Spanish telecom giant Telefonica (TEF) reported fourth quarter and fiscal 2010 results. Fourth quarter earnings per share of €0.30 ($0.41) not only missed the Zacks Consensus Estimate of $0.95, it also came in below €0.54 earned in the year-ago quarter.
Net income plummeted 45% year over year to €1.333 billion ($1.81 billion) in the reported quarter with the economic crisis in Spain affecting its domestic wireless business.
Fiscal 2010 net income climbed 30.8% year over year to €10.167 billion ($13.49 billion).
Consolidated revenue increased 9.9% year over year to €16.457 billion ($22.37 billion) in the fourth quarter. Despite weak Spanish operations, revenue growth in Latin America, particularly Brazil, was the silver lining. In fiscal 2010, consolidated revenue was €60.737 billion ($80.61 billion), up 7.1% year over year.
On an annual basis, operating income before depreciation and amortization (OIBDA) fell 9.5% to €5.410 billion ($7.35 billion) in the reported quarter and rose 14% to €25.777 billion ($34.21 billion) in 2010.
Segment Results
Telefonica Espana: The operator’s Spanish revenues fell 7.5% year over year to €4.670 billion ($6.35 billion) in the reported quarter, hurt by declines in both wireline and wireless business. Wireline revenues dropped 9.8% year over year to €2.859 billion ($3.89 billion) due to lower voice as well as data and IT revenues. Revenues from wireless operations fell 6.1% to €2.138 billion ($2.91 billion) on account of lower mobile services revenues, resulting from a reduction in mobile termination rates.
Telefonica Europe: Revenues from Europe climbed 15.5% year over year to €4.017 billion ($5.46 billion), buoyed by higher revenues from Telefonica’s British unit O2 UK, the highest contributor to the carrier’s European sales. Revenues from O2 UK increased 14.8% year over year to €1.884 billion ($2.56 billion), owing to higher mobile services revenue and handset sales, reflecting a surge in demand for smartphones.
Revenues from Germany showed a substantial increase of 31.6% to reach €1.314 billion ($1.79 billion), while Ireland and Czech Republic dropped 9.2% and 2.7 % to €207 million ($281 million) and €563 million ($765.4 million), respectively.
Telefonica Latin America: Latin America posted healthy results in the reported quarter and remained one of the best performing regions. Revenues leaped 20.1% year over year to €7.606 billion ($10.34 billion), driven by solid subscriber accretion.
Brazil was once again the largest contributor, followed by Chile (28%), Columbia (25.9%), Argentina (24.7%), Ecuador (15.3%), Peru (15%), Mexico (10.1%) and Uruguay (9.5%). Growth in these markets were partially offset by weak performance in Venezuela (37.1%) and Central America (5.8%).
Revenues in Brazil (the largest market) shot up 55.3% year over year to €3.578 billion ($4.86 billion) attributable to strong growth in the mobile business and better results from the wireline business. Revenues from Telefonica’s Brazilian wireline subsidiary, Telesp (TSP), inched up 0.5% to €1.758 billion ($2.39 billion).
Vivo Participacoes (VIV), now fully controlled by Telefonica, gained 2.6 million customers in the reported quarter bringing its total subscriber base to 60.3 million (up 16.5% year over year). Vivo posted revenue of €2.11 billion ($2.87 billion), up 147.9% year over year primarily attributable to strong mobile services revenues.
Despite competitive pressures, Vivo maintained its leadership position in terms of net additions and exited 2010 with a 29.7% market share.
Subscriber Statistics
During 2010, total customer access reached approximately 287.6 million, up 8.7% year over year, with 9% and 14.38% year-over-year growth in Latin America and Europe, respectively. Telefonica added more than 19.2 million new subscribers in 2010, which is 1.5 times higher than 2009.
On an annualized basis, mobile access rose 8.9% to 220.2 million customers and mobile broadband access shot up 63.9% to 22.2 million. Total retail broadband access grew 27% to 17.1 million, driven by the rapid adoption of bundled services (voice, broadband, and television). Pay TV access reached 2.8 million, up 12% year over year. Fixed telephony access dipped 2.7% to 41.4 million subscribers in 2010.
Churn remained stable at 2.3% in 2010 on improved quality and successful customer loyalty programs.
Liquidity and Capital Expenditure (CapEx)
Telefonica exited fiscal 2010 with net debt of €55.593 billion ($73.78 billion), up from €43,551 billion in 2009.
CapEx (excluding spectrum acquisitions) upped 13.6% year over year to €8.228 billion ($10.92 billion) in 2010. Including spectrum acquisitions in Germany and Mexico, CapEx was €10.84 billion ($14.39 billion).
Guidance
For fiscal 2011, Telefonica expects revenue to increase 2% from the 2010 level. The OBIDA margin is expected to be in the high-30s and CapEx is likely to be roughly €9 billion.
The company also targets dividend distribution of €1.60 per share in 2011, which represents an increase of 14.3% from 2010. Telefonica reiterated its target of distributing a minimum dividend of €.75 per share in 2012.
Our Analysis
We believe Telefonica remains challenged by a weak Spanish economy and ongoing reduction in mobile termination rates. We are concerned about the company’s highly leveraged balance sheet, increasing competition (especially in Brazil and U.K.) and regulatory involvement, all of which may limit upside potential of the stock. Consequently, we are currently rating the stock Underperform.
On the flip side, we believe investor sentiment will improve going forward as the acquisition of Vivo enables Telefonica to offer full competitive bundled services and enhances its competitive position against America Movil (AMX).
The company’s dominant position in the Spanish telecom market and the strengthening position in the Brazilian market make it attractive for investment. Further, the company’s 2011 guidance suggests its continued focus on growth markets that should lead to profitability.
Telefonica currently retains a Hold rating with the Zacks #3 Rank for the short term (1–3 months).
AMER MOVIL-ADR (AMX): Free Stock Analysis Report
TELEFONICA S.A. (TEF): Free Stock Analysis Report
TELESP PART ADR (TSP): Free Stock Analysis Report
VIVO PARTICIPAC (VIV): Free Stock Analysis Report
Zacks Investment Research
