2012 was a key year in Telefónica's transformation process. Various initiatives were introduced during the course of the year that will accelerate the restoring of the Company's growth differential. In the management report on the 2012 results, César Alierta, the Executive Chairman of the Company, highlighted the “progressive improvement quarter by quarter” as a result of a “deep transformation process at Telefónica”, aimed at regaining sustainable growth of organic revenue and a continued increase in margins.

Thus, Telefónica Latinoamérica's revenues exceeded those of Telefónica Europe for the first time, remaining along with mobile data revenues as the main growth levers for the Group, with both registering an acceleration in their organic growth rates in the fourth quarter. At the same time, Telefónica Europe regained strong commercial momentum in its main markets thanks to the success of the newly launched tariffs, particularly "Movistar Fusión" in Spain, which reflects a general improvement in the competitive position in the different markets.

Furthermore, the fourth quarter is the best in the whole year, discounting exceptional impacts. Thus, for the third quarter in a row there was a sequential improvement in underlying OIBDA in absolute terms across all regions, and in the consolidated OIBDA margin, which returned to year-on-year growth in underlying terms, on the back of the transformational initiatives and cost reduction measures undertaken in several areas.

Revenues stood at 62,356 million euros at the end of December driven by the solid growth of mobile data revenues (+12.8% year on year) and the evolution of this item in Latin America (+5.5%).Telefónica’s consolidated OIBDA grew by +5.1% in reported terms to 21,231 million euros, which places the OIBDA margin at 34% (+1.9 p.p.). With regard to operations Telefónica ended the year with a customer base that grew by +3% to 316 million accesses.

At the end of 2012 Telefónica’s net income totalled 3,928 million euros. The behaviour of the net profit compared to 2011 (-27.3%) is affected by a number of extraordinary impacts that took away 2,536 million euros from this item during the year. Among them are the adjustment of the value of stakes in Telecom Italia and, above all, Telefónica Ireland, and the effect of the devaluation of the Venezuelan Bolivar. Without these effects, the consolidated net profit stood at 6,465 million euros.

Telefónica announces its guidance for 2013 and reiterates the shareholder remuneration policy for 2013, of paying a cash dividend of 0.75 euros per share.

Operating guidance (in organic terms*):

Revenue growth.

Lower OIBDA margin erosion than in 2012.

CapEx/Sales similar than in 2012.

Financial guidance:

Net financial debt < 47,000 million euros.

2012, a year of a deep transformation

In 2012 Global Resources consolidated its operating model and, through its global areas, consistently contributed to Telefónica’s progress in optimising scale economies. As a result, it has obtained higher efficiencies, improvements in time to market and customer satisfaction, in addition to increased competitiveness in its multinational businesses. Thus, it has set the basis for accelerating our IT transformation, which will be supported on our new data centres (Mexico, Brazil and Spain); the value traded globally in mobile devices has risen to 80%, focused on 100 references; and in addition, the new organisation of Telefónica’s multinational businesses has been strengthened and as a result, revenues from its multinational businesses increased 7% year-on-year, highlighting international services (+23% year-on-year).

During 2012, Telefónica has also improved the CapEx efficiency by focusing on growth, reallocating resources to higher-growth operations and services -such as the selective rollout of fibre and VDSL-, improving service quality and customer satisfaction, strengthening our networks via spectrum acquisition, and prioritising simplicity in order to best take advantage of shared investment.

At the same time, there was a substantial improvement in financial flexibility at the end of 2012, thanks to a significant reduction in debt during the second half of the year, thanks to strong cash flow generation and a proactive portfolio management; and the Company's refinancing efforts throughout 2012, among other things. All these measures have led to significant reduction in financial leverage, credit rating stabilization and significant liquidity improvement.

During the fourth quarter of 2012, Telefónica advanced further with the transformation of the Company. Telefónica Digital, as part of its strategy to boost innovation and capture opportunities in the digital world, has made significant progress, including the progress with the development of Firefox OS, an HTML5-based Mozilla operating system; the strategic agreement with Microsoft for the creation of a Global Video Platform; or the creation of Telefónica Dynamic Insights, a new global business unit aimed at opening up the new value-creation opportunities offered by the so-called “big data” sector. In addition, Wayra successfully held its first “DemoDay Global” in Miami to present to international investors the advances made by 17 start-ups chosen from the more than 180 ventures so far accelerated. During the quarter Wayra incorporated new academies in Sao Paulo, Munich, Prague and Santiago de Chile, making a total of 13 academies around the world.

