Improvement in bottom line fails to mask RomTelecom’s woes

1 Mar 2004

Romania’s former fixed line monopoly RomTelecom reported pre-tax profits of EUR45.6 million in 2003, compared to a EUR65.9 million loss in 2002, but the news failed to prevent CEO James Hubley from confirming plans to shed a further 3,500 jobs in 2004 and continue efforts to boost efficiency in the face of emerging competition in its domestic market. Full year revenues of EUR797.4 million were down 16.8% year-on-year, while operational costs decreased 22% to EUR581.3 million and EBITDA reached EUR216 million (+3%). RomTelecom’s majority shareholder OTE attributed part of the drop in revenues to the impact of exchange rate differences, despite the operator gaining regulatory approval from the National Regulatory Authority for Communications (ANRC) on 2 October for the conversion of tariffs into euros. However, lower interconnection and fixed-to mobile traffic, as a result of market liberalisation, were also significant contributory factors to the steep decline. In 2003 interconnection revenues plummeted by 50% (on a cumulative basis) from 2002 as RomTelecom lost a significant share of inbound and outbound international traffic from mobile operators. And while the company claims to have now arrested the trend in falling inbound traffic – revenues rose by 76% quarter-on-quarter in the final three months of the year – and that losses in incoming ILD traffic to VoIP providers have been stopped, RomTelecom faces an uphill task in the years to come.

The country’s fixed line market was opened to competition from 1 January 2003 and as early as April RomTelecom confirmed that it was facing serious problems and making the uncomfortable transition from being a monopoly to coping with a competitive environment. Just six months into the new regime the telco reported that its half-yearly fixed line revenues had plummeted by 18.9% year-on-year to EUR389.7 million, prompting James Hubley to concede that competitors were cherry-picking its best clients, and that the deregulation of the lucrative IDD market was causing its revenues to collapse. And, flushed with their success in the international calls market, newcomers have now turned their focus to a second pillar of RomTelecom’s business – the long-distance market.

RomTelecom’s woes have led to criticism in the local press and protests from lobby groups. In July 2003 Hubley admitted that his company had made several strategic errors in its investment programme but promised that this was about to change. Nonetheless RomTelecom’s new supremo has been accused of mis-managing the telco – including a charge that a recently purchased USD50 million billing system from Convergis of the UK was too expensive. Criticism was also levelled by a lobby group including a member of the OTE board in November – though OTE was quick to publicly back Hubley soon after. Some Greek newspapers report too that he was fired from his post at Czech Telecom after a new USD30 million billing system failed and that his Romanian management team is too old to deal with RomTelecom’s problems. The fact remains, however, that RomTelecom has, by and large, been the architect of its own undoing. When OTE moved to acquire a majority stake in RomTelecom in 2002, the Romanian operator took a decision to stop all investment in infrastructure, which effectively crippled its efforts to preempt its new competitors in the run-up to liberalisation.

If this were not enough, RomTelecom lacks a credible mobile subsidiary to take the strain while it contends with the upheaval in its domestic fixed line market. Its cellular subsidiary Cosmorom is failing, and with less than 2% of the market in June 2003 faces an uncertain future as OTE has refused to underpin the loss-making operator and threatened to close it down altogether. In January 2004 the ANRC said that RomTelecom could choose an investment bank to advise it on the possible sale of Cosmorom by the end of the month, and although a long-delayed shareholders’ meeting to discuss the future of the unit has been held, no information has as yet been released about the identity of the bank selected. It is expected that the bank appointed to review OTE’s strategic options regarding Cosmorom will provide its report in May 2004.

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