Telefónica Reports A 5.4% Increase In Revenue And 11.6% Rise In Free Cash Flow In The First Nine Months Of The Year

Telefónica (NYSE:TEF) (LSE:TDE) released its January-September earnings today, with revenue growth of 5.4% and a 11.6% rise in free cash flow. The performance to September reflects its focus on setting the groundwork for future growth and allows Telefónica to reiterate its guidance for 2011 and confirm its shareholder remuneration policy.

At 30 September, Telefónica reported strong growth in its customer base (+6%), with almost 300 million accesses across the world. Highlights include the success of the strategy to capture contract customers (accounting for almost 50% of mobile net adds so far this year), the penetration of mobile broadband services (accounting for 15% of the Company’s mobile accesses) and the increase in fixed broadband services (17.8 million customers to date).

Telefónica reported a 5.4% increase in revenues to 46,672 million euros at the end of the third quarter, due mainly to the higher growth in revenues from mobile data services (up almost 20% in organic terms) and the sound performance of its business in Latin America, where reported revenues climbed 18%.

Additionally, more than a quarter of consolidated revenues (26%) derive from the fixed and mobile internet business and revenues from services that go beyond connectivity, and the new organisational structure announced in September. This will allow the Group to focus on developing the digital world with these segments of activity as its main pillars, thereby increasing the weight of the revenues within the Telefónica Group and at the same time increase efficiency.

Lastly, in addition to the positive impact of the revaluation to fair value of the pre-existing stake in Vivo at the time of the acquisition of the interest belonging to Portugal Telecom in 2010, January-September 2011 earnings were shaped by the provision recognised for restructuring costs following the agreement reached with the trade unions to reduce the headcount by up to 6,500 in Spain over the next three years. The latter measure has affected reported earnings but does not imply cash outflow. In reported terms, consolidated OIBDA totalled 14,251 million euros, operating income was 6,696 million euros and net profit stood at 2,733 million euros to September 2011. Excluding extraordinaries, the year-on-year change in these items would be 0.1%, -6.8% and -10.6%, respectively.

Telefónica Chairman, César Alierta, has stated that consolidated figures at 30 September 2011 reflect the “Company's focus on setting the groundwork for future revenue growth”, highlighting the results of the strategy to expand mobile broadband services. “30% of our mobile service revenues now come from data services”. He also reiterated the sound results achieved in Brazil, the stabilisation of trends in Spain, and the Group's capacity to generate high levels of operating cash flow despite the increase in commercial activity and higher investment.

César Alierta concluded by underlining the importance of Telefónica’s new structure, announced in September, to face forthcoming challenges. “It will allow us to grow faster in a digital world and become more efficient, leveraging on our advantages: diversification, integration, scale and reach,” he said.

Driving broadband and connectivity–based services

In the first nine months of the year the Company has focused its commercial strategy on fostering the penetration of broadband services, both wireless and wireline, as well as the use of services beyond connectivity as the key levers for future revenue growth. In this regard, the Company is increasing its efforts to massively expand “smartphones” and other mobile broadband devices, leveraging the increasing availability of a handset portfolio with more competitive prices and tiered pricing adapted to customer needs in accordance with its usage profile.

This strategy led to a significant increase in the commercial activity in the third quarter of the year, especially in Latin America, which posted record net adds (4.9 million new accesses in the third quarter, 1.6 times higher than in the third quarter of 2010), with strong momentum in mobile contract and mobile broadband accesses.

Total accesses managed by Telefónica increased by 6% in reported terms to 299.7 million at the end of September 2011, setting the basis for the Company’s future revenue growth. By region, Telefónica Latinoamérica and Telefónica Europe, with year-on-year growth of 9% and 5% respectively, were the major contributors to Telefónica's customer base growth.

Telefónica's mobile accesses reached 231.9 million by the end of September 2011, up 8% year-on-year in reported terms, underpinned by the sustained increase in the contract segment (+12% year-on-year), which now accounts for 32% of the total mobile access base (+1.2 percentage points year-on-year). The Company’s focus on capturing high-value customers was reflected in the contract segment contribution to total net adds, which accounted for close to 50% in the first nine months of 2011, and rose above 100% for Telefónica España, and stood at 95% for Telefónica Europe.

Mobile broadband accesses -accesses with a data rate attached and therefore active users of the service- exceeded 34 million at the end of September 2011 (+76% year-on-year). This figure represents a penetration rate of 15% of Telefónica's total mobile access base (+4 percentage points versus December 2010). Telefónica Europe reached a penetration rate of 29%, followed by Telefónica España (27%). Meanwhile, there is huge scope for increasing penetration at Telefónica Latinoamérica (9% at the end of September 2011).

Growth in mobile broadband accesses was reflected in mobile data revenues, growing at 19.6% in organic terms and accelerating with respect to previous quarters to account for 30% of Telefónica's mobile service revenues. Noteworthy was the strong increase in non-P2P SMS data revenues (+38.8% year-on-year in organic terms), which represent more than 50% of total data revenues.

Retail fixed broadband accesses reached a total of 17.8 million (+7% year-on-year). The Company continues to push its bundling strategy for voice, broadband and television services, which has proved to be a key driver to churn control. Hence, both in Spain and Latin America almost 90% of retail fixed broadband accesses are bundled as part of either a dual or triple service package.

The number of pay TV accesses stood at 3.2 million at the end of September 2011 (+18% year-on-year), with a pick-up in the growth rate thanks to the success of commercial repositioning of the service in Latin America and in Spain and the incorporation of TVA's customers in Brazil since June.

Fixed telephony accesses totalled 40.4 million, down 3% year-on-year. This decline remained stable in recent quarters.

Analysis of the income statement

It is important to bear in mind that Vivo has been fully consolidated since October 2010 (prior to that date, the results of Vivo were proportionately consolidated). Consequently, this has an impact on the year-on-year comparisons of Telefónica’s financial results in reported terms.

In January-September 2011 revenues totalled 46,672 million euros, a year-on-year increase of 5.4%, driven by higher revenues from Telefónica Latinoamérica (+18.1% year-on-year). Changes in the consolidation perimeter contributed with 5.6 percentage points to this growth, while foreign exchange rates dragged 0.5 percentage points to revenue growth.

In organic terms, revenues rose 0.3% in the first nine months of 2011, negatively impacted by mobile termination rate cuts across all regions, which dragged 632 million euros to consolidated revenues. Excluding this impact, organic revenue growth would have reached 1.6% (+6.8% in reported terms).

By services, the contribution of services with the highest growth potential continues to increase (fixed/mobile broadband, services beyond connectivity) to exceed 26% of consolidated revenues by the end of September (+3 percentage points with respect to January-September 2010). This contribution virtually offsets the lower contribution by traditional access and voice revenues.

By regions, revenues from Telefónica Latinoamérica already account for 46% of total consolidated revenues (+5 percentage points with respect to September 2010) and remain the Company’s main growth engine and the largest contributor to consolidated revenues in organic terms (+2.2 percentage points), thereby offsetting the lower contribution by Telefónica España (-2.1 percentage points) and Telefónica Europe (-0.2 percentage points). Revenues from Telefónica Europe represent 25% of the consolidated revenues, while Telefónica España contributes with some 28%.

Consolidated operating expenses stood at 33,475 million euros (+16.9% year-on-year in reported terms), negatively affected by the accounting of a non cash-impact provision for restructuring expenses (2,671 million euros consolidated) associated to the workforce restructuring plan recently approved by the Company. In addition, the strong commercial activity registered in the third quarter of the year also led to a year-on-year increase in commercial expenses. In organic terms, the year-on-year increase in operating expenses stood at 2.9%. Personnel expenses amounted to 8,916 million euros, rising 5.4% in organic terms. In reported terms, personnel expenses increased year-on-year by 49.5% as a result of the provision for the workforce restructuring plan in Spain mentioned above.

The average number of employees at the end of September 2011 was 285,063 (20,395 more than at the end of September 2010), mainly due to the larger workforce at Atento. Excluding Atento, Telefónica's consolidated average workforce was 133,841 employees (126,591 at the end of September 2010).

High operating efficiency

Telefónica’s efficiency global projects continued to make a positive contribution to consolidated results in the first nine months of 2011 (441 million euros in terms of revenue and 368 million euros in OIBDA). In this regard, and reflecting the benefits of our scale, it is worth to highlight the incorporation of Sunrise to Telefónica's “Partners Programme” in September 2011, adding to Bouygues and Etisalat, which joined the programme in previous quarters.

Gains on sales of fixed assets totalled 293 million euros in the first nine months of the year, mainly due to the positive impact of the partial reduction of our economic exposure to Portugal Telecom (183 million euros). It is worth to remind that in the third quarter of 2010 this item included the positive impact of a revaluation of the previously-held stake in Vivo at its fair value at the date of acquisition of the 50% in Brasilcel owned by Portugal Telecom (3,797 million euros).

Thus operating income before depreciation and amortization (OIBDA) in the first nine months of the year stood at 14,251 million euros. In underlying terms, OIBDA remained stable (+0.1%), despite an increase in commercial activity and the negative impact of interconnection (149 million euros to the end of September).

In organic terms, OIBDA fell by 4.6% year-on-year (-30.0% in reported terms), mainly due to the lower contribution by Telefónica España (-4.3 percentage points), not being offset by the higher contribution from Telefónica Europe (+0.2 percentage points). Telefónica Latinoamérica dragged 0.4 percentage points from consolidated OIBDA organic growth, reflecting the negative impact of the Mexican business, lower revenues from regional initiatives with respect to 2010 and strong commercial activity.

Despite intense commercial activity and the negative impact from regulation, the organic OIBDA margin in the first nine months of the year stood at 35.8%, posting a limited erosion of 1.8 percentage points year-on-year, in line with the Company's expectations.

By region, Telefónica Latinoamérica accounted for 46% of underlying OIBDA (+4 percentage points year-on-year), rising to 65% including also the contribution by Telefónica Europe.

Depreciation and amortization in the first nine months of the year (7,554 million euros) posted a year-on-year increase of 12.0% in reported terms, reflecting full consolidation of Vivo and the amortization of Vivo's purchase price allocation. As a result, operating income (OI) from January to September 2011 amounted to 6,696 million euros, with a 6.8% year-on-year decline in underlying terms. In organic terms, operating income in the first nine months of the year was 8.6% down year-on-year.

Profit from associates stood at -506 million euros for January-September 2011 versus +68 million euros at the end of September 2010. The year-on-year change was mainly the result of the non-cash impact of Telco SpA’s revision of its value of its investment recorded in the second quarter of 2011.

Total financial expenses up to September 2011 were 2,045 million euros, which yield an effective cost of 4.85% on a total average debt of 56,327 million euros during the first nine months of the year. In comparison with the same period last year, financial expenses decrease by 69 basis points.

Telefónica’s Free Cash Flow up to September 2011 amounted to 5,701 million euros, an increase of 591 million euros (+11.6%) year-on-year. Free Cash flow per share reached 1.26 euros.

Sound financial position

Net Financial Debt has been reduced by 163 million euros with respect to December 2010 (55,593 million euros), reaching 55,430 million euros as of the end of September 2011. It is worth highlighting that net financial debt has been reduced by around 1,000 million euros during the last quarter.

The leverage ratio, net debt over last twelve months’ OIBDA (excluding results on the sale of fixed assets and adjusted by firm commitments relating to the Fundación Telefónica’s social welfare activities and by workforce restructuring plan in Spain), stood at 2.49 times at September 2011, and at 2.55 including commitments.

During the first nine months of 2011, Telefónica’s financing activity, excluding short term Commercial Paper Programmes activity and including the extension on the Vivo syndicated facility, rose to above 9,900 million equivalent euros, with the main objective of refinancing in advance 2011 maturities and smoothing our debt maturity profile for 2013 at the holding level.

At the end of September 2011, bonds and debentures represented 63%, on the consolidated financial debt breakdown, while debt with financial institutions reached a 37% weight.

Corporate income tax in the first nine months of the year totalled 1,082 million euros which, over income before tax of 4,145 million euros, results in an accrued rate of 26.1%. Profit attributable to minority interests dragged net income by 330 million euros in the first nine months of the year, mainly due to minority interests in net income by Telefónica Brazil and Telefónica Czech Republic, which have more than offset the minority interests in Telefónica Telecom losses.

As a result of the above items, consolidated net income for the first nine months of 2011 was 2,733 million euros which, a year-on-year decrease of 10.6% in underlying terms, with the basic earnings per share, also in underlying terms, standing at 1.20 euros (-10.4% year-on-year).

CapEx in the first nine months of the year stood at 6,625 million euros (-8.5% year-on-year) and includes the cost of the spectrum in Spain, Brazil and Costa Rica. In organic terms, CapEx rose by 5.0% with respect to January-September 2010. The Company continues to focus its investments on growth and transformation projects, fostering the development of fixed and mobile broadband services.

Consequently, operating cash flow (OIBDA-CapEx) totalled 7,626 million euros at the end of September (-8.6% in organic terms).

Copyright Business Wire 2010

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