Telefonica SA (TEF) reported fourth-quarter 2009 results with earnings per ADS of US$2.37, comfortably beating the Zacks Consensus Estimate of US$1.63. The Spanish telecom behemoth reported a net income of €2.44 billion (US$3.60 billion), up 22% year-over-year, supported by higher sales as a result of healthy subscriber accretion in Latin America as well as lower taxes.
For 2009, net income increased 2.4% year-over-year to €7.78 billion (US$10.85 billion) or €1.71 a share (or US$7.14 per ADS), missing the Zacks Consensus Estimate of US$7.19. The current Zacks Consensus Estimate for 2010 EPS is US$7.56.
Revenue
Consolidated revenue for the quarter grew 1.2% year-over-year to €14.97 billion (US$22.1 billion), beating the Zacks Consensus Estimate of US$20.4 billion. Latin America contributed 42% of the group’s revenues followed by Spain at 34% and Europe at 23%. Revenue for 2009 declined 2.1% year-over-year to €56.73 billion (US$79.1 billion), missing the Zacks Consensus Estimate of US$80.3 billion.
Result by Segments
Telefonica Espana
The company’s Spanish revenue declined 1.6% year-over-year to €5.05 billion (US$7.5 billion), impacted by a reduction in mobile termination rates (inter-operator fees) and the economic downturn. Wireline business revenues increased 1.8% year-over-year to €3.2 billion (US$4.7 billion) while revenue from wireless operation declined 4.4% to €2.3 billion (US$3.4 billion).
Telefonica Europe
Revenue from Europe declined 3.9% year-over-year to €3.5 billion (US$5.2 billion), especially due to lower revenue from the UK operation. Reported revenue from the company’s UK wireless operation O2 UK (highest contributor to European sales) was €1.6 billion (US$2.4 billion), down 6.5% over the year-ago quarter, due to competition and termination rate cuts. Revenues from Germany increased 7.2% while in the Czech Republic they declined 11.1%.
O2 UK continues to struggle, with declining revenues as the operator faces intense competition, especially from its biggest rival Vodafone (VOD). Competition is set to intensify in the British mobile market as the other two major carriers Deutsche Telekom (DT) and France Telecom (FTE) are set to merge their UK operations.
The integrated company will dethrone O2 UK as the largest wireless carrier in the UK. Moreover, O2 UK lost exclusivity on Apple’s (AAPL) iPhone in the UK as Vodafone and France Telecom’s Orange UK began selling the iconic device in late 2009.
Telefonica Latin America
Latin America, which has been the principal growth engine for Telefonica in the past quarters, posted healthy results in the quarter. Revenue from this region grew 8% year-over-year to €6.3 billion (US$9.3 billion), boosted by solid subscriber accretion. Revenue in Brazil (the largest market) rose 12.9% year-over-year to €2.3 billion (US$3.4 billion), favored by the rapid economic recovery in the country.
Vivo (Brazilian wireless operation) gained 2.9 million customers in the quarter, bringing its total subscriber base to 51.7 million (up 15% year-over-year). Vivo maintained its leadership in terms of share of net additions with a roughly 37% market share. Telefonica’s Brazilian wireline subsidiary, Telesp posted growth across broadband and Pay TV businesses while losing customers in its legacy voice telephony operation.
Telefonica continues to lead the Brazilian wireless market with an approximately 30% market share. However, France-based media company Vivendi SA, which outbid Telefonica for a controlling stake in the Brazilian telecom operator GVT Holding, represents an emerging threat. To counter intense competition, Telefonica is considering a more aggressive pricing strategy.
Subscriber Results
At the end of 2009, total customer access points reached approximately 264.6 million, up 2.1% year-over-year. Broadband and Pay TV businesses remain on the positive growth tracks which continue to offset decline in the fixed-line voice customer base.
Total retail broadband access grew 8.2% year-over-year to 13.5 million, boosted by the rapid adoption of bundled services (dual or triple play service packages). Total wireless access reached 202.3 million, with roughly 6.5 million net additions during 2009, driven by contributions from Brazil, Germany and Mexico. Pay TV access was 2.5 million, up 9.8% year-over-year.
Spain exited 2009 with 46.8 million access lines (down 1.2%) and 23.5 million wireless (down 0.3%) customers. Europe registered 49.2 million accesses (up 6.9% year-over-year), with the mobile customer base growing 6.5% year-over-year to 44.1 million driven by steady wireless subscriber growth in the UK (up 5.1%) and Germany (up 9.2%).
Total customer access in Latin America reached 168.6 million (up 6.5%) with roughly 4.9 million net additions in the quarter. Wireless subscriber base grew 9.2% to 134.7 million with a net addition of 11.4 million subscribers in 2009, boosted by growth at Vivo.
Outlook
Telefonica has released its financial guidance for 2010. The operator expects a basic EPS of €2.10 and dividend per share of €1.40 for the year. Consolidated revenue has been projected to grow 1%-4% year-over-year with annual OIBDA growth forecasted in the range of 1%-3%. Telefonica plans to boost dividend to at least €1.75 a share in 2012.
Capital expenditure (CapEx) for 2010 is projected between €7.45 billion (US$11 billion) and €7.65 billion (US$11.3 billion), higher than €7.26 billion (US$10.7 billion) in 2009. Telefonica plans to spend more than R$2 billion (US$1.14 billion) in Brazil in the current year. The company plans to allocate a major portion of the budgeted CapEx for expanding its broadband network infrastructure in Brazil.
The carrier remains committed to expanding its 3G wireless business as it has reportedly begun a commercial roll-out of its HSPA+ technology based 3G mobile broadband network in Spain that offers peak downlink speeds of 21 megabits per second. Telefonica is also expected to conduct 4G network trials in six countries across Europe and Latin America in 2010.
Telefonica is expanding its handset portfolio and is aggressively pursuing expansion initiatives into other emerging markets as it has strengthened its foothold in China through an increased stake in China Unicom (CHU). Moreover, recent speculations suggest that Telefonica is mulling the acquisition of its European peer Telecom Italia (TI) to expand its footprint in Brazil.
Telefonica’s dominant position in the Spanish telecom market, attractive growth prospects in Latin America and healthy dividend payouts remain positive factors for investment considerations.
However, we remain cautious with regard to Telefonica’s declining wireline business, aggressive acquisition strategy and highly leveraged balance sheet. The company continues to operate with a high debt level with net debt of €43.6 billion (US$60.8 billion) at the end 2009.
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