Spanish telecom giant Telefonica (TEF) reported results for the first nine months of 2010 with earnings per share of €1.95 ($2.57) above €1.17 in the year-ago period. Despite weak Spanish operations, revenue growth in Latin America led to strong results for the period. Notably, earnings per share more than doubled year over year to €1.12 ($1.47) in the third quarter.
Net income jumped 65.6% year over year to €8.8 billion ($11.6 billion) for the first nine months of 2010. In the third quarter of 2010, net income tripled to €5.06 billion ($6.65 billion) from €1.88 billion in the year-ago quarter. Third quarter profit was led by the company’s acquisition of remaining 50% stake in Brazilian wireless Vivo Participacoes (VIV) from Portugal Telcom (PT).
During the first nine months, consolidated revenue increased 6% year over year to €44.28 billion ($58.31 billion) driven by increased commercial activity. Total revenue grew 7.3% to €15.23 billion ($20 billion) in the third quarter from €14.19 billion in the year-ago quarter.
Operating income climbed 36.8% year over year to €13.6 billion ($17.9 billion).
Segment Results
Telefonica Espana: The operator’s Spanish revenues fell 4.2% year over year to €14.04 billion ($18.49 billion), hurt by declines in both wireline and wireless business. Wireline revenues dipped 5.1% year over year to €8.54 billion ($11.19 billion) due to lower access and voice service revenues. Revenues from wireless operations fell 4.1% to €6.41 billion ($8.44 billion) on account of lower mobile service revenues, driven by a reduction in mobile termination rates.
Telefonica Europe: Revenues from Europe climbed 11.8% year over year to €11.24 billion ($14.80 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 rose 9.2% year over year to €5.32 billion ($7 billion), owing to higher mobile service revenue and handset sales, reflecting the increased demand for smartphones.
Revenues from Germany leaped 27.8% to €3.51 billion ($4.62 billion), while Ireland and Czech Republic dropped 5.3% and 2.8% to €641 million ($844.2 million) and €1.63 billion ($2.15 million), respectively.
Telefonica Latin America: Latin Americaposted healthy results in the first nine months of the year and remains one of the best performing regions in the post-financial crisis environment. Revenues from this region increased 10.7% year over year to €18.43 billion ($24.27 billion), driven by solid subscriber accretion. Brazil was once again the largest contributor in the first none months, followed by Argentina (12.2%), Venezuela (8.7%), Chile (8.6%), Peru (8.0%) and Mexico (7.5%).
Revenues in Brazil (the largest market) spiked 2.7% year over year to €7.54 billion ($9.93 billion) attributable to strong growth in the mobile business and better results from the wireline business.
Vivo gained 6 million customers in the reported period bringing its total subscriber base to 57.7 million (up 18.2% year over year). This represents a more than two fold increase from the comparable period last year. Vivo posted revenue of €2.85 billion ($3.75 billion), up 7.8% year over year primarily attributable to the strong mobile service revenues.
Vivo maintained its leadership in terms of share of net additions and exited the fist nine months with 30.1% market share. Revenues from Telefonica’s Brazilian wireline subsidiary, Telesp (TSP), inched up 0.1% to €5.09 billion ($6.70 billion) owing to higher data and IT revenues, partially offset by lower traditional telephony revenues.
Subscriber Statistics
During the first nine months of 2010, total customer access reached approximately 282 million, up 4.9% year over year, with 9.4% and 13.8% year over year growth in Latin America and Europe, respectively. Telefonica added more than 17.4 million new subscribers in the first nine months of 2010, which is 1.7 times higher than the year-ago period.
On an annualized basis, mobile access rose 4.4% to 214.9 million customers and mobile broadband access shot up 73.4% to 19 million. Total retail broadband access grew 26.5% to 16.7 million, driven by the rapid adoption of bundled services (dual/triple-play service packages). Pay TV access reached 2.7 million, up 9.8% year over year. Fixed telephony access inched up 0.1% to 41.5 million subscribers in the first nine months.
Churn remained stable at 2.3% in the first nine months of 2010 on improved quality, successful customer loyalty and retention programs.
Capital Expenditure (CapEx)
CapEx (excluding spectrum acquisitions) grew 5.9% year over year to €4.85 billion ($6.39 billion) in the reported period. The company acquired €1.38 billion spectrum in the German market and €1.01 billion spectrum in Mexico. Including the spectrum cost, CapEx was €7.24 billion ($9.53 billion).
Our Analysis
We believe Telefonica continues to invest in growth and transformation projects, fostering the development of broadband services (both fixed and wireless). Telefonica acquired the full control of its Brazilian wireless joint venture, Vivo, which enables the company to offer full competitive bundled (fixed-line and wireless) service.
This makes Telefonica the market leader in the Brazilian market and enhances its competitive position against America Movil (AMX). While Telefonica continues to lead the Brazilian wireless market, the company is exposed to increased competition.
While Telefonica’s Spanish revenue continues to be impacted by the reduction in mobile termination rates and a soft economy, we believe company’s dominant position in the Spanish telecom market and its strengthening position in the Brazilian market makes it attractive for investment.
However, we indicate some areas of caution, including the company’s highly leveraged balance sheet, increasing competition (especially in Brazil and U.K.) and regulatory involvement, all of which may limit significant upside potential.
We are currently maintaining our long-term Neutral recommendation with Zacks #3 Rank (Hold).
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