Europe and LATAM Boost Telefonica - Analyst Blog

Spanish telecom giant Telefonica (TEF) reported its first-half 2010 earnings per share of 83 Euro cents ($1.06), comfortably beating the year-ago earnings of 76 Euro cents (97 cents). Net income upped 9.4% year over year to €3.8 billion ($4.8 billion).

 

Consolidated revenue increased 5.4% year over year to €29.05 billion ($37.07 billion), driven by strong growth in Latin America and Europe as well as the recovery in Spain. Operating income inched down 0.6% year over year to €6.5 billion ($8.3 billion).

 

 

Telefonica Espana: The operator’s Spanish revenues fell 4.5% year over year to €9.3 billion ($11.9 billion), hurt by declines in both wireline and wireless business. Wireline business revenues dipped 6% year over year to €5.7 billion ($7.3 billion) due to lower access and voice service revenues. Revenues from wireless operations fell 3.4% to €4.2 billion ($5.4 billion) on account of lower service revenues driven by a reduction in mobile termination rates (inter-operator fees) and lower prices.

 

Telefonica Europe: Revenues from Europe climbed 10.8% year over year to €7.7 billion ($9.8 billion), buoyed by higher revenues from Telefonica’s British unit O2 UK, the highest contributor to the carrier’s European sales. Revenues from O2 UK rose 4% to €3.4 billion ($4.3 billion) as expanded smartphone adoption and associated data services boosted subscriber accretion.

 

Revenues from Germany leaped 27.4% to €2.3 billion ($2.9 billion), while Ireland and Czech Republic plunged 6.9% and 6.5% to €419 million ($534.7 million) and €1.1 billion ($1.4 million), respectively.

 

Telefonica Latin America: Latin America posted healthy results in the first half of the year and remains the principal growth engine for Telefonica. Revenues from this region increased 10.2% year over year to €12.1 billion ($15.4 billion), driven by solid subscriber accretion. Brazil was once again the biggest contributor in the first half, followed by Argentina (11.9%), Venezuela (9.8%), Chile (8.5%), Peru (7.9%) and Mexico (7.7%).

 

Revenues in Brazil (the largest market) spiked 1.5% year over year to €4.9 billion ($6.2 billion). Improving growth trends in the wireless business and stabilizing growth in wireline business continues to drive Brazilian revenue.

 

Vivo (Brazilian wireless operation), a 50-50 joint venture between Telefonica and Portugal Telecom (PT), gained 4.2 million customers in the fist half, bringing its total subscriber base to 56 million (up 19.6% year over year). This represents more than a two-fold increase from the comparable period last year. Vivo posted revenue of €1.8 billion ($2.3 billion), up 7.2% year over year primarily due to the strong service revenues.

 

Vivo maintained its leadership in terms of share of net additions and exited the fist half with 30.2% market share. Revenues from Telefonica’s Brazilian wireline subsidiary, Telesp (TSP), dipped 1% to €3.3 billion ($4.2 billion) owing to lower sales from traditional telephony revenues and a decline in narrowband partially offset by sales from broadband and Pay TV business.

 

 

During the first half of 2010, total customer access reached approximately 277.8 million, up 5.2% year over year, with 9.5% and 14.6% year over year growth in Latin America and Europe, respectively. Telefonica has added more than 13.4 million new subscribers in the first half of 2010, which is 2.4 times higher than the year-ago period.

 

On an annualized basis, mobile access rose 5% to 211 million and mobile broadband accesses shot up 84.6% to 17 million. Telefonica Espana and Telefonica Latin America led to solid growth in mobile broadband accesses.

 

Total retail broadband access grew 25.2% year over year to 16.4 million, driven by the rapid adoption of bundled services (dual/triple-play service packages). Pay TV access reached 2.7 million, up 10.4% year over year. Fixed telephony access remains flat at 41.7 million subscribers in the first half.

 

Churn improved year over year to 2.2%, driven by improved quality, successful customer loyalty and retention programs.

 

 

CapEx (excluding spectrum acquisitions) was €2.9 billion in the first half. Telefonica Espana made the investment mainly on growth and transformation projects. In addition, the company has acquired spectrum which costs €1.4 billion in the German market. Including this spectrum cost, CapEx was €4.3 billion.

 

 

Telefonica’s dominant position in the Spanish telecom market, its attractive growth prospects in Latin America and healthy dividend payouts remain positive factors for investment considerations. However, we remain cautious on the carrier’s declining wireline business, its aggressive acquisition strategy and highly leveraged balance sheet.

 

While Telefonica continues to lead the Brazilian wireless market, the company is exposed to increased competition. France-based media company Vivendi SA, which has acquired the controlling stake in the Brazilian telecom operator GVT Holding, poses as an emerging threat. Moreover, Telefonica’s biggest rival in Latin America, America Movil (AMX) is reportedly integrating its Brazilian wireless and wireline assets. We also indicate some areas of caution, including the company’s highly leveraged balance sheet, increasing competition (especially in Brazil and U.K.) and further regulatory involvement, all of which may limit significant upside potential.

 

We are currently maintaining our Underperform recommendation with Zacks #5 Rank (Strong Sell).