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Acquisitions Boost Telefónica in Q3

Spanish incumbent Telefónica SA impressed today with its third-quarter results, reporting a record 53.3 percent year-on-year increase in net profit to €1.42 billion (US$1.66 billion). (See Telefónica Reports Q3.)

Group revenues climbed 32.2 percent to €10.04 billion ($11.73 billion) during the quarter, boosted by the acquisition of 's (NYSE: BLS) assets in Latin America and in the Czech Republic earlier this year. (See Telefonica Buys Cesky Telecom.) The operator is revising its forecast for full-year revenue growth to at least 15 percent, up from a previous guidance of between 12 and 15 percent.

The results come a week after Telefónica Móviles SA, which accounts for about half the group's business, reported a 24 percent increase in profit. (See Móviles Moves Up in Q3.)

Santiago Fernandez Valbuena, Telefónica's CFO, told a conference call the company is "winning the challenge of operating in more mature markets," and seeing "solid single-digit growth in Spain."

Revenues at domestic fixed-line division Telefónica de España grew 4.3 percent during the quarter to €2.93 billion ($3.42 billion), prompting the operator to upgrade its domestic revenue forecast for the year to more than 4 percent, from a range of between 0.5 percent and 2 percent.

According to a research note from Lehman Brothers, the "performance of the Spanish wireline business is impressive."

Group revenues were 1.5 percent ahead of Lehman's forecast, and earnings before interest, taxes, depreciation, and amortization (EBITDA) were 0.5% ahead at €4.32 billion ($5.04 billion).

By the end of September, the operator had 2.4 million retail DSL subscribers in Spain, up 67.4 percent year on year. Julio Linares López, executive chairman of Telefónica de España, said on the call that its ADSL2+ proposal -- to roll out services where local loop unbundling is available -- has been approved by the Spanish regulator CMT. He noted the CMT has made an "important change" in no longer requiring service providers to offer equivalent wholesale services.

Cesky Telecom, which contributed 2.3 percent to revenue growth, has been promoting its broadband services heavily, he said, and "in the near future we will launch IPTV based on our own experience here in Spain." Telefonica's Imagenio triple-play service has 123,000 subscribers, and more than 650,000 customers take more than one service from the operator.

Linares López confirmed Telefónica is rolling out fiber-to-the-node to some extent in its enterprise business as well as testing it for residential services in collaboration with Cesky, but said it's too early to have settled on the right approach -- that decision is likely to come next year.

Although the company upped its revenue guidance for the year, the forecast for operating income before depreciation and amortization (OIBDA -- Telefónica's term for EBITDA) remains unchanged, indicating lower margins. Linares López pointed to possible changes with pension and personnel costs at the end of the year, an increase in advertising expenses to fight off competition, and operating expenses derived from local loop unbundling as pushing up costs.

Ovum Ltd. analyst Cesar Bachelet sounds a note of caution on the figures, writing in a research note that although Telefónica is seeing healthy revenue growth without sacrificing profits, the Spanish operations have "borne the burden" of its acquisition strategy.

Competitive moves that will pressure Telefónica include 's (NYSE: FTE) acquisition of Spanish mobile operator Amena, which also involves a merger between cable operators Grupo Auna and Ono. (See FT Takes on Telefónica.)

Shares in Telefónica closed up €0.13 (1.04%) at €12.66 on the Madrid Stock Exchange. The stock has fallen more than 5 percent since the company announced its $31.4 billion offer for U.K. mobile operator O2 plc (NYSE/London: OOM) last week, reflecting investors' concerns over the synergies of the deal, with banks including UBS AG and Credit Suisse First Boston Corp. downgrading the stock and Standard & Poor’s cutting its credit rating from A to A-. (See Telefónica Swoops In on O2.)

However, Ovum's Bachelet notes that "acquisitions within the eurozone, such as the recent bid for O2, are definitely steps in the right direction. Although the synergies and the growth prospects may not be as obvious, the potential for volatility would be reduced. With the situation heating up at home, this can't be a bad thing."

— Nicole Willing, Reporter, Light Reading

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