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Telefónica Upbeat Despite Slump in Profits

Iain Morris
2/25/2015
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Spanish telecom giant Telefónica has issued a bullish forecast that group revenues will grow by 7% this year, claiming to have seen major improvements in the operating environment during the last three months of 2014.

The operator's headline 2014 results were seriously hurt by a currency crisis in Venezuela and restructuring costs in Germany, where it concluded a merger between its local unit and E-Plus Service GmbH & Co. KG in October. Net income for the full year fell by 34.7%, to €3 billion (US$3.4 billion), while revenues slumped by 11.7%, to €50.4 billion ($57.2 billion), compared with 2013. (See Eurobites: Telefónica Hit by E-Plus Costs in Q4.)

In purely organic terms, however, Telefónica claims that revenues grew year-on-year by 2.6% in 2014 and by 5% in the last three months of the year.

Table 1: Headline Figures (€M)

2014 YoY change (reported) YoY change (organic) Q4 2014 YoY change (reported) YoY change (organic)
Revenues 50,377 (11.7) 2.6 12,399 (14.1) 5.0
OIBDA 15,515 (18.7) 0.2 3,190 (35.9) 0.0
OIBDA margin 30.8% (2.6 p.p.) (0.8 p.p.) 25.7% (8.7 p.p.) (1.6 p.p.)
Operating Income (OI) (1)(2)(3) 6,967 (26.3) 1.9 933 (66.2) (5.0)
Net income (1)(2)(3) 3,001 (34.7) 152 (89.5)
Capex 9,448 0.6 16.9 3,710 9.9 2.1
Spectrum 1,294 5.8 39.5 1,102 n.m. n.m.
OpCF (OIBDA-Capex) 6,067 (37.3) (12.7) (520) n.m. (3.9)
(1) E-Plus has been included in the consolidation perimeter from 1 October 2014. (2) T. Ireland has been removed from the consolidation perimeter from 1 July 2014. (3) T. Czech Republic has been removed from the consolidation perimeter from 1 January 2014. Source: Telefónica

The operator has embarked on a major shakeout of its portfolio: In 2013 it sold assets in the Czech Republic and Ireland, which wiped more than €2.1 billion ($2.4 billion) off revenues in 2014, and it is now prioritizing investments in the core markets of Spain, Germany and Brazil.

Bolstered by the E-Plus merger, those three markets together accounted for about 57% of Telefónica's sales in 2014, up from just 43% in 2013.

The financial guidance for this year assumes that Telefónica will complete the sale of Telefónica UK Ltd. (branded O2) to Hutchison Whampoa Ltd. (Hong Kong: 0013; Pink Sheets: HUWHY), which offered about £10 billion ($15.5 billion) for the business earlier this year. It also strips out figures from Venezuela, whose currency has suffered a massive devaluation, while including a full year of revenues from E-Plus and six months from GVT, the Brazilian fixed-line business it agreed to buy from France's Vivendi in September. (See Hutchison Offers $13.9B for UK's O2 and Eurobites: Telefónica Seals Brazilian Deal.)

Taking all of that into account, Telefónica plans to invest 17% of its revenues in capital expenditure this year, up from about 16% in 2014. The guidance implies that investments will increase markedly on a per-country basis.

The operator believes heavy spending on the rollout of high-speed networks will give it an advantage over rivals and fuel sales growth.

Speaking to analysts on the operator's earnings call, Telefónica chairman and CEO Cesar Alierta expressed confidence that Spain's economy was on the mend after a turbulent few years during which unemployment has soared.

Revenue generated in the Spanish market shrank by 4.9% in the October-to-December quarter, compared with the year-earlier period, but the year-on-year rate of decline has fallen from 11.9% in the last three months of 2013.

Responding to questions from analysts, executives said they would channel fiber investments in Spain into areas already considered to be competitive and address other parts of the country when there is more regulatory certainty.

Earlier this month, Telefónica was reported by Reuters to have scaled back its investment plans after Spain's regulator suggested it should open its fiber network to rivals outside nine major cities where broadband competition is already healthy.


For more fixed broadband market coverage and insights, check out our dedicated broadband content channel here on Light Reading.


Nevertheless, Alierta told analysts that he was broadly optimistic about the direction in which European regulation is moving. "The important thing is the digitization of the economy and I think there will be big changes in favor of fiber and LTE and a more positive framework for investments," he said.

