OTE Group reported EUR 1.25 billion in revenues for the second quarter, a decrease of 7.6 percent year-on-year. Mobile operations are increasingly important for the group, contributing EUR 646.5 million or almost 52 percent of revenues. This amount was still down 6.6 percent from a year earlier, but that's a big improvement on the previous quarter’s drop of 14.7 percent, helping the group’s overall financial performance.
Combined revenue from OTE (fixed voice and broadband) and Cosmote's operations in Greece reached EUR 2.2 billion in H1, down by 12.2 percent compared to a year earlier. The mobile operations (Cosmote) accounted for 56.7 percent of the group’s revenue in Greece. Fixed-line operations were seriously challenged in H1, suffering a 14.2 percent revenue fall year-on-year. This is an acceleration from drops of 7.28 percent in the first half of 2010 and 6.93 percent in the first half of 2009. OTE's EBITDA in H1, excluding the costs of voluntary retirement programs and restructuring plans, fell 22.28 percent to EUR 271.4 million. OTE is continuing its cost reductions, and operating expenses were reduced to EUR 859.3 million in H1, reflecting a 11.7 percent cut compared to the same period last year. Finally, OTE's Greek operations had cash of EUR 189.8 million and EUR 2.7 billion in debt at the end of the period, keeping liquidity risk at moderate levels.
The company's retail KPIs are still poor. OTE wholesale remains the major business unit with growth, due primarily to the increased demand for local loop unbundling (LLU) services. OTE's profitability in Greece is seriously challenged by three major factors:
Limited efficiency in retail: Fixed voice lines fell by 10.8 percent year-on-year, while the broadband customer base increased by only 1.0 percent, compared to market growth of 15.4 percent. The total broadband market in Greece added 334,646 new customers in Q2, of which 323,231 were served by LLUs, i.e. the competition. While IPTV subscribers grew by 80 percent compared to a year earlier, OTE lost around 2,000 IPTV subscribers or 3.6 percent of its customer base versus the end of March.
Difficulty controlling payroll expenses: OTE employees hired before 2005 are entitled to special employment status as public service workers with agreed annual salary raises. This makes it difficult for OTE to apply its own salary policies freely. In the first half of 2011, OTE reduced salaries to EUR 348 million, down 7.8 percent from the year-earlier period, but management says that this is still far from low enough.
Regulation: The Greek regulator EETT is reluctant to accept OTE’s cost accounting and, according to OTE executives, it has set network element unbundling at below-cost prices. Also, OTE argues that the EETT delays decisions on OTE retail products, which must be cleared first by the regulator. Last but not least, the EETT rejected recently OTE’s proposal to offer VDSL, unless a wholesale offer was made available first.
In conclusion, OTE has to improve the retail operations and customer loyalty to reduce the strong churn in voice and limited performance in broadband. This is not easy to achieve in a market that has become tremendously price sensitive. While OTE wants to launch VDSL to improve its bottom line from increased ARPU, its retail performance so far doesn't bear this out. Inevitably a network sharing regime will be implemented by EETT. While controlling payroll costs may make the company more cost efficient in the short term, it will only be an innovative new value proposition for competitors and customers, addressing the current market and macro-economic conditions, that will make the difference for OTE in the long run.
