European Operators Finally Turn a Corner

Positive Results Offer Respite After Years of Decline

Leading European operators appear to be finally emerging from years in the doldrums, as their results for the second quarter of 2017 pointed to continued financial recovery. The drivers of turnaround included strong investment in network quality, good adoption of bundled services and efforts to boost average spending in mobile, dubbed “more for more” initiatives.

Telefonica led the way, raising full-year revenue guidance on the back of growth of 1.9 percent year-on-year. This may appear marginal, but it’s a far cry from the double-digit falls not uncommon just a few years ago. In its home market, the Spanish operator continues to deploy a strategy aimed at upselling customers to higher-tier bundles. A good example is its multiplay service Fusion, which saw average spending jump an impressive 6 percent year-on-year. UK arm O2 again defied multiple headwinds to deliver yet another impressive quarter, boosted by strong brand loyalty and differentiated customer offers.

For Orange, the big story was a return to revenue growth in its home market of France for the first time in eight years. The operator has been heavily affected by the assertive tactics of fourth entrant Free Mobile, but its focus on fibre and 4G roll-out to support multiplay bundles has helped upturn. During the results announcement, CEO Stephane Richard trumpeted improvements in customer care, with digital interactions pushing the number of customer service calls down by a fifth. Mr Richard is also hoping a move into financial services — including the upcoming launch of Orange bank — will help create new opportunities for growth.

Vodafone also saw momentum in Europe as it continues to focus on the three “growth engines” of mobile data, convergence and enterprise. Spain and Italy were the standout regions and there was even a glimmer of hope for the embattled UK business, as contract churn fell for a second consecutive quarter. Its net promoter score in the UK continued to rebound, albeit from catastrophically low levels. CEO Vittorio Colao said that the recent launch of its Vodafone Pass bolt-on should encourage higher average spending in mobile. It enables zero-rated access to social, music or video applications and has been launched in five markets. Early signs show that the concept is resonating well with customers: 600,000 passes were sold in Italy within the first month.

Deutsche Telekom also reported good numbers. However, growth in Europe was tentative, with the main driver being another stellar quarter at T-Mobile US. This prompted the operator to raise full-year EBITDA guidance. In Germany, revenue nudged up 0.6 percent, helped by the introduction of StreamOn, a service that zero-rates music and video content.

BT attempted to put recent challenges behind it, as it announced plans to combine its consumer unit with EE. Despite another difficult quarter — again overshadowed by accounting irregularities in its Italian business — it posted solid results at both its EE and consumer businesses.

Finally, Telecom Italia reported encouraging revenue growth, at 3.7 percent, against the backdrop of growing influence from Vivendi and the ousting of CEO Flavio Cattaneo.

However, despite much positive news, operators are far from out of the woods. New EU roaming regulation is certain to hit their performance in the third quarter of 2017, while most markets remain ultracompetitive. The trend is encouraging, but the headwinds remain strong.

CCS Insight’s quarterly review of leading European network operators is due to be published soon.