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Telefónica SA (TEF)

Q4 2010 Earnings Call

February 24, 2011 10:00 pm ET

Executives

María García-Legaz Ponce – Head of Investor Relations

César Alierta – Chairman and Chief Executive Officer

Santiago Fernández Valbuena – General Manager Strategy, Finance & Corporate Development and Chief Financial Officer

Guillermo Ansaldo – Chairman and Chief Executive Officer – Telefónica Espana

Jose Maria Alvarez-Pallete – Chairman and Chief Executive Officer – Telefónica Latinoamerica

Julio Linares – Chief Operating Officer

Miguel Escrig – Chief Financial Officer

Analysts

David Wright- Deutsche Bank

Tim Boddy – Goldman Sachs

Mathieu Robilliard – Exane BNP Paribas

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Jesus Romero – BofA Merrill Lynch

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Presentation

Operator

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Ladies and gentlemen, thank you for standing by. Welcome to Telefónica's January to December 2010 results conference call. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to hand the call over to Ms. María García-Legaz Ponce, Head of Investor Relations. Please go ahead, madam.

María García-Legaz Ponce

Good afternoon, ladies and gentlemen and welcome to Telefónica's conference call to discuss January-December 2010 results. I am María García-Legaz Ponce, Head of Investor Relations.

Before proceeding, let me mention that this document contains financial information that has been prepared under International Financial Reporting Standards. This financial information is audited.

This presentation may contain announcements that constitute forward-looking statements, which are not guarantees of future performance and involve risk and uncertainties, and actual results may differ materially from those in the forward-looking statements as a result of various factors. We invite you to read the complete disclaimer, including the first page of the presentation, which you will find on our website.

We encourage you to review our publicly available disclosure documents filed with the relevant securities market regulators. If you don't have a copy of the relevant press releases and the slides, please contact Telefónica's investor relations team in Madrid by dialing the following telephone number, 34-91-482-8700.

Now, let me turn the call over to our Chairman and CEO, Mr. César Alierta, who will be leading this conference call.

César Alierta

Thank you, Maria. Good afternoon, ladies and gentlemen. Thank you for attending Telefónica's 2010 full-year results conference call.

Today I have with me Julio Linares, Chief Operating Officer; Santiago Fernández Valbuena, Chief Strategy Officer; Guillermo Ansaldo, head of Telefónica Espana; Jose Maria Alvarez-Pallete, head of Telefónica Latinoamerica; Matthew Key, head of Telefónica Europe; and Miguel Escrig, Chief Financial Officer. During the question and answer session you will have the opportunity to ask questions directly to any of them.

2010 achievement reinforce our track record as a highly predictable and reliable Company, and proves our differential profile in the industry with tangible results. First, in 2010 we have posted a solid set of results, delivering superior top-line growth, best-in-class profitability, and high cash generation. A strong execution and diversification has been key for this strong performance.

Let me highlight Latin America accounted for 43% of Group sales, while our push in mobile broadband data has delivered a 19% annual organic growth in mobile data revenue. This was achieved in a context of strong commercial effort, resulting in a very rapid expansion of the customer base and the acceleration of restructuring measures that will further increase efficiency in the future.

Second, we have completed key strategic transactions, particularly the acquisition of 50% of Brasilcel following the M&A path set in October 2009.

Third, we continue delivering on our commitments, meeting our 2010 guidance and maintaining a robust balance sheet. All this with leading cash returns for our shareholders, raising the dividend for 2011 14% year-on-year to EUR1.60 per share.

Please turn to slide number three to review 2010 major financial metrics. Reported year-on-year growth rates were impacted by several nonrecurring effects – change in consolidation, especially the full consolidation of Vivo in the fourth quarter and ForEx. Nevertheless, underlying results remain very robust.

Revenue increased 7.1% in nominal terms to EUR60.7 billion and 2.4% year-on-year on organic terms. 2011 OIBDA exceeded EUR25.8 billion, up 14% or 0.8% in organic terms.

As a proxy to cash flow generation, operating cash flow almost reached EUR15 billion in 2010, despite increasing CapEx and the spectrum acquisitions.

Net income exceeded the EUR10 billion mark, increasing by 31% over the previous year. At the OIBDA level the EUR3.8 billion positive impact derived from the revaluation of our persisting stake in Vivo was partially offset by our decision to accelerate operations restructuring, which led to non-recurrent restructuring expenses amounting to EUR1.3 billion in the second half of the year, EUR1.1 billion in the fourth quarter. On top of that, in the fourth quarter of the year we had the impact of the tax asset reassessment in Colombia.

Nonrecurrent restructuring expenses were mainly related with personnel reorganization, EUR658 million, and firm commitments relating to the Telefónica Foundation's social activities. This reached EUR400 million in total, 70% recorded at Telefónica and the remaining 30% at Telefónica Latinoamerica.

Depreciation and amortization increased year-on-year, recording EUR84 million in the fourth quarter, due to the amortization of the Vivo purchase price allocation. We estimate an annual impact or depreciation/amortization of around of EUR350 million for the next five years. So these impacts are preliminary and analgesic.

As a result, earnings per share reached EUR2.25, above our target of EUR2.10 per share.

Turning to slide number 5, a value-oriented strategy across the Group is behind the sound commercial performance recorded in 2010, which has allowed us to maintain our strong competitive position. We focus our commercial investments on value and growth levers.

Mobile broadband data continues to shine, with a demonstrable year-on-year increase of 64% to reach the 22 million mark. The contract segment kept gaining traction, accounting for 53% of 2000 mobile net adds, while Vivo brand net adds increased over 44% in organic terms. As a result, we now manage over 288 million accesses, 7% more than a year ago in organic terms.

Let's turn to slide number 6 for the review of the top line. Reported revenue growth recorded the fourth sequential quarter of improvement, ramping up 9 percentage points from 2009 year-end, underpinned by the faster customer base expansion and the full consolidation of Vivo since October 2010.

In organic terms, sales sustained a positive trend, positive up to September, showing a healthy 2.4% year-on-year growth. Excluding the impact for MTR's cuts, organic sales growth jumped to 3.4% year-over-year. Nice how that 190 basis points more than a year ago on the back of our strong commercial efforts to drive penetration and usage growth.

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