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Mobile services

Telefónica Boosted by German, UK M&A

Telefónica has insisted it remains on course to deliver a 7% increase in revenues this year after its earnings in the first three months received a boost from takeover activity. (See Telefónica Upbeat Despite Slump in Profits.)

The Spanish telecom incumbent flagged a 12.6% rise in sales for the January-to-March quarter, to €11.5 billion ($13.1 billion), compared with the same period in 2014, thanks chiefly to the consolidation of results from E-Plus, a German mobile operator it bought from Dutch incumbent KPN in October.

Telefónica's operating income before depreciation and amortization (OIBDA) was also bolstered by the E-Plus takeover, growing by 7.7%, to €3.6 billion ($4.1 billion).

The operator claimed that revenues grew by 3.3% and OIBDA by 2.4% on a purely organic basis after strong performances in all of its markets except Spain, where recent economic turmoil has wreaked havoc with its business.

Telefónica's share price fell by about 1% in morning trading in Spain after the company revealed that revenues in its domestic market, which still accounts for about a quarter of the total, were 3.8% lower than in the first quarter of 2014.

Investors may have been especially worried by the contraction in the operating margin in Spain, with OIBDA falling by 8.6%, to about €1.3 billion ($1.5 billion).

Table 1: Telefónica Headline Results

Q1 2015 YoY change (reported) YoY change (organic)
Revenues €11.5B 12.6% 3.3%
−Spain €2.8B -3.8% -3.8%
−Germany €1.9B 69.4% 2.9%
−Brazil €2.8B 4.8% 4.3%
−Latin America €3.7B 19.6% 9.7%
−other companies and eliminations €305M -24.7% -
OIBDA €3.6B 7.7% 2.4%
−Spain €1.3B -8.6% -8.4%
−Germany €408M 62.6% 9.0%
−Brazil €840M 1.4% 0.9%
−Latin America €1.1B 23.5% 14.5%
−other companies and eliminations -€38M 9.0% -
Net income €1.8B 1012.3% -
Capex €1.7B 25.8% 21.5%
OIBDA-capex €1.9B -4.2% -8.3%
Source: Telefónica

Despite signs of continued weakness, executive chairman César Alierta insisted that Spain has "already begun its return to growth" in a published statement, noting an increase in customer numbers.

Telefónica finished the quarter with 41.2 million mobile customers and 5.9 million retail broadband subscribers in its domestic market -- 1% more, in each case, than in March 2014.

The loss of traditional fixed-line customers and a fall in customer spending bore responsibility for the revenue decline, but Telefónica was able to point to improvements since last year, when sales shrank by 4.9% in the October-to-December quarter.

Its plan is to reduce the rate of contraction by 1.1 percentage points each quarter. Should Telefónica just hit that target, its Spanish business would eventually return to growth in the first quarter of 2016.

Alierta is banking on a strong recovery in the Spanish economy, which analysts expect to grow much faster than the European Union average this year, allowing Telefónica to sell pricier services to Spanish businesses and consumers.

Next page: When there's pain in Spain…

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iainmorris 5/14/2015 | 9:25:48 AM
Pain in Spain A key metric to look out for in the second quarter (April to June) is whether Telefónica can limit its revenue decline in Spain to 2.7%. Anything greater and investors may have trouble accepting Alierta's view that domestic-market conditions are rapidly improving.   
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