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Telefónica Reports Q2 Revenues Growth

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7/25/2019

MADRID -- Financial results January-June 2019:

Telefónica today presented its financial results for the first half of 2019. The figures showed the profitable and sustainable growth of main indicators, as well as a strong cash generation and a further debt reduction, for the ninth consecutive quarter, reinforcing the financial position of the company.

Highlights:
Leader in fibre, both in Europe and Latin America. Telefónica's FTTx/cable coverage exceeded 121 million premises passed, the largest network outside China. Of the total, 53 million passed through our own fibre network.

Higher value, more satisfied and more loyal customers. Average revenue per user (ARPU) increased 4.4% and churn remains stable. Revenues: profitable and sustainable growth. Revenues for the April-June period increased 3.7% year-on-year, with all regions growing organically in the semester. In reported terms, revenues stabilized in the quarter for the first time in eight quarters. Broadband & services over connectivity already account for 55% of total revenues and are increasingly less exposed to regulation. OIBDA was up 1.6%, both in organic terms.

Advances in our transformation thanks to a more efficient use of networks and end-to-end digitalization. Telefonica has reached network sharing agreements in Germany, Brazil and UK, which will generate efficiencies and allow faster roll-outs. We are on track to deliver the digital transformation plan in terms of savings, with 45% of the objective already achieved at the end of June.

Debt reduction for the 9th consecutive quarter. Net debt fell by 5.7% year-on-year and stood at 40,230 million euros at June 30, mainly due to free cash flow generation (2,756 million euros in the semester). Including asset sales already announced, net debt decreased by approximately € 1,500M, to € 38,700M.

Higher customer value
Telefónica Group's access base stood at 346.6m at June 2019, and improved in value, with average revenue per access growing to +4.4% y-o-y organic, while churn remained stable, thanks to the strategic focus on value customers, which continued posting solid growth.

Revenues totalled €12,142m in the second quarter and grew 3.7% y-o-y organic (€24,121m in January-June, +3.8%) and remained stable y-o-y in reported terms. The growth in the quarter came from the solid growth in service revenues (+2.3%) and the strong advance of handset sales (+16.7%). Excluding the negative impact from regulation (-0.6 p.p. in the second quarter; -0.7 p.p. in the first half) revenues would have grown by +4.3% y-o-y organic (+4.5% in January-June).

Revenues coming from broadband and services beyond connectivity accounted for 55% of the total in the second quarter (+2 p.p. y-o-y), reflecting the Company's focus on data monetization and digital services, as well as a further advance in the transformation process. Digital service revenues reached €1,907m in April-June (+19.0% y-o-y) and €3,783m in the first half of the year (+20.1% y-o-y).

Operating expenses (€8,259m in April-June; +2.8%; €16,373m in January-June, -1.2%), were affected by the positive impact recorded in the second quarter of 2018 associated with a favourable court ruling in Brazil (€485m), which more than offset the positive impact in 2019 associated with the application of the new IFRS 16 accounting standard mentioned above.

It is important to highlight the reported variation of the consolidated financial statements for the first half 2019 reflected the adoption of IFRS 16 since 1 January 2019 (the statements for January-June 2018 were reported according to IAS 17). The organic variation excludes the impact of the accounting change to IFRS 16 (+€354m in April-June and +€768m in January-June on OIBDA; and -€70m and -€87m on the net income). The Consolidated Statement of Financial Position at 30 June 2019 includes lease liabilities, including those held for sale, amounting to €7,542m.

The evolution of exchange rates negatively affected the Company's reported results mainly due to the depreciation of the Brazilian real and the Argentine peso against the Euro, although the trend improved sequentially. In the second quarter of 2019 foreign currencies reduced y-o-y revenue growth by 4.1 p.p. and OIBDA by 3.6 p.p. However, the negative impact of the depreciation of currencies at the OIBDA level (-€332m in the first half) decreased significantly in terms of cash flow generation (-€91m). The results were also affected by the exit from the perimeter of consolidation of T. Nicaragua (since 1 May 2019), T. Guatemala (since 1 January 2019), and Antares (since 1 February 2019).

OIBDA (€4,438m in April-June; €8,702m in January-June) increased by 4.7% y-o-y in the second quarter (+1.6% organic) and by +7.4% in the first half of the year (+1.3% organic), positively affected by the impact of the new IFRS 16 accounting standard. Excluding the negative impact of regulation (-0.6 p.p. in April-June; -0.6 p.p. in January-June), OIBDA would have increased by 2.2%% y-o-y organic (+1.9% in the first half).

OIBDA margin stood at 36.5% in the second quarter, expanding 1.7 p.p. y-o-y (-0.7 p.p. organic). In January-June, OIBDA margin expanded by 2.8 p.p. y-o-y to 36.1%.

