Telefónica's Acquisitions, Expanding Mobile Business,Broadband Growth Drive Q1 Revenue Up 45% Y/Y

Spanish telecoms group Telefónica posted a 39.6% y/y jump in first-quarter net profit to 1.27 billion euro, from 912.2 million euro a year earlier, on a 45.4% y/y increase in total revenue to 12.04 billion euro, underpinned by strong customer–base growth. The stellar performance was helped by the full consolidation of Czech Republic's Cesky Telecom in July 2005 and the partial consolidation of U.K. mobile group O2 in February 2006. Excluding the acquisitions, organic revenue growth in the first quarter stood at 8.9% y/y. Telefónica's underlying core profit, or OIBDA (operating income before depreciation and amortisation), which measures the company's profitability, jumped by 37.3% y/y to 4.69 billion euro. The OIBDA margin of the Telefónica Group came in at 38.9% at the end of March 2006, 2.3 percentage points down on the same period last year. 

The largest telecoms company in Latin America and Spain had a total of 184.2 million customers worldwide at end-March 2006, including its mobile unit Telefónica Móviles and the recently created division Telefónica O2 Europe. Of the total, 6.27 million subscribed to fixed-line, high-speed internet access services. Broadband internet customers were up by 55.4% y/y to 6.3 million, constituting one of the main driving forces of the growth of the fixed-line unit. The figure exceeded the 3-million mark in Spain, up 46.8% y/y, and in Latin America reached 2.9 million. Cellular customers increased by 21% y/y to 98.5 million at end-March 2006. The total number of mobile subscribers for Telefónica O2 Europe - which includes Cesky Telecom, O2 and Telefónica Germany - reached 32.8 million, of which 4.7 million belonged to Cesky Telecom and 28.1 million to O2 Group. Earlier this week, Telefónica Móviles reported a 3.5% y/y increase in net profit to 447 million euro in the first quarter of 2006 on an 17.7% y/y rise in sales to 4.33 billion euro, owing to an increase in the total number of clients and traffic. Telefónica Móviles had an OIBDA of 1.47 billion euro, up by 11.7% y/y in the first three months of this year, representing 31.4% of the group's total OIBDA. The OIBDA margin stood at 34%.

However, first-quarter sales slowed at Spanish fixed-line unit Telefónica de España, which posted a 3.3% y/y increase in revenue to 2.9 billion euro in the first three months of 2006, including broadband. Revenues from its domestic broadband internet operations were up 35% y/y to 500 million euro, offsetting a 2.6% y/y fall in domestic voice revenue to 1.25 billion euro. First-quarter OIBDA at its domestic fixed-line unit was up by 5.3% y/y at 1.26 billion euro. The results placed Telefónica above its European peers. Earlier this week, Deutsche Telekom, Europe's leading telecoms group, reported first-quarter results that indicated a slowdown in its domestic fixed-line operations. Telefónica’s Latin American fixed-line unit saw a 30.6% y/y jump in sales to 2.32 billion euro, boosted by solid growth in broadband internet and the appreciation of local currencies against the euro. First-quarter OIBDA for the unit amounted to 994.2 million euro, up 15.5% y/y on the same period in 2005, and represented 21.2% of consolidated OIBDA. Its OIBDA margin stood at 34%. 

In the first three months of this year, the company invested over 1.3 billion euro, up 76.4% y/y, on capital expenditure, owing to its commitment to broadband expansion in Spain and Latin America and the consolidation of O2 and Cesky Telecom. 

Outlook and Implications

Geographic Diversification: Last year, Telefónica acquired a 51% stake in the Czech fixed-line incumbent last year during the latter’s privatisation, and paid US$21.8 billion for a 100% stake in U.K. mobile group O2 (see Europe: 28 February 2006: European Telecoms Mergers and Acquisitions). Telefónica O2 Europe posted 2.41 billion euro in first quarter revenue, accounting for 20% of the group's total revenue; no comparative figure was provided for the same period last year. The wider geographical exposure that follows Telefónica's acquisitions in Latin America and Europe has enabled the company to generate a balanced revenue mix. Spain represented 40.7% of the group's first quarter revenues and Latin America 36.6%. Europe excluding Spain accounted for 21.8%, with the United Kingdom at 9.5% of total revenues, Germany at 5.1% and the Czech Republic at 4.2%. Brazil contributed 16.1% to consolidated revenues. Telefónica is also likely to tighten cooperation with China Netcom,after the Spanish group increased its stake in China's regional fixed-line provider from 5% to 9.9% last November (see China: 15 November 2005: Telefónica to Double China Netcom Stake). The Spanish group may also be interested in U.K. telecoms carrier Cable and Wireless (C&W), with its Bulldog broadband arm. C&W could prove a good match for Telefónica, and enable it to acquire a strong foothold in the British broadband market and build on the acquisition of O2. The group's free cash flow (OIBDA minus capex) increased by 26.4% y/y to 3.38 billion euro, owing to the effective management of operations. 

Broadband Growth: Telefónica maintained its broadband market share in Spain and announced that it reached the landmark 3-million mark for broadband clients in Spain at end-March 2006. Its Spanish broadband subscriber base grew from 2.72 million at end-2005 to over 3 million at the end of March, up 47% y/y and 11% quarter-on-quarter (q/q). The telco connected 280,000 net new ADSL subscribers in the first three months of 2006. Telefónica is planning to invest US$200 million in 2006 to develop its triple-play offer, at the centre of its broadband strategy. Of this total