Tele2 Shares Drop After Earnings Miss Estimates on Competition

Tele2 AB fell the most in more than eight months in Stockholm after the Swedish telecommunications provider said fourth-quarter earnings dropped 7 percent, missing analyst estimates, as competition increased in Russia.

Earnings before interest, taxes, depreciation and amortization declined to 2.67 billion kronor ($422 million) from 2.87 billion kronor a year earlier, falling short of the 2.96 billion-krona average of 13 estimates compiled by Bloomberg. Tele2 wrote off 45 million kronor for Russia, mostly for inventory, it said in a statement today. Tele2 shares fell as much as 11 percent, the biggest intraday drop since May 17.

With its older Russian regions maturing and rivals seeking to win over consumers, it’s more costly to find new mobile users, Chief Executive Officer Mats Granryd said in an interview today. Tele2 intends to be more competitive on price in the country, affecting profit in the short term, Granryd said in the statement. The Stockholm-based company made 30 percent of its revenue from Russia in the quarter.

Even adjusting for the Russia write-off and startup losses in eastern regions of the country, total Ebitda would have missed consensus estimates by 5 percent, Barry Zeitoune, a London-based analyst at Berenberg Bank, said in a note today. “Guidance implies a 6 percent cut to 2013 Ebitda estimates,” he said.

Tele2 shares declined 9.9 percent to 103 kronor as of 11:24 a.m., bringing the fall to 23 percent in 12 months.

‘Growth Engine’

The fourth-quarter Ebitda margin in Russia contracted to 37 percent from 40 percent a year earlier.

New regions in Russia, which are more profitable, are expected to help balance declining margins elsewhere in the country, Granryd said, adding he expects the Russian Ebitda margin to decline “one to two percentage points” over 2013.

“It’s becoming a bit more expensive to keep that growth engine going” in Russia, Granryd said. “It’s maturing a bit, but we are convinced getting new subscribers is the right strategy.”

In Sweden, Tele2’s largest market outside of Russia, sales last quarter rose 2 percent. The company spent more money subsidizing the sale of high-end smartphones, which weighed on profitability and brought its Ebitda margin for its mobile business down to 29 percent from 33 percent a year earlier.

“If people were to move away from Apple more into other smartphones, that would be beneficial to us,” Granryd said. “The iPhone 5 “is hurting us, let’s put it that way. If people would choose an Android-based phone that would benefit us.” Android is Google Inc.’s operating system for mobile phone.

Fourth-quarter net income fell 57 percent from a year earlier to 565 million kronor, missing the 1.17 billion-krona average of 11 estimates compiled by Bloomberg. Sales climbed 3.9 percent to 11.3 billion kronor.

Tele2 proposed a dividend of 7.1 kronor a share, up from 6.5 kronor a year earlier.

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