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Telefonica dragged to first loss in nine years

Restructuring charges and economic crisis in Spain weight heavily on the group as it transitions to new digital strategy


Published: 14 November, 2011

READ MORE: Financial | Spain | Telefonica

Telefonica reported its first net loss in nine years, dragged down by its home market in Spain, which in turn is caught up in the southern €opean debt crisis. The Spanish group has been engaged in a major restructuring to reduce reliance on its homeland and focus on new digital revenues, but this came with higher operating expenses for this quarter plus a €2.67bn charge for workforce reductions, mainly in Spain.

That, and the difficult climate in parts of the EU, offset strength in Latin America and the UK, and some analysts were "shocked" that the group reiterated its previous guidance for full year 2011, saying it would be difficult to meet that target of 2% year-on-year revenue growth.

For the third quarter, the operator reported a group net loss of €429m, compared with a profit of €5.06bn in the comparable period, on revenue of €15.79bn, up 3.7% year-on-year. The period was hit by a 33.4% rise in operating expenses to €13.17bn and a €2.67bn provision for the plan to axe 6,500 jobs in Spain. By contrast, the year-ago results included a €3.8bn gain on the revaluation of its holding in Brazilian unit Vivo.

Telefonica is engaged on a major initiative to roll the Spanish unit into the broader European operation, in the process investing in new digital and multiscreen businesses and implementing centralized procurement, to save costs across Europe and sometimes Latin America too. These changes, headed up by Matthew Key, are one of the more radical and creative strategies to be adopted by the major European telcos as they face eurozone slowdown and saturating core markets. But they will take another few quarters to take full effect, and in Q3, continued pressure in Spain saw revenues in that market fall by 8.8% to €4.31bn. EUropean businesses (excluding Spain) also saw a revenue decline of 5% to €3.87bn, while its Latin American units saw a revenue increase of 17.5% to €7.41bn. If these trends continue, the latter business is on track to overtake Europe as Telefonica's biggest source of revenue.

However, in operating income terms, Europe remains the workhorse. OIBDA (operating income before depreciation and amortisation) fell in Spain to a loss of €596m, compared with a year-ago profit of €2.92bn, but Europe as a whole rose 17.3% to €1.07bn, while Latin America fell by 59.2% to €2.58bn.

The group ended the period with 231.87m mobile connections, up 9.9% year-on-year, and with an encouraging shift towards higher value postpaid customers, which are now up from 30.5% to 32.3% of the total, even though many Latin American countries remain heavily weighted towards prepaid and that approach is also on the rise in Europe.

The star of the European business was Telefonica O2 in Germany, whose "strong commercial results … offset moderate performances elsewhere in the group." However, there are good indicators at the UK arm, which "saw fresh commercial momentum in the third quarter after the introduction of a new smartphone tariff structure at the end of August." The UK is set to be the heart of the new Telefonica Digital operation, which plans to leverage new acquisitions like the Jajah VoIP platform, to exploit multiscreen content and Wi-Fi more aggressively, and to reduce the number of handsets offered across the group by 60% or more to reduce cost and customer confusion.

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