Morningstar | Swisscom Reported Better 2018 Revenue, but Guidance Weak; Shares Fairly Valued
Swisscom reported 2018 revenue that was a bit ahead of our expectation and EBITDA in line, but provided 2019 guidance with revenue a bit below our flat projection. The firm reported revenue grew 0.4% to CHF 11.71 billion versus our estimate of a decline of 0.1% to CHF 11.65 billion. While EBITDA came in at CHF 4.21 billion versus our projection of CHF 4.22 billion. We don’t expect any significant changes to our CHF 470 per share fair value estimate. Our narrow-moat rating remains intact, and we believe the shares are fairly valued.In the core Swiss telecom business revenue dropped 2.7% to CHF 8.8 billion. This was primarily due to continued fixed-line cord-cutting, causing its base to fall 10.8% to 1.64 million. However, its prepaid wireless customer base also declined 6.9% to 1.87 million. This was more than some postpaid subscriber growth could offset. Importantly though, Swisscom succeeded in maintaining its very impressive 60% market share. This is possible as people are using fewer devices. The firm managed to grow its broadband and pay TV bases slightly, but these markets, along with wireless, are reaching saturation. We think it will be increasingly difficult to add new customers.
However, the firm is having success converting its subscribers into converged users. Its converged offering, inOne, now includes 54% of its mobile subscribers and 57% of its broadband base. As more customers join its converged ranks, we anticipate Swisscom will be able to raise prices in order to return to revenue growth. For 2018, strong revenue growth of 8.2% at Fastweb, its Italian subsidiary, was sufficient to grow the firm’s total revenue. However, competition is increasing, and management doesn’t expect revenue growth at Fastweb will be sufficient to offset revenue declines in Switzerland in 2019. As revenue growth slows, Swisscom is focusing more on reducing costs. The firm generated an EBITDA margin of 36%, and we believe it can succeed in driving this slightly higher.
Swisscom is engaged in providing telecommunication services and is active in Switzerland and Italy. Co. has three operating divisions: Swisscom Switzerland, Fastweb; and Other Operating Segments. Co.'s Swisscom Switzerland divisions comprised of: Residential Customers; Small and Medium-Sized Enterprises; Enterprise Customers; Wholesale; and IT, Network & Innovation. Co.'s Fastweb segment supplies its fixed-network both directly via its own fiber-optic network and also via the unbundled fixed-access lines and wholesale products. Co.'s other operating segments provides ICT solutions for physicians, hospitals and insurers, develops and operates intelligent solutions for energy management.
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