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Cost cuts buoy European telecoms Add to ...

Major European telecoms demonstrated their resilience on Thursday amid the global recession and reported better-than-expected first-half results helped by cost-cutting programs.

Spain's Telefonica , Europe's biggest telecoms company, was even slightly upbeat, saying its Spanish business, which accounts for more than one quarter of its revenues and had been a worry for some analysts because of swelling joblessness, was showing "signs of stability".

France Telecom, Europe's number 3, flagged a second-half slowdown in activity and increasing cost pressure due to regulatory decisions, but still expected to hold up well, reaffirming its profit outlook despite the recession.

British telecoms group BT also beat estimates and said it had made a good start to its cost-cutting program, sending its shares up 13 per cent.

"These are fairly strong results from all three," said Mark Giles, analyst at research firm Ovum.

"It shows what we have been talking about for a while, telecoms seem to be more resilient," he added.

Telcos have the benefit of steady cash flows because customers will not give up their phones, and they can react to tough times by cutting costs. That allows them to weather the economic storm better than other sectors even when regulation and competition increase.

Telco spending cuts translated into pain, however, for equipment vendors such as Alcatel-Lucent.

The French-American telecoms equipment group reported a deeper second-quarter loss, hit by telecoms operators cuts in capital expenditures but expects to burn less cash and improve margins in the second half.

France Telecom shares rose 3.12 per cent to 17.52 euros, and Telefonica was up 0.17 per cent at 17.66 euros, while the DJ Stoxx telecoms index gained 2 per cent by 0907 GMT.

Telefonica said first half net profit rose 0.7 per cent to €3.62-billion ($5.12-billion), as the Spanish company's booming Latin American units helped offset sagging Europe and the group cuts costs by 4.5 per cent.

"Given the state of the economy in general, the results are good," said Virginia Perez, analyst at ACF brokerage in Madrid.

Telefonica reiterated its full-year guidance, in which it expects a 1 to 3 per cent increase in operating profit before depreciation and amortisation (OIBDA).

Analysts said they saw better shareholder remuneration later this year.

"While some investors were looking for a buyback, there was no update. We continue to expect that a buyback will be announced in October," said JP Morgan analyst Hannes Wittig.

France Telecom's net profit for the first half was 2.579 billion, up 2.3 per cent.

"We are confident we can adjust to current conditions while preparing to take maximum advantage of the recovery when it occurs," chief executive Didier Lombard said in a statement.

The French former monopoly said it would try to limit margin erosion through cost cutting, and confirmed its 2009 target for organic free cash flow of €8-billion after it generated €4.1-billion in the first half.

"The most important issue at France Telecom is that they have confirmed their cash flow target despite regulatory pressure," said telecoms analyst Bettina Deuscher at Landesbank Baden Wuerttemberg (LBBW), adding that at present credit default swaps were relatively expensive.

BT posted a better-than-expected 3 per cent fall in first-quarter adjusted core earnings and said it was on track to deliver cost reductions after a "solid" start to the year..

BT also maintained restructuring and spending and cost saving targets announced at its year-end results in May.

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  • Updated August 23 10:22 AM EDT. Delayed by at least 15 minutes.

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