation, ‘non-voice’ revenues fell from 26.4 per cent to 25.4 per cent of overall revenues year-on-year.

Alexander described it as good progress in a “challenging competitive and economic environment”.

He declared the company is on track to generate £3.5 billion of cost-savings from the merger and its stated target of 25 per cent margins in 2014 “in spite of the ongoing challenging economic, regulatory and market conditions”.

Those conditions aren’t getting any easier right now and Alexander and his team still have a hard year ahead.

Nokia cuts
The same is true of many unfortunate employees at Nokia, which is taking the axe to staffing costs in response to its own difficult market dynamics.

The world’s biggest mobile phone maker has spelled out how it plans to revamp its handset business in the wake of the controversial decision to use Microsoft’s operating system for its smartphones.

Its current operating system business, Symbian, is being outsourced as part of plans to slash costs by £1 billion.

Nokia is transferring 3,000 Symbian employees to services giant Accenture, and making 4,000 research and development handset staff redundant – mostly in Finland, Denmark and Britain.

Accenture will take over the Symbian business and become a primary software partner for future smartphones running on Microsoft’s Windows platform.

Very bad news for many staff, then, but good news for the shares, which took a hammering after the Microsoft decision.

Nokia shares rose more than three per cent on news of the cost cuts as analysts said the Accenture deal looked like a cleaner, easier and cheaper way to get out of Symbian without expensive redundancy payouts.

Nokia plans to use Windows Phone as its main smartphone operating system from 2012, and is expected to phase out its use of Symbian over the next couple of years.

“Restructuring had been widely expected, but Nokia will be hoping that the transfer of 3,000 jobs to Accenture will help cushion the blow as it ramps down its Symbian investments,” said Ben Wood, head of research at CCS Insight.

It’s all to do, of course, with the rise of the Apple iPhone and the Google Android platform, both of which have spanked Symbian in the smartphone stakes.

Nokia’s chief executive Stephen Elop is the man behind the Microsoft tie-up, which aims to tackle Apple and Google head-on, but which remains unconvincing thus far to many analysts.

Elop told a news conference in Helsinki: “The competitive environment has changed rapidly.”

It sure has.

Virgin growth
Finally, Tom Alexander’s former employer, Virgin Mobile, has released its latest results – within those of its parent Virgin Media, and its growth looks somewhat healthier than that of Everything Everywhere.

Mobile revenues were up 3.8 per cent in the first quarter, as the group carried on with its push to sell more contracts to its prepay-heavy base.

The number of contract customers increased by 23 per cent year-on-year to 1.3 million, while average revenues per user rose by 7.3 per cent, thanks to improved proportion of contract punters (who tend to spend more than prepay customers).

The opportunity to cross-sell mobile services to cable customers was one of the main reasons given by Virgin Media for the merger, when cable giant NTL acquired Sir Richard Branson’s Virgin Mobile.

And now that strategy is showing signs of working. The company says it now has 556,000 cable households with one or more mobile contracts, up 17 per cent on a year ago.

It said that the households had approximately 759,000 contract mobiles, up 19 per cent and representing 60 per cent of all contract subscribers.

“We also estimate we have a further 176,000 cable households with at least one of our prepay phones,” it added.

“Collectively, this represents 15 per cent of our cable base that take at least one mobile service from us, leaving a significant growth opportunity to cross-sell to the remaining 85 per cent.”

Contract net adds were up 53,000, a slight decrease on the previous quarter, while the prepay base lost a net 120,000 subscribers.

So, while overall subscriber numbers fell 43,300, taking into account the higher revenues per user of contract subscribers, Enders Analysis estimates that the base grew about four per cent in “revenue-generating capacity terms”.

A steady performance, then.

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