Telefónica Ups Q1 Profit

Posts 15.1% increase in Q1 revenues to €13.75B and 7.7% increase in net profit to €1.26M on the back of growth in Spain and Latin America

May 16, 2007

8 Min Read

MADRID, Spain -- Telefonica Group's (NYSE:TEF - News; LSE:TDE - News) 1Q07 results demonstrate once again that Telefonica is the European incumbent offering the best combination of growth and profitability in the telecommunications sector. This is borne out by the year-on-year nominal growth of 6.1% in basic EPS to 0.260 euros and in revenues (+15.1%), OIBDA (+9.6%), OI (+15%) and net profit (+7.7%). This year-on-year growth trend in both net EPS and the other figures mentioned above has been occurring continually since 3Q04.

In line with the positive trend across all lines, organic(1) revenue growth of 7.8% was recorded in 1Q07, thanks largely to the success of the integrated management model that has led to a significant increase in both the customer base and service usage.

As part of the corporate reorganisation approved in July 2006, the Company also incorporated all the information relating to the fixed, mobile, cable and Internet businesses into Telefonica de Espana and Telefonica Latinoamerica in this first period of 2007. Likewise Telefonica O2 Europe includes O2 Group results and Telefonica O2 Republica Checa.

By leveraging synergies, optimising costs and diversifying geographically, Telefonica has managed to increase its operating cash flow (OIBDA-CapEx) by 10.8% yoy to 3,718 million euros.

206 million accesses

The Telefonica Group continued, through a high commercial effort, to maintain high growth rates in terms of customers in markets where it operates, thus strengthening its competitive position. Hence, total accesses were in excess of 206.6 million by the end of March 2007, up 11.4% year-on-year. This variation is due mainly to cellular and broadband connections and extended product packages that include voice, broadband and television. Telefonica Espana contributed 44.8 million to the total number of Telefonica Group accesses (+5.5%year-on-year), Telefonica Latinoamerica with 117 million (+14.1% year-on-year) and Telefonica O2 Europe with 39.2 million (+7.8% year-on-year).

Telefonica Group cellular accesses stood at 148.9 million by 31st March 2007, 13.4% higher than in March 2006 due to the increased growth of Telefonica Latinoamerica where they totalled 85.6 million (+15.6% year-on-year). In Spain, the total number of customers increased a remarkable 7.6% year-on-year to stand at 21.8 million in a market that now has eight operators. In Europe, customers rose to 35.9 million, 9.4% up on cellular connections in march 2006.

Retail broadband internet connections exceeded 8.5 million by the end of March 2007, a year-on-year increase of 36.4% thanks to the success of the commercial campaigns developed by the Telefonica Group to encourage total market growth. The marketing of voice, broadband and television bundles continues to be launched successfully and is playing a significant role in the growth, retention and loyalty of customers. Hence, the number of retail internet broadband connections totalled 4 million in Spain (3 million one year ago), 4 million in Latin America (2.9 million twelve months ago) and 0.5 million in Europe (0.3 million in march 2006).

The number of Pay TV customers for the Telefonica Group exceeded 1.1 million, up by 54.7% in relation to March 2006, after having launched different competitive offers in the countries where already this service is provided (Spain, Czech Republic, Peru, Chile and Colombia).

Sustained growth...

Revenues for the Telefonica Group amounted to 13,747 million euros during the first three months of 2007, a year-on-year growth of 15.1%. the organic growth(2) of revenues would stand at 7.8%, supported by the growth of Telefonica Latinoamerica and Telefonica Espana.

Telefonica Espana registered in January-March a figure of 5,033 million euros (36.6% of consolidated revenues), 5.5% up on the first quarter of 2006. Revenues from Wireline Business totalled 3,050 million euros, 3.6% higher than that registered during the first three months of 2006. Wireless Business revenues reached 2,336 million euros during the first three months of 2007, 7.9% higher than those obtained during the same period of 2006.

Telefonica Latinoamerica revenues in January-March 2007 (34.1% of total revenues) reached 4,685 million euros, a year-on-year increase of 8.5% (+12.3%(3) organic growth), supported by the growth of the broadband market and the strength of the cellular market.

Telefonica O2 Europe achieved revenues of 3,534 million euros in January-March 2007 compared with the 2,409 million euros of the first quarter of 2006, when the assets of the O2 Group were included in February-March 2006 and those of Telefonica Deutschland and Telefonica O2 Czech Republic in January-March 2006.

Cumulative operating costs for the Telefonica Group stood at 8,828 million euros at the end of the quarter, 15.5% higher than in January-March 2006 as a result of increased commercial efforts made to capture customers and ensure their loyalty and of the changes in the accounting consolidation perimeter.