Net income in January-June reached €1,787m (+2.8%). In April-June, it stood at €862m and decreased 4.5% y-o-y affected by the following impacts: i)provision for tax litigations (-€152m); ii) hyperinflation adjustment in Argentina (-€101m); iii) depreciation and amortisation charges arising from purchase price allocation processes (-€93m); iv) adoption of IFRS 16 accounting standard (-€70m) and iv) restructuring costs (-€14m). In positive: i) interests associated to the extraordinary tax refund in Spain (+€151m) ii) net capital gains from the sale of companies (+€62m) and ii) the growth of T. Venezuela (+€37m). Basic earnings per share amounted to €0.32 and increased by 12.0% in the first half of the year (€0.16 in the second quarter; -4,3% interanual).

CapEx in January-June totalled €3,385m (-13.9% y-o-y) and included €22m of spectrum (€4m in the second quarter mainly in T. Argentina). In organic terms, it increased 6.3% y-o-y affected by a different calendar of execution, decelerating its growth trend in the second quarter (+2.4%), and continued to focus on accelerating excellent connectivity (deployment of LTE and fibre networks, increased network capacity and virtualisation) and improving quality and customer experience (implementation of AI in the Company's technology platforms).

Operating cash flow (OIBDA-CapEx) reached €5,317m in the first half of 2019, up 27.5% y-o-y (-2.4% organic, affected by a different calendar of CapEx execution). Operating cash flow boosted 45.1% y-o-y in the second quarter (+0.9% organic).

Free cash flow before principal payments of lease liabilities reached €3,587m in January-June 2019. However, after these payments (-€831m), free cash flow totalled €2,756m in January-June 2019 and increased by 78.0% y-o-y.

Debt reduction for the 9th consecutive quarter
Net financial debt decreased 5.7% y-o-y and stood at €40,230m at the end of June. Against December 2018, net debt decreased by €844m thanks to free cash flow generation (€2,756m) and net financial divestments mainly from the sale of T. Nicaragua, T. Guatemala and Antares (€321m). In contrast, the factors that increased debt were: i) shareholder remuneration (€1,089m, including the replacement of capital instruments and coupon payments), ii) labour-related commitments (€419m) and iii) other factors for a net amount of €726m.). Including asset sales already announced, net debt decreased by approximately € 1,500M, to € 38,700M.

In the second quarter, net financial debt decreased by €151m thanks to free cash flow generation (€1,347m) and net financial divestments mainly from the sale of T. Nicaragua (€182m). On the other hand, following the adoption of IFRS 16, lease liabilities, including those held for sale, amounted to €7,542m. Net financial debt including lease liabilities was €47,772m.

In January-June 2019, the financing activity of Telefónica amounted to approximately €5,699m equivalent (without considering the refinancing of commercial paper and short-term bank loans) and focused on maintaining a solid liquidity position and refinancing and extending debt maturities (in an environment of low interest rates). Therefore, as of the end of June, the Group has covered debt maturities for the next two years. The average debt life stood at 10.3 years (vs. 9.0 years in December 2018).

Advanced networks and excellent connectivity
Telefónica, through excellent connectivity, continues with its digital transformation towards a technology company. Smart connectivity over new, highly available and fast networks, which are flexible, secure and advanced, and integrate elements of artificial intelligence guaranteeing accessibility to the latest generation services that customers are demanding. Commercial operations in the online channel accelerated and grew by 28% y-o-y in January-June and 12% y-o-y reduction in calls handled in the first half of the year.

The Group’s FTTx/cable coverage reached 121m of premises passed (53.2m in own network; +12% y-o-y; 22.2m FTTH in Spain, 20.3m in Brazil and 10.6m FTTx/cable in HispAm, +29% y-o-y. Deployment in Latin America benefits from an already industrialised process, and both lower deployment (-50% in the last 5 years in Spain) and maintenance costs (failure rate 50% lower than copper in Spain and Brazil). Retail fibre and cable accesses connected amounted to 13.9m (+14% y-o-y), where UBB accounted for 65% of total broadband accesses (+8 p.p. y-o-y); and in Spain wholesale fibre accesses amounted to 1.9m (+61% y-o-y), increasing the return on investment. In LTE coverage reached 78% (4 p.p. y-o-y; 95% in Europe and 73% in Latin America) and traffic accounts for 73% of the total. Besides, Telefonica has reached network sharing agreements in Germany, Brazil and UK, which will generate efficiencies and will allow faster roll-outs.

The E2E Digital Transformation programme is focused on offering a more digital customer experience, facilitating the launch of services and making the cost structure more flexible. Out of the 2019 savings target, 45% was reached in January-June, in line with expectations (>€340m in addition to the more than €300m achieved in 2018).

Telefónica

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