Spanish telecom giant Telefonica (TEF) reported
strong fiscal 2011 results. The company reported adjusted earnings
of $2.31 per ADS (€1.66 per share) outpacing the Zacks Consensus
Estimate of $1.79. However, earnings per share decreased 16.4% from
the prior year due to lingering domestic economic downturn, intense
competition and higher operating costs.
Adjusted net income dropped 16.6% year over year to €7.5 billion
($10.5 billion) in 2011. Adjusted net income for the year excluded
the one-time negative impacts from €1,870 million charge related to
the provision for workforce restructuring in Spain, €481 million of
Telecom Italia stake write-downs, €56 million difference in market
value of the BBVA stake, €30 million of tax reassessment, and €790
million of deferred tax liability on PPA. This was partially offset
by the positive impact from €184 million related to the partial
reduction of exposure to Portugal Telecom, €952 million deferred
tax liability related to the Vivo acquisition.
Including these special items, net income plunged to €5.403
billion ($7.5 billion) from €10.2 billion in 2010.
Consolidated revenue rose 3.5% year over year to €60.84 billion
($87.63 billion) in 2011 beating the Zacks Consensus Estimate of
$82 billion. Despite weaker operations in Spain and Europe, Latin
America drove the double-digit revenue growth.
Consolidated operating expenses increased 10.2% year over year
to €44.501 billion ($62.06 billion). Adjusted operating income
before depreciation and amortization (OIBDA) slid 2.1% to €22.7
billion ($31.6 billion), resulting in OIBDA margin of 36.1%, down
from 38.2% last year.
Segment Results
Telefonica Espana:
The operator’s Spanish revenues fell 7.6% year over year to €17.3
billion ($24.1 billion), hurt by declines in both wireline and
wireless businesses. Wireline revenues dropped 6.7% year over year
to €10.6 billion ($14.8 billion) due to lower access, voice and
Internet broadband revenues partially offset by higher data and IT
revenues.
Revenues from wireless operations fell 9.4% to €7.7 billion
($10.8 billion) resulting from a reduction in mobile termination
rates (MTRs). This was partially offset by strong mobile data
revenues and improved handset sales.
Telefonica Europe:
Revenues from Europe slid 1.3% year over year to €15.5 billion
($21.6 billion) manly due to lower MTRs. Excluding this, revenues
inched up 1.7% benefiting from the successful mobile data pricing
strategy.
Revenues from UK fell 2.7% year over year to €6.9 billion ($9.7
billion) in 2011. Revenues from Germany showed a 4.3% increase to
reach €5 billion ($7 billion), while Ireland, and Czech Republic
and Slovakia declined 14.7% and 5.5% to €723 million ($1 billion)
and €2.1 billion ($3 billion), respectively.
Telefonica Latin
America: Latin America continued to
grow at a faster pace in fiscal 2011 and remained one of the best
performing regions. Revenues climbed 13.5% year over year to €29.24
billion ($40.8 billion), driven largely by Brazil (accounting for
49% of the revenues in Latin America and representing a growth of
5.4%), followed by Argentina (14.5%), Venezuela (11.2%), Peru
(6.1%), Chile (4.8%), and Columbia (4.5%). However, revenue from
the key Mexico market registered a considerable decline of 12.3%
due to reduced MTRs.
Revenues in Brazil (the largest market) increased 5.4% year over
year to €14.3 billion ($20 billion) backed by strong commercial
activity and the high adoption of new services in the second half.
Telefonica’s Brazilian wireless business showed a 10.6% increase in
revenue to €8.4 billion ($11.8 billion) from the last year.
Wireline revenues fell 1.4% year over year to €5.9 billion ($8.2
billion).
Other companies (ATENTO): ATENTO
revenue increased 8.4% year over year to €1.8 million ($2.5
million).
Subscriber Statistics
At the end of 2011, total customer access reached approximately
306.6 million, up 6.7% year over year, with 9.6% and 3.2%
year-over-year growth in Latin America and Europe,
respectively.
On an annualized basis, mobile access rose 8% to 238.7 million
customers and mobile broadband access shot up 61% to 38 million.
Total retail fixed broadband access grew 5% to 18 million, driven
by the rapid adoption of bundled services (voice, broadband, and
television). Pay TV access reached 3.3 million, up 19% year over
year. Fixed telephony access dropped 3% to 40.1 million subscribers
in 2011.
Liquidity and Capital Expenditure (CapEx)
Telefonica exited the year with net debt of €56.3 billion ($78.5
billion), up from €55.6 billion at the end of 2010. The leverage
ratio (net debt-to-EBITDA) was 2.63 times as of December 2011.
CapEx grew 3.3% year over year to €10.2 billion ($14.2 billion)
in 2011. Despite the strong investments in spectrum, free cash flow
improved to a record €9.27 billion ($12.9 billion) from €8.5
billion in the prior year.
Looking Ahead
For 2012, Telefonica expects revenue to grow at least 1% year
over year with lower EBITDA margin decline. Additionally, the
company expects leverage ratio (net debt-to-EBITDA) to be
equivalent to 2.35 times for fiscal 2012.
Telefonica reiterated its dividend payment policy announced in
December 2011. The company expects to pay a total dividend per
share of €1.50 for 2012 and 2013. The company will pay a cash
dividend of €1.30 per share and buy back shares with the
balance.
Our Take
Telefonicaremains challenged by a weak domestic economy,the
slowdown in Brazil, the ongoing reduction in mobile termination
rates, a highly leveraged balance sheet and growing competition
from France Telecom S.A. (FTE), Vodafone
Group Plc (VOD), China Mobile Ltd. (CHL)
and America Movil S.A.B. de C.V.
(AMX).
However, Telefonica’s presence in the strong performing Latin
American region, in particular Brazil, would boost future earnings
growth. Additionally, continued investments in the expansion of
broadband services (both fixed and wireless) are expected to stem
some of the rot in domestic operations. Further, we are impressed
with the company’s efforts to expand its broadband and data
services in several markets. The company’s increased efforts would
lead to strong revenue and profitability, thereby increasing
shareholder returns.
We are maintaining our long-term Neutral recommendation on
Telefonica. For the short term (1–3 months), the stock also retains
a Hold rating with a Zacks #3 Rank.
AMER MOVIL-ADR (AMX): Free Stock Analysis Report
CHINA MOBLE-ADR (CHL): Free Stock Analysis Report
FRANCE TELE-ADR (FTE): Free Stock Analysis Report
TELEFONICA S.A. (TEF): Free Stock Analysis Report
VODAFONE GP PLC (VOD): Free Stock Analysis Report
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