Telefónica Deutschland's Q2 profit shows benefits of E-Plus buy

Telefónica Deutschland reported core earnings for the second quarter of 2016 that were better than expected, hailing the success of efforts to improve the monetisation of mobile data services following the acquisition and subsequent integration of E-Plus.

The Germany-based operator, which is majority owned by Telefónica in Spain, said second-quarter core earnings (described by the company as OIBDA) increased by 1.2 per cent year on year to €459 million ($505 million), without taking exceptional effects into account. This was slightly ahead of an average €456 million in a Reuters poll, while Jefferies International analysts also said core earnings slightly beat consensus estimates.

The operator also posted a net profit of €252 million after a loss of €68 million in the same period of 2015. It attributed this turnaround to the extraordinary effect from the sale of 2,350 wireless towers to Telxius -- Telefónica group's mobile towers units.

On a less positive note, mobile service revenues were down 1.7 per cent in the second quarter at €1.36 billion, a development that Telefónica Deutschland blamed on the highly competitive market conditions.

Jefferies noted that the decline in mobile service revenue accelerated further in the quarter -- up from 1.3 per cent in the first quarter and 0.9 per cent in the final quarter of 2015, for example.

"In this context, it is important to keep in mind that the company is undergoing a stark mix shift from retail to wholesale as the merger remedy [an MVNO agreement formed with Drillisch as part of the E-Plus acquisition] unfolds," the analysts added.

Against this backdrop, Telefónica Deutschland reiterated its mobile service revenue outlook for the full year while narrowing the projected range. Mobile service revenues are now expected to show slightly negative growth in 2016, the company said. Jefferies described this slight change in guidance as "a marginal disappointment, in our view."

Overall, Telefónica Deutschland was in bullish mood and clearly believes it has made good progress in the integration of the O2 and E-Plus mobile networks.

CEO Thorsten Dirks said the strategy of "systematic data monetisation is paying off and will gain further momentum in the course of our digital transformation."

CFO Rachel Empey added that the operator will "see the positive impact of our investments in brands, networks and IT in the second half. By the end of this year, we will have already captured more than half of our targeted overall synergy run-rate of €800 million in operating cash flow."

The operator is also placing a heightened focus on new services such as O2 Banking, which was launched this week. It has also just announced a tie-up with Sky Deutschland that will provide O2 customers with mobile access to films, TV series and sports content such as Bundesliga and Champions League football.

For more:
- see the Telefónica Deutschland release
- see this Reuters article

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