Friday, July 31, 2009

European telcos tread carefully in enterprise services business

Comment from Richard Mahony and David Molony, analysts at Ovum

UK: BT Global Services has reported a 4 percent increase in revenues to £2,079 million in the three months to the end of June, the first quarter in its current financial year, 2010. However, its EBITDA was squeezed further to £62 million and the division ended with an operating loss of £124 million.

Orange Business Services, the enterprise division of France Telecom, has reported revenues down 1.7 percent on a like-for-like basis to €3,836 million in the first six months, but its EBITDA margin was up at 20.4 percent.

Both companies cited the impact of exchange rates on their outcomes, but while BT’s sterling numbers were adversely affected, France Telecom said that exchange rates had worked in its favour.

Orange Business Services reported steady if unexciting progress overall, but the numbers are going in the right direction. Revenues from advanced and extended services -– the next generation of IP and value-added services -– increased 4.9 percent and 5.9 percent, respectively on a like-for-like basis.

Operators make the best of mobile
Orange Business Services’ subscriber numbers for managed services are at new higher levels. The worldwide total for IP VPN users increased to 324,000. Managed mobile service Business Everywhere increased end users to a new high of 718,000.

Mobile network capability is only one advantage that Orange Business Services enjoys over BT Global Services. The French service provider’s numbers also count revenues from SMEs in France, Poland, the UK and Spain.

BT Group keeps its SME services in the Retail division under BT Business. As we have pointed out previously, this is a key contributor to its margin. BT also improvises well with MVNO-based mobility services, although it did not break out revenues this time.

Equally, there is no sign that France Telecom thinks this is the time to try and take advantage of any perceived weakness at BT with a major expansion programme. Capex in the enterprise business was reduced by 12.1 percent to €138 million.

At the MNC level, it is less obvious that Orange Business Services has found the magic bullet for profitability; it does not break out margins for MNC contracts versus SME business.

However, the order book at Orange Business Services has been filled with a series of strong contract renewals this year, among them Fairchild Semiconductor, Total and Zurich Financial. These have all included new service features in the extended contracts.

For example, WAN optimization for Total has helped to raise the new contract value to €100 million. Zurich Financial’s IP outsourcing contract is being extended to include managed BlackBerry mobile services and HD videoconferencing.

BT clings to prospects for MNCs
Despite its setbacks, BT Global Services is maintaining a strong win rate in comparison with its competitors, and maintaining its regional strength within Europe. We also see that the business has a strong order book, with some profitable contracts. The latest performance has been largely down to some unprofitable deals.

However, in spite of its shaky financial performance, customer sentiment remains largely positive and the BT Global Services sales machine continues to win business at a rate that outstrips it competition in Europe.

The BT Global Services order book comprises some of the largest contracts, and it continues add to it, with £1.4 billion for the quarter. A key contract for the quarter was the extension of the DFTS contract through the UK Ministry of Defence (MoD) as the business considers how to proceed with its future core network strategy.

The Fiat Group renewed its contract, worth €325 million (£278 million) over the next five years, presumably as a result of BT’s previous acquisition of Atlanet.

Whilst it is dangerous to make direct comparisons, assuming that this deal is of a similar scope to the one that BT signed five years ago, BT is not generating the same revenues -– the original contract was signed for €450 million (£303 million) in 2005.

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