Telefonica (
TEF) reported third-quarter 2009 results with earnings per ADS of US$1.88, comfortably beating the Zacks Consensus Estimate of US$1.49. The Spanish telecom giant reported net income of €1.99 billion (US$2.85 billion), down 0.6% year over year, due to lower sales as a result of the beleaguered economy, especially in Spain.
Revenue
Consolidated revenue fell 5.7% year over year to €14.1 billion (US$20.2 billion). Revenue was impacted by weak contributions from domestic and European markets due to the recession. Latin America contributed 40% of the group revenues followed by Spain at 35% and Europe at 25%.
Result by Segments
Telefonica Espana
The company’s Spanish revenue declined 8.9% to €4.9 billion (US$7 billion), impacted by a reduction in mobile termination rates (inter-operator fees) and the economic downturn. Wireline business revenues fell 9.4% year over year to €2.9 billion (US$4.1 billion) while revenue from wireless operation declined 6.4% to €2.3 billion (US$3.3 billion).
Telefonica Europe
Revenue from Europe declined 5.5% year over year to €3.5 billion (US$5 billion), especially due to lower revenue from the UK operation. Reported revenue from O2 UK (the company’s UK wireless operation and highest contributor to European sales) was €1.7 billion (US$2.4 billion), down 7% over the year-ago quarter, due to competition and termination rate cuts. Revenue from Germany increased 5.5% while in the Czech Republic they declined 15.7%.
O2 UK continues to struggle, with declining revenues as the operator faces intense competition, especially from its biggest rival
Vodafone (
VOD). Competition is set to intensify in the British mobile market as the other two major carriers
Deutsche Telekom (
DT) and
France Telecom ((
FTE) have finalized an agreement to merge their UK operations. The integrated company will dethrone Telefonica as the largest wireless carrier in the UK.
Telefonica Latin America
Revenue from Latin America, which has been the principal growth engine for Telefonica in the past quarters, also fell 2.3% year over year to €5.6 billion (US$8 billion). This is due to revenue declines across key markets such as Brazil, Argentina and Chile. Revenue in Brazil (the largest market) declined 8.9% year over year to €2.2 billion (US$3.1 billion), due to weaker contribution from its Brazilian subsidiaries, Vivo and Telesp.
Telefonica continues to lead the Brazilian wireless market with approximately 30% market share. The company recently made an all-cash bid to acquire Brazilian telecom operator GVT Holding SA in an effort to expand its presence in the lucrative Brazilian telecom market.
Subscriber Results
At the end of the third quarter, total customer access points reached approximately 268.6 million, up 6.6% year over year. Subscriber accretion was driven by healthy growth in wireless, broadband and Pay TV services.
Total retail broadband access grew 9.8% year over year to 13.2 million, boosted by the rapid adoption of bundled services (dual or triple play service packages). Total wireless access reached 205.9 million, with roughly 5 million net additions made during the quarter, driven by contributions from Brazil, Germany, Mexico and the UK. Pay TV access was 2.5 million, up 15.1% year over year.
Spain exited the quarter with 47.3 million access lines and 24 million wireless customers. Total customer access in Latin America reached 163.7 million with nearly 3 million net additions in the quarter. Europe registered 48.6 million accesses (up 8% year over year), with the mobile customer base growing 7.3% year over year to 43.5 million.
Outlook
Telefonica has reaffirmed its financial guidance for 2009 as it expects continued increases in consolidated revenues with annual OIBDA growth projected in the range of 1 - 3%. Annual operating cash flow growth is expected in the range of 8 - 11%. Capital expenditure for 2009 is projected below €7.5 billion (US$10.2 billion), lower than 2008 level, as the company is increasingly focused on reducing spending to improve cash flow generation.
The company remains committed to expanding its 3G wireless business as it has reportedly begun a commercial roll-out of its HSPA+ technology based 3G mobile broadband network in Spain that offers peak downlink speeds of 21 megabits per second. Telefonica is also set to conduct 4G network trials in six countries across Europe and Latin America during the next six months.
Telefonica has expanded its handset portfolio with the recent launch of
Palm Inc’s (
PALM) Pre smartphone in the UK, Spain, Ireland and Germany. The company is also aggressively pursuing expansion initiatives into other emerging markets as it recently strengthened its foothold in China through an increased stake holding in
China Unicom (
CHU).
The company’s dominant position in the Spanish telecom market, attractive growth prospects in Latin America and healthy dividend payouts remain positive factors for investment considerations. However, we remain cautious with regard to Telefonica’s declining wireline business, aggressive acquisition strategy and highly leveraged balance sheet.
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