A costumer base of 316 million accesses

The Company's total accesses rose 3% year-on-year, reaching 315.7 million at year end 2012, with a significant rise in the number of contract accesses and fixed and mobile broadband accesses. Noteworthy was the 6% year-on-year increase in accesses at Telefónica Latinoamérica (67% of the total). In the fourth quarter, Telefónica Europe posted positive net additions on its total accesses, as a result of strong commercial momentum.

Mobile accesses stood at 247.3 million at the end of the quarter, up 4% on 2011, driven by sustained growth in mobile contract accesses (+7% year-on-year), which now account for 33% of total mobile accesses. Mobile net additions in 2012 totalled 12.1 million accesses (excluding the disconnection of 3.6 million inactive mobile accesses in Spain and Brazil). The Company‟s mobile broadband accesses stood at 52.8 million in December 2012, maintaining a solid 38% year-on-year growth, and representing 21% of mobile accesses (+5 percentage points year-on-year).

Fixed-line accesses reached 40.0 million at the end of 2012, with net additions of 181 thousand during the fourth quarter. Retail fixed broadband accesses reached 18.6 million at the end of the year, a 3% increase vs. December 2011, with 530 thousand net additions during 2012. In the fourth quarter, Telefónica Europe showed net additions for the first time since March 2011, thanks to the commercial momentum on fixed broadband at Telefónica España. Retail fixed broadband accesses reached a penetration rate of 46% over total fixed accesses.

Analysis of the income statement

It is important to note that Atento Group deconsolidated its results from Telefónica Group as of the end of November 2012 (following the disposal of the company during the fourth quarter of 2012), therefore affecting year-on-year comparisons of Telefónica's reported financial results.

Revenues in 2012 totalled 62,356 million euros, a 0.8% decrease vs. 2011, (-2.0% year-on-year in the fourth quarter), affected by adverse conditions in certain markets, both economic and those resulting from more intense competition, and the negative effect of regulation. Revenues increased 0.7% year-on-year in 2012, excluding the negative effect of regulation.

The Company's high diversification remains a key differentiating factor in the current environment, as demonstrated by the revenue breakdown. By regions, Telefónica Latinoamérica's revenues in 2012 continued to show strong year-on-year growth in organic terms (+6.7%), accelerating in the fourth quarter vs. the third quarter (+7.5% vs. +6.4%), and they now account for 49% of consolidated revenues (+2.9 percentage points vs. the previous year), exceeding the revenues from Telefónica Europe (48% of total). By services, mobile data revenues remained as growth driver in 2012 (+12.8% year-on-year), contributing more than 34% to mobile service revenues during the period.

Consolidated operating expenses amounted to 42,343 million euros, 4.9% less than in 2011. The reported year-on-year comparison is affected by the provision for expenses related to the redundancy program in Spain booked in the third quarter of last year (2,671 million euros). The trend in expenses improved in the fourth quarter, with a 3.1% decrease year-on-year, thanks to the efficiency and cost cutting measures introduced.

By concepts, supplies for full-year 2012 totalled 18,074 million euros, a 1.0% decrease in reported terms. In the fourth quarter of 2012, the decrease accelerated (-3.9% year-on-year in reported terms), reflecting lower mobile interconnection costs in all regions and lower handset upgrades in Spain and the UK. Subcontract expenses stood at 13,487 million euros while personnel costs stood at 8,569 million euros, a 22.7% decrease vs. 2011, being the year-on-year comparison affected by the provision for the redundancy program in Spain mentioned above. Excluding Atento, which was sold in the fourth quarter, Telefónica's average workforce stood at 131,468 employees.

Gains on sales of fixed assets in 2012 stood at 782 million euros (-5.0% year-on-year) and at 493 million euros in the fourth quarter (-6.9% year-on-year).

OIBDA and OIBDA margin evolution

It is important to mention that OIBDA is affected by a value adjustment (-527 million euros) by the Telefónica Group in relation to Telefónica Ireland. Thus, operating income before depreciation and amortisation (OIBDA) amounted to 21,231 million euros, with a sequential improvement in underlying OIBDA in all regions. In the fourth quarter, underlying OIBDA was virtually stable in year-on-year terms at 5,862 million euros, confirming, for the third quarter in a row, a sequential quarterly improvement in OIBDA.

OIBDA margin at the end of 2012 stood at 34.0%. The sustained sequential improvement in the underlying OIBDA margin continued in the fourth quarter (37.0%, compared with 35.1% in the third quarter, 34.6% in the second quarter, and 32.8% in the first quarter). Noteworthy, underlying OIBDA margin in the fourth quarter registered positive year-on-year growth (+0.1 percentage points compared with -0.5 percentage points in the third quarter, -1.9 in the second quarter, and -2.8 in the first quarter), reflecting the success of measures implemented to improve the Company's efficiency.

