Telefonica disappoints despite Latin American growth
Profits hit by eurozone crisis and writedowns associated with Telecom Italia stake, as Spanish giant pulls in its horns
Published: 14 May, 2012
Telefonica's earnings in Latin America overtook those from Europe for the first time in the first quarter, as the Spanish giant disappointed analysts with its profits.
The operator said operating income fell by 8.8% year-on-year to €5.08bn ($6.6bn), below analyst consensus forecasts of €5.23bn. In Spain, it was hit by the country's economic crisis and a major customer shift towards low cost rivals like Jazztel and Yoigo, while the UK's O2 was also a weak spot. Operating income in Spain fell by 14% in the quarter, and in Europe as a whole by 15%. Telefonica operates the Movistar or O2 mobile brands across several European markets and most of Latin America.
"Results were very weak," Andres Bolumburu, an analyst at Banco de Sabadell, told Bloomberg. "The performance in Europe was very poor this quarter, especially in the UK, while Spain continues its decline and Latin America provides positive growth overall."
At the end of last year, Telefonica cut its dividend forecasts by 14%, the first reduction in a decade, announced 6,500 job cuts and put a freeze on major acquisitions. CEO Cesar Alierta restructured the European operations, folding the domestic Spanish unit into the wider European division and setting up a London-based digital unit to drive new revenues.
Despite the growth in its Latin American markets, Telefonica still faces intense price competition in that region, especially from the other major America Movil, as well as regulatory obstacles. In Europe, the Spanish firm's performance is lagging behind that of key rivals, partly because of the economic depression in its home base. In Q1, Deutsche Telekom beat analyst estimates and slowed its European revenue decline, while Telecom Italia enjoyed an unexpectedly high 10% leap in quarterly profit (though that was also driven by its Latin American holdings).
In that region, Telefonica's operating income rise by 0.8% to €2.55bn, in stark contrast to the 15% decline in Europe. Overall, net income fell 54% year-on-year €748m, a figure worsened by a €337m after-tax charge for a writedown of the company's indirect 10.5% stake in Telecom Italia. Revenue was up 0.5% to €15.51bn and the subscriber base grew by 6.4%, largely because of expansion in key Latin American territories like Brazil and Mexico. In Brazil, the number of customers climbed by 16%, while revenue rose 4.2% to €3.6bn, and in Argentina revenue was up 19% to €869m in a 2.9% increase in subscribers. In Europe, the number of customers fell by 1.2% to 103.2m across wireline and wireless.
Telefonica is shedding non-core assets and is in the process of selling its 2% stake in Portugal Telecom, and also wants to offload online booking service Rumbo and call center unit Atento. It it targeting over €1.5bn from these deals, and may also launch sales or IPOs for some affiliates.