Depending on the eventual shape of regulation, Telefónica plans to spend "up to" €3.5 billion ($4 billion) on fiber rollout in Spain in 2015 and 2016. Its aim is to cover between 13 million and 18 million premises by December 2016, up from 10.3 million in December 2014.

Alierta also ruled out any further acquisitions following Telefónica's purchase of Germany's E-Plus and Brazil's GVT, saying his intention was to focus on the existing footprint.

Although Brazilian competition authorities have yet to sign off on the GVT deal, the Spanish player expects to generate synergies of €4.7 billion ($5.3 billion) by combining GVT with its mobile operation.

Meanwhile, the O2 deal with Hutchison is expected to reduce net debt to about 2.35 times annualized OIBDA (operating income before depreciation and amortization) in 2015, down from a ratio of about 2.52 in December 2014.

Even so, there is some concern that regulatory authorities may seek to block the deal, believing it will have an adverse impact on competition in the UK's mobile market. A merger between Hutchison-owned Three UK and O2 would leave the country with just three mobile network operators.

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

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iainmorris
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iainmorris,
User Rank: Blogger
3/1/2015 | 8:00:56 AM
Re: Profitable and investing
No doubt, but it still marks a pretty big increase in spending in actual terms. Given FTTH targets in Spain and the need to remain competitive against DT -- which has announced capex hikes of its own - in Germany, it isn't that much of a surprise that it's planning to spend more this year.
James_B_Crawshaw
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James_B_Crawshaw,
User Rank: Blogger
3/1/2015 | 7:35:42 AM
Re: Profitable and investing
The 7% revenue growth in 2015 is not organic. Some of it is organic (maybe 3%) but the rest is due to consolidation of E-Plus for a full 12 months (only partial consolidation in 2014) and GVT for 6 months (nothing in 2014). Presumably part of the rationale of buying E-Plus was capex synergies. 
iainmorris
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iainmorris,
User Rank: Blogger
3/1/2015 | 3:41:45 AM
Re: Profitable and investing
Capex was €8.158B in 2014 minus spectrum costs, while revenues were €50.377B (16.2% ratio). Assuming they can pull off 7% revenue growth, they'll be generating about €53.9B in revenues in 2015. Investing 17% of that in capex would produce a figure of €9.163B. And, of course, they quit Ireland last year and have not entered any new markets (even though they have acquired new assets in existing ones).
iainmorris
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iainmorris,
User Rank: Blogger
3/1/2015 | 3:41:44 AM
Re: Profitable and investing
Capex was €8.158B in 2014 minus spectrum costs, while revenues were €50.377B (16.2% ratio). Assuming they can pull off 7% revenue growth, they'll be generating about €53.9B in revenues in 2015. Investing 17% of that in capex would produce a figure of €9.163B. And, of course, they quit Ireland last year and have not entered any new markets (even though they have acquired new assets in existing ones).
iainmorris
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iainmorris,
User Rank: Blogger
3/1/2015 | 3:41:43 AM
Re: Profitable and investing
Capex was €8.158B in 2014 minus spectrum costs, while revenues were €50.377B (16.2% ratio). Assuming they can pull off 7% revenue growth, they'll be generating about €53.9B in revenues in 2015. Investing 17% of that in capex would produce a figure of €9.163B. And, of course, they quit Ireland last year and have not entered any new markets (even though they have acquired new assets in existing ones).
James_B_Crawshaw
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James_B_Crawshaw,
User Rank: Blogger
2/26/2015 | 9:28:15 AM
Re: Profitable and investing
Sorry to rain on the parade but TEF's capex/sales was 16.7% in 2014 and guidance for 2015 and 2016 is around 17% so not a material increase. Moreover, they say capex/sales will revert to 15% in 2017. 
cnwedit
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cnwedit,
User Rank: Light Beer
2/25/2015 | 11:58:16 AM
Regulatory uncertainty has global impact
Interesting to see that Telefonica is hedging its fiber bets in places where it doesn't see an advantage in the expense of fiber when it has to immediately be shared with the competition. 

It's the Spanish-language version of a familiar American tune. 
Ray@LR
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[email protected],
User Rank: Blogger
2/25/2015 | 11:50:14 AM
Profitable and investing
There's no doubt that Telefonica is a moving feast -- well done Iain on unravelling those numbers -- but at the end of the day the company is making money and it is investing in next gen tech, with its capex-to-sales ration going UP htis year.

That's positive, right??
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