Optical/IP Networks

Telefónica Raises Growth Outlook

Telefónica SA (NYSE: TEF) is brimming with confidence following further growth in the first half of this year, so much so that it has raised its guidance for the full year. (See Telefónica Reports 1H07.)

The carrier, which owns fixed and mobile assets in Europe and Latin America, today reported revenues of €27.8 billion (US$38 billion) and net income of €3.8 billion ($5.2 billion) for the first six months of 2007, an increase of 10.6 percent and 66 percent, respectively, compared with the same period a year ago.

Revenues in the second quarter were €14.1 billion ($19.3 billion), up 6.5 percent, while net income stood at €2.6 billion ($3.6 billion), more than double a year ago. The numbers are all roughly in line with analyst expectations.

The company has nearly 213 million customers (as of June 30), including nearly 155 million mobile users (including the O2 operations in Europe), and 9.1 million broadband customers (4.2 million in Spain), of which 1.3 million are signed up for IPTV services. (See O2 Reports Q2.)

Now the carrier has raised its outlook for the full year, saying it expects revenues to increase by 8 to 10 percent, compared with its previous forecast of 6 to 9 percent growth. In 2006, Telefónica reported revenues of €52.9 billion ($72.3 billion). (See Telefónica Reports 2006.)

It expects operating income to rise by 19 to 23 percent, better than the 14 to 20 percent range it had previously predicted. Telefónica also plans to invest more money in its networks: Its capital expenditure plan for 2007 has been raised to €8.1 billion from €7.8 billion ($11.1 billion from $10.7 billion).

The analyst team at Dresdner Kleinwort is cautious about Telefónica's near-term prospects. In a research note issued this morning they acknowledge the carrier's "decent H1" but believe that the various factors that have helped drive recent growth -- a strong Spanish economy, weak mobile competition in Spain, strong uptake in Latin America -- can't last much longer and "could easily start looking worse."

They add that, while Telefónica is confident, "we urge that jubilation on a guidance upgrade (of a wide range) should be tempered… It is our view that the operational drivers are going to be tougher in H2."

Telefónica's share price is up slightly, by €0.04, to €17.05 on the Madrid Stock Exchange today.

Ovum Ltd. analyst Steven Hartley, meanwhile, believes the carrier "should be applauded, particularly as this quarter relies less on acquisitions and more on organic growth."

And he notes that Telefónica now faces the continued challenge of growing without the boost of major acquisitions in the coming years, as the carrier's chairman, César Alierta, has ruled out further acquisitions. That means each of the carrier's businesses worldwide are now under pressure to help drive the carrier towards its new targets.

That reference to the lack of further acquisitions doesn't, of course, include the investment in Telecom Italia (TIM) , which has already been announced but is yet to be completed. (See Telefónica Takes Stake in Telecom Italia and TI Stake Buy Delayed.)

And there's no absolute guarantee Alierta won't pull the acquisition trigger again, as Telefónica is believed to be interested in taking control of Brazilian mobile operator Vivo Participacoes SA , where it already owns a stake. (See EuroBites: Le DSL.)

— Ray Le Maistre, International News Editor, Light Reading

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