...and profitable businesses

As a result of the performance of the aforementioned revenues and expenses, the consolidated operating income before depreciation and amortization (OIBDA) totalled 5,106 million euros, 9.6% higher than in the same period of the previous year. Therefore, excluding the negative impact of exchange rates and perimeter effects, the organic growth rate(4) would have stood at 5.9%. In terms of profitability, the OIBDA margin to March stood at 37.1%, 1.8 percentage points lower than that obtained in January-March 2006.

With a contribution of 47.8% to the Telefonica Group's total consolidated OIBDA, Telefonica Espana recorded OIBDA of 2,439 million euros in the first quarter of the year, a year-on-year growth of 10.7%. In the Wireline business OIBDA (1,419 million euros) increased by 12.4% year-on-year compared with January-March 2006 and the OIBDA margin stood at 46.5% (46.1% in January-March 2006, excluding the provision for the Redundancy Program). The Wireless business OIBDA in January-March 2007 amounted to 1,027 million euros (+7.9% year-on-year) and the margin as a percentage of revenues stood at 44%, the same level than the previous year.

OIBDA for Telefonica Latinoamerica (1,713 million euros) represented 33.6% of total OIBDA for the Telefonica Group, registering a year-on-year growth of 12.1% (+20.2% in constant euros). Organic variation would reach 14.6%(5).

Telefonica O2 Europe, contributing 18.3% to the Telefonica Group's total OIBDA, obtained cumulative OIBDA of 933 million euros in January-March, compared with the figure of 756 million euros in 2006, which included the February-March period of the 02 Group and the January-March period of Telefonica O2 Czech Republic and Telefonica Deutschland.

Depreciation and amortization cumulative to March reached 2,396 million euros, 4.1% up on the same period of 2006 as a result of the higher depreciation and amortization of Telefonica O2 Europe. This includes the O2 Group Purchase Price Allocation (231 million euros) and Telefonica O2 Czech Republic (39 million euros), whereas in 2006, the months of February and March were included for the 02 Group and the January-March 2006 period for Telefonica O2 Czech Republic. In organic terms(6), depreciation and amortization registered a 6.3% drop, basically due to the decline in Telefonica Espana and Telefonica Latinoamerica.

Operating income for the quarter amounted to 2,710 million euros, up 15% year-on-year to stand at 19.6% in organic terms(6).

The results of associated companies cumulative to March totalled 35 million euros, 60.2% up on that recorded in January-March of the previous year. This improvement is basically associated with two factors: 1) Sogecable is no longer accounting by the equity method and 2) the greater positive contribution of Portugal Telecom.

Financial results and net debt

Net financial results for the first quarter 2007 amounted to 768 million euros, 47.1% above those of first quarter 2006. The net free cash flow after CapEx generated by the Telefonica Group in the first quarter 2007 totaled 950 million euros of which 744 million euros were assigned to Telefonica share buyback program and 214 million euros to commitment cancellations derived mainly from the pre-retirements plans. Financial investments for the period amounted to 200 million euros, has caused the need to increase net financial debt in 208 million euros. In the opposite side, net debt has decreased 469 million euros because of changes in the perimeter of consolidation and other effects on financial accounts, mainly due to the differential between accrued and payments. This has been translated in a decrease of 261 million euros with respect to the net financial debt of the fiscal year 2006 (52,145 million euros), reaching the net financial debt of Telefonica Group at March 2007 in 51,884 million euros.

The tax rate recorded during the first three months of 2007 stood at 33.2%, amounting the tax provision to 656 million euros. However, the cash outflow for the Telefonica Group will be further reduced as negative tax bases are compensated for.

The results attributed to minority interests subtract 65 million euros from the net income for the Group during the first quarter of 2007, 23.2% less than in the same period of the previous year (-84 million euros in January-March 2006). This variation is mainly due to the change of stake in Telefonica Moviles (merger with Telefonica S.A. in July 2006).

As a result of all of these items, the net income for the first three months of the year amounted to 1,257 million euros, compared with the 1,167 million euros of January-March 2006 to give a year-on-year growth of 7.7%. Basic net earnings per share grew by 6.1% compared with the first quarter of the previous year to stand at 0.260 euros.

Telefonica Group CapEx during the first quarter of the year amounted to 1,388 million euros, a 6.5% increase year-on-year (+8.6% in constant euros), due to greater investments in Telefonica Latinoamerica (broadband, TV and GSM) and Telefonica O2 Europe (2G and 3G networks). 74% of total investment was devoted to growth activities, 5 percentage points up on the previous year mainly due to optimisation towards broadband and the mobile business. Nevertheless, it should be noted that there is a strong cyclical component of the investments, so that this performance cannot be extrapolated to the full year.

Telefónica SA (NYSE: TEF)

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