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WRAPUP 2-Europe telcos meet forecasts, fail to excite investors

Published 08/06/2009, 10:08 AM
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* Deutsche Telekom Q2 in line, confirms outlook

* Portugal Telecom Q2 net profit drops in line

* Telecom Italia broadly in line, confirms targets

* PT shares 1.6 percent down, DT flat, T.Italia down 3 percent (Recasts, adds Telecom Italia results, updates shares)

By Nicola Leske and Deepa Babington

BONN/ROME Aug 6 (Reuters) - Deutsche Telekom and Telecom Italia's first-half profits met market expectations and confirmed their forecasts, but failed to spark enthusiasm among investors as other large European telecom peers have with their results.

Deutsche Telekom, Europe's biggest telecoms group by sales, posted quarterly earnings in line with analyst expectations, thanks to growth abroad and a stake it acquired in Greek telecoms group OTE last year.

As expected, Italy's largest telecoms operator Telecom Italia reported a drop in first-half profit due to higher taxes, but not as much as expected by analysts.

Telecom Italia shares were down 3 percent after the results, which one analyst said could be due to disappointment that the company did not turn in sharply better-than-expected results like peers France Telecom, BT and Telefonica did last week.

Former incumbent Portugal Telecom (PT), the country's leading telecom company, said its second-quarter net profit fell in line with forecasts, as its Brazilian operations offset the impact of lower mobile termination fees in its business at home.

European telecom operators are struggling with saturated markets and fierce competition at home and so are increasingly reliant on securing growth abroad, especially in emerging markets.

PT shares were trading 1.76 percent lower at 7.14 euros by 1304 GMT. Deutsche Telekom shares were flat, while the DJ Stoxx Telecoms index slipped 0.3 percent.

UK, U.S. PROBLEMS

Deutsche Telekom said adjusted core profit rose 8.4 percent to 5.3 billion euros ($7.63 billion) and it was on track to meet 2009 targets, which were cut in April due to difficult market conditions, especially in the United States and the UK.

In spite of the company's reassurances, however, its UK business, where it is number four out of five operators, could still act as a drag.

Chief Executive Rene Obermann said the business had improved and its new managing director, Richard Moat, would present details on UK strategy in the next few weeks. He declined to comment on persistent rumours that the business would be sold.

As for its other problem child, T-Mobile USA, Obermann said Deutsche Telekom was working to improve the business, but that a turnaround would not be evident in the third quarter.

Analysts welcomed the results but warned of problems on the horizon.

"There is no escaping the fact that what was once Deutsche Telekom's growth engine -- T-Mobile US -- is now a declining franchise," Michael Kovacocy of Metacommunicare said, adding he saw "decidedly negative year-on-year comparisons" within a few quarters.

Joeri Sels at DZ Bank was more pessimistic: "We continue to assume that the company will struggle to achieve its FY09 guidance and rate a further profit warning likely."

OUT OF STEAM

Telecom Italia, Europe's No. 5 telecoms operator, has adopted a conservative debt- and cost-cutting strategy to turn itself around and has said it will not focus on revenues at the expense of profitability.

Like Deutsche Telecom, it confirmed its targets after posting a 13 percent drop in first-half net profit to 964 million euros due to higher taxes.

"The numbers are in line with expectations, there are no surprises," an analyst said. "The question remains on how the top line will fare over the next six months."

Telecom Italia shares have risen 14 percent over the last three months, as the company noted seeing the first signs of an economic recovery and an uptick in Italian telecom spending.

In Portugal, smaller peer PT said net profit fell 20 percent to 89.7 million euros, as expected, hit by a 41 percent fall in call termination charges and higher taxes.

"The shares have had a good run and offer a committed dividend yield of 8 percent for 2009-2011. However, I'm not sure there's enough in today's numbers to drive further upside," Terry Sinclair, an analyst at Citi Global Markets, said. (Additional reporting by Andrei Khalip and Axel Bugge in Lisbon, Stefano Rebaudo in Milan; Editing by Rupert Winchester)

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