Swedish telecommunications giant TeliaSonera (OTC:TLSNF) announced its third quarter 2013 results on October 17, 2013. These results were very good overall and do an excellent job of showcasing the company's growth story, which I have written about several times previously, playing out.
As usual, I will begin my analysis of the company's third quarter results by looking at the highlights from the report:
- Net sales in local currencies remained stable. However, net sales in the company's reported currency (the Swedish krona) declined by 1.8% to SEK 25,381 million. This decline is entirely due to currency fluctuations and is not a symptom of any weakness in the company's business.
- The company's addressable cost base decreased by 3.9% when measured in local currencies. The addressable cost base decreased by 5.4% when measured in Swedish krona. The addressable cost base in the third quarter was SEK 6,760 million.
- TeliaSonera's EBITDA increased by 3.8% when measured in local currencies compared to the third quarter of last year. When measured in the company's reported currency, EBITDA increased by 1.5% over the prior year quarter to SEK 9,419 million.
- TeliaSonera had an EBITDA margin of 37.1% in the third quarter when measured in Swedish krona. This represents an increase compared to the third quarter of last year in which the company had an EBITDA margin of 35.9%.
- Operating income increased 5.4% from the prior year quarter to SEK 7,130 million.
- The company reported a net income of SEK 4,641 million. This represents an increase of 15.1% over the prior year quarter.
- The company's earnings per share worked out to SEK 1.07 in the most recent quarter. This represents an increase of 15.05% compared to the prior year quarter.
- The company had a free cash flow of SEK 7,308 million in the third quarter. This represents an increase of 91.06% over the prior year quarter. However, the majority of this increase can be explained by the company receiving a dividend of SEK 1,940 million net of taxes from Russia's MegaFon during the quarter. In the third quarter of 2012, the company did not receive any dividend from MegaFon.
As is immediately visible, TeliaSonera was able to significantly improve its profitability in the face of stable net sales. It did this through cost reductions. In the third quarter of 2012, TeliaSonera began to examine its operations for redundancies that could be eliminated in order for the company to cut its costs. One area where significant cost reductions were identified was in personnel where approximately 2,000 employees were doing jobs that were either also being performed by someone else or whose positions were no longer needed due to changes in the operating environment. One example of this second classification of unneeded worker would be someone working in fixed-line telephony, which has been declining over the past few and so presumably no longer generates the volume of work that it once did. I will discuss this in more detail later. The elimination of these 2,000 personnel will reduce the company's addressable cost base by approximately SEK 2 billion net over a period of two years. The company expects to complete its staffing reductions by early 2014 at the latest. It is worth noting that these reductions will amount to greater savings going forward than what we see right now. This is because the company has so far spent SEK 1.4 billion in 2013 due to costs related to these staffing reductions (such as severance pay). These are not recurring costs that the company will have to continue to pay indefinitely; however, the cost reductions will remain after these costs related to the terminations have ended. Thus, the company should see its addressable cost basis decrease further once the costs that it is incurring for severance pay and for similar expenses have ended.
TeliaSonera increased its subscriber count further in the third quarter. At the end of the third quarter 2012, TeliaSonera had a total subscriber count of 178.9 million. Today, that figure stands at 185.8 million, an increase of 6.9 million year-over-year. During the third quarter alone, TeliaSonera increased its subscriber count in its consolidated operations by 0.9 million and that of its associated companies by 1.4 million. These subscriber gains were primarily customers who want to use their mobile devices (such as smartphones or tablets) on the company's network or who want internet or television service in their homes and businesses. The company lost subscribers to its traditional telephone network, mirroring a trend that has also been reported by other companies in the industry. With that said, the company did report slightly lower revenues from its Mobility Services division in the third quarter of this year compared to the third quarter of last year. The reason for that is that the company was unable to charge other telecommunications as much for routing calls on its network as it could last year. It was able to reduce the division's cost structure to compensate for this however, so the overall profits from the division went up.
TeliaSonera's future growth will not come from its home market of Sweden, however. That market is one of the most mature markets in the world for all types of telecommunications services. Any profitability growth there must necessarily come from cost reductions in order to boost margins. TeliaSonera had some success with this approach in the third quarter.
Rather, the company's growth must necessarily come from the company's operations in several Central Asian and Eastern European nations including Nepal, Kazakhstan, Turmenistan, Azerbaijan, and Uzbekistan among others. This is a region in which the company has seen significant year-over-year sales growth, particularly in mobile.
The company's cost reductions have also increased its EBITDA margin in these nations:
One reason why the company is likely to have higher growth in these markets than in its home market is that several of these countries have a relatively low mobile penetration rate. For example, in Uzbekistan there are 72.21 mobile phone subscriptions for every 100 people. The same figure for Sweden is 122.62 mobile subscriptions for every 100 people. Therefore, the company can grow its subscriber and revenue base simply by signing up customers who have not previously had any mobile service in Uzbekistan. However, in a more mature market like Sweden, the company must entice customers to switch to it from their current service.
The company's growth in its bottom-line income could result in higher dividends for the investor. This is because of the company's dividend policy. TeliaSonera has the stated policy of paying out at least 50% of its net income attributable to owners of the parent company to investors in the form of an annual dividend. This policy has resulted in a dividend that has fluctuated over the years with the company's earnings but the general trend has been towards a dividend that has been increasing over time.
Unfortunately, the company is unlikely to increase its dividend this year, which will be paid in April 2014. This is because the company has seen its net income decline by 1.7% in the first nine months of 2013. While this decline has primarily been due to currency fluctuations, the fact remains that the company had total net income of SEK 2.95 per share in the first nine months of the year. The company's net income will likely be around SEK 1.00 per share in the fourth quarter, bringing its net income for the year to about SEK 3.95 to SEK 4.00 per share. A steady dividend of SEK 2.85 per share would give the company a payout ratio of 72.15%. While it is possible that management will increase the dividend slightly, possibly up as high as SEK 3.00, a dividend of SEK 2.85 would still meet the company's policy of paying out 50% of net income. Therefore, I expect to see the dividend stay about the same due to the slight decline in net income.
Additional disclosure: I am long TeliaSonera. My position is held in the ordinary shares traded in Stockholm and not in the ADRs that trade on the pink sheets.