Healthy outlook for Swisscom ahead of results

Swisscom's results are released on Tuesday Keystone Archive

The country's biggest telecommunications operator, Swisscom, is set to release results on Tuesday that will show costs continuing to weigh on revenues. But the financial situation of the former state monopoly looks bright compared to many of its European rivals.

Although analysts expect net profit to come in at around SFr3 billion ($1.78 billion) the result will be largely due to extraordinary factors such as the sale of its Cablecom division.

Analysts will be keener to look at the operating result, which will give a better picture of the company’s underlying strength. That is likely to show a 10 per cent decrease to just over SFr4 billion.

“There are two factors behind that,” says Zurich Cantonal Bank analyst, Sven Bucher. “First there is the pressure on the fixed line business. Last year saw a sharp decline in tariffs and also Swisscom had to subsidise its mobile business.”

The former state monopoly has found it difficult to adjust to the liberalisation of the telecommunications market two years ago, which saw the entry of several competitors in the sector.

As the market-leader in Switzerland, Swisscom is finding it hard to generate growth within Switzerland.

It has been undergoing a major shake-up to focus on its core activities. This has led to a huge reduction in its workforce, which has been reduced by around a fifth, as well as the outsourcing of marginal activities. By the end of 2003, the group will have around 12,000 employees.

It also sold a 25 per cent stake of its mobile phone division to the world leader in the market, Vodafone, and has divested much of its property portfolio.

This has left the company with an enviable debt position in comparison to many other European telecommunications firms which have plunged into the red.

Swisscom is also well positioned to take advantage of the launch of the third generation of mobile phone technology.

“It’s got an advantage firstly because of its collaboration with Vodafone,” says Bucher, “and also because it only paid SFr50 million for its domestic UMTS licence in comparison to billions of Euros paid by companies in countries like Germany and Britain.”

Swisscom last week received a first instalment of SFr2.2 billion for its deal with Vodafone. A second instalment of roughly the same amount is due next year. The sale of real estate has earned it SFr2.5 billion.

The cash is likely to be used to cut debt further and should still leave plenty to spend on acquisitions for its German mobile subsidiary, debitel.

The Swiss government still has a 65 per cent share in Swisscom and the state will have to maintain its majority stake until a referendum due to take place in 2003.

“The government’s majority stake in Swisscom certainly hinders the company’s room for manoeuvre,” says Sven Bucher. “There’s a consolidation process going on in the industry and it’s difficult for Swisscom to participate.”

But there’s also a view that Swisscom would do better to concentrate on niche acquisitions and steer clear of major tie-ups.

The premier league of European telecommunications companies is made up of British Telecommunications, France Telecom, Deutsche Telekom, Telecom Italia, Telefonica and Vodafone.

Swisscom probably heads the first division and is in no hurry for promotion according to its CEO, Jens Alder. Even if it were able to, swallowing smaller rivals could make business much more complicated.

One Swiss bluechip, the SAirGroup, has already experienced difficulties as it tried to punch above its weight as a cross-border player. Swisscom is unlikely to make the same mistake by overstretching itself.

by Michael Hollingdale