Telefonica, S.A.'s CEO Discusses Q1 2012 Results - Earnings Call Transcript

Telefonica, S.A. (TEF)

Q1 2012 Earnings Call

May 11, 2012 8:00 am ET

Executives

María García-Legaz Ponce - Head of Investor Relations

Ángel Vilá Boix - Member of The Supervisory Board

Julio Linares Lopez - Chief Operating Officer, Executive Director, Member of Innovation Committee and Member of Executive Commission

Unknown Executive -

Cesareo Alierta Izuel - Executive Chairman, Chief Executive Officer and Chairman of Executive Commission

Santiago Fernandez Valbuena - Chairman of Telefónica Latinoamérica and Director of Telefónica Latinoamérica

Analysts

Jesús Romero - BofA Merrill Lynch, Research Division

Torsten Achtmann - JP Morgan Chase & Co, Research Division

Georgios Ierodiaconou - Citigroup Inc, Research Division

Luis Prota - Morgan Stanley, Research Division

Luigi Minerva - HSBC, Research Division

Robin Bienenstock - Sanford C. Bernstein & Co., LLC., Research Division

Unknown Analyst

Timothy Boddy - Goldman Sachs Group Inc., Research Division

Will Milner - Arete Research Services LLP

Justin Funnell - Crédit Suisse AG, Research Division

Paul Marsch - Berenberg Bank, Research Division

Keval Khiroya - Deutsche Bank AG, Research Division

Nick Lyall - UBS Investment Bank, Research Division

Guy R. Peddy - Macquarie Research

Presentation

María García-Legaz Ponce

Good afternoon, ladies and gentlemen, and welcome to Telefónica's conference call to discuss January, March 2012 results. I am María García-Legaz, Head of Investor Relations.

Before proceeding, let me mention that this document contains financial information that has been prepared under International Financial Reporting Standards. These financial information is unaudited. This presentation may contain announcements that constitute forward-looking statements, which are not guarantees of future performance and involve risks and uncertainties, and that certain 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 included in 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 and market regulators. If you don't have a copy of the relevant press release and the slides, please contact Telefónica's Investor Relations team in Madrid by dialing the following telephone number +34-91-482-8770.

Now let me turn the call over to our Chief Financial and Corporate Development Officer, Mr. Angel Vila, who will begin this conference call.

Ángel Vilá Boix

Thank you, María. Good afternoon, ladies and gentlemen, and welcome to Telefónica's First Quarter Results Conference Call. It is my pleasure to chair this call. Today with me are the members of the executive committee, so during the question-and-answer session they would have the opportunity to answer the questions you may have.

Progress year-to-date shows that we are delivering on our growth strategy, fully executing the priorities set for 2012. First, on the commercial side, we have had a very strong start for 2012, leveraging the new propositions launched across markets since second half of 2011. Growth in the quarter was underpinned by the expansion of our mobile base, especially on the mobile broadband space. Second, top line has recorded a significant improvement year-on-year, as increased commercial push is already flowing into revenue. In the middle of the crisis, we are back to positive growth rates, despite material drags from regulation in Spain. Mobile data sales continue to post very solid growth and will drive further top line growth acceleration along the year.

Third, our businesses in Latin America have delivered an outstanding evolution in the first quarter, with sustainable pricing-related revenue expansion. To highlight, Brazil already accounts for about 1/4 of our total revenues, similar to Spain. And despite having our headquarters in Europe, for the first time, over 50% of our OIBDA comes from Latin America.

Fourth, we are setting the new paradigm in the sector, working in several areas including commercial approach, devices and networks that will show progress [ph] later on. Let me say that we continue to invest for future growth, with focused investments in mobile broadband and fiber, where the quantum leap in terms of coverage is particularly remarkable.

Finally, on the financial front, we have been productive year-to-date, with 2012 maturities already being fully refinanced, more than 40% of 2013 maturities refinanced and the Colombian restructuring executed. And that we are taking further actions to progressively reduce the leverage ratio and to protect the rating.

Please turn now to Slide #4 for a review of first quarter financial performance. Revenue reached over EUR 15.5 billion in the first quarter, up 0.5% year-on-year, despite the adverse conditions faced in most of our European markets. Excluding MTR cuts, revenue growth was 1.6%. Below the revenue line, both in 2011 and 2012, we have booked several material exceptional items. In particular, 2012 accounts include a noncash impact of the reduction in the value of our investments in Telecom Italia, with a negative effect in net income of EUR 637 million, while a year ago, we recorded a positive impact from the reduction in our stake in BT.

So to better understand the underlying performance of the company, we will focus on the P&L excluding those nonrecurring effects. As such, underlying OIBDA was close to EUR 5.1 billion, down 7.4% year-on-year, while underlying net income totaled almost EUR 1.3 billion. CapEx to sales was 11%, higher than a year ago, though below our 2012 target due to different quarterly execution path along the year. Finally, let me highlight that the first quarter results are in line with our internal expectations and therefore, we would reiterate our 2012 guidance.

Slide #5 shows the sustained ramp-up in accesses growth to 7% year-on-year. The very strong performance in mobile, particularly in broadband, underpin accesses expansion to over 309 million, in spite of the 2 million mobile disconnections in Spain in Q1. Mobile net adds reached 4.3 million in the first quarter, 1.5x higher than a year ago, on the back of higher gross adds, churn control and a twofold rise in net adds in Latin America. We again posted record smartphone sales, accounting for 81% of commercial activity in Europe in the first quarter of 2012.

Top line reacceleration was driven by 2 key strategic pillars, Latin America and mobile data, as shown in Slide #6. Revenues in Latin America posted high-single digit growth, with a remarkable 580 basis points acceleration quarter-on-quarter. This performance more than offset the decrease in top line in Europe.

On the mobile data space, the growing demand of smartphones and the strong traction of the new key data propositions led to a 55% year-on-year increase in our mobile broadband accesses, with the 17% mobile broadband penetration. As a result, data revenues rose 15% year-on-year to reach over 1/3 of mobile service revenues. Non-SMS revenues already account for 55% of total data sales as we leverage tier pricing to monetize the strong increase in data traffic, with traffic overall rapidly converging.

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