By region, Telefónica Latinoamérica continued increasing its contribution to consolidated underlying OIBDA, accounting for 51%. Telefónica Europe accounted for slightly less than 50%, and Telefónica Spain's contribution fell to less than a third of the total (31%).

Depreciation and amortisation in 2012 (10,433 million euros) increased 2.8% year-on-year while operating income (OI) totalled 10,798 million euros and particularly improved in the fourth quarter.

Profit from associates amounted to -1,275 million euros (-635 million euros in 2011), mainly due to Telco, S.p.A.'s adjustments of the value of its investment in Telecom Italia, as well as to the recovery of all the operating synergies considered at the time of this investment, with both effects totalling -1,355 million euros in 2012. It should be pointed out that these effects were non-cash impacts.

Net financial expenses for the full-year 2012 totalled 3,659 million euros, 24.4% more than in 2011. This implies an effective cost of debt of 5.37% over the last 12 months excluding exchange rate differences. Free Cash Flow for full-year 2012 amounted to 6,951 million euros.

It is important to highlight that, following the Company's efforts to reduce debt, net financial debt decreased by 5,045 million euros in 2012, finishing the year at 51,259 million euros. Thus, the leverage ratio for the past 12 months (net debt over OIBDA) stood at 2.36 times as of the end of December.

Active financing policy

During 2012, Telefónica's financing activity, excluding short-term Commercial Paper Programmes activity, stood at around 15,000 million equivalent euros and has exceeded the amount raised in fiscal year 2011, improving significantly the Company’s liquidity position. The financing activity was focused on financing in advance debt maturing in 2012, and on smoothing the debt maturity profile for 2013 and 2014 at the Holding level. Therefore, the Company maintains a debt maturity profile that, along with cash flow generation expectations, is covered beyond 2014.

At the end of December 2012, bonds and debentures represented 68% of consolidated financial debt breakdown, while debt with financial institutions represented 32%.

Corporate income tax for 2012 totalled 1,461 million euros, which, over an income before taxes of 5,864 million euros, implied an effective tax rate of 24.9%, mainly due to the recognition of tax losses in several countries during the fourth quarter. Profit attributable to minority interests dragged net income by 475 million euros in 2012.

As a result of the above items, consolidated net income in 2012 was 3,928 million euros (-27.3% year-on-year) and the basic earnings per share 0.87 euros. The behaviour of net profit in 2012 compared to 2011 (-27.3%) is affected by a number of extraordinary impacts, which last year reduced this item by 2,536million euros. These included the adjustment of the value of the stakes in Telecom Italia and Telefónica Ireland, and the effect of the devaluation of the Venezuelan Bolivar. Without these effects, the consolidated net profit stood at 6,465 million euros, while basic earnings per share was 1.44 euros.

It is important to underline the significant improvement in the fourth quarter, in which net profit reached 2,051 million and 0.46 euros per share in underlying terms, showing strong sequential growth (+28.5% vs. the third quarter of 2012) and remaining virtually stable in year-on-year terms.

CapEx in 2012 reached 9,458 million euros. It is important to highlight that in 2012 this item included 586 million euros mainly relating to the cost of the spectrum in Brazil, Ireland, and Venezuela. The Company continued to devote the bulk of its investments on growth and transformation projects (81% of total investment), fostering the expansion of high-speed broadband services, both fixed and mobile. The CapEx to sales ratio (excluding spectrum) for 2012 stood at 14.2%, in line with 2011.

Consequently, operating cash flow (OIBDA-CapEx), excluding spectrum, stood at 12,360 million euros in 2012 (+9.6% year-on-year)

(*) Guidance criteria 2013: 2013 guidance assumes constant exchange rates as of 2012 (average FX in 2012), excludes hyperinflationary accounting in Venezuela in both years and considers constant perimeter of consolidation. OIBDA level guidance for 2013 excludes write-offs, capital gains/losses from companies’ disposals, towers sales and other significant exceptionals. CapEx excludes spectrum acquisition.

2012 adjusted bases exclude:
  • Capital gains/losses from companies’ disposals: Capital gains/losses from China Unicom, Atento, Hispasat and Rumbo and impairment of T. Ireland.
  • Homogeneous perimeter: 2012 adjusted figures exclude results of Atento, Rumbo and small changes in T. Digital perimeter and homogeneous accounting treatment of Joint Ventures.
  • Tower sales.
  • Change in contractual commercial model for contract handsets in Chile.

2012 Bases for 2013 targets:
  • Organic revenues 2012: 61,084 million euros.
  • OIBDA margin erosion ex-towers: -1.4 percentage points.
  • Organic CapEx/Sales ex-spectrum: 14.1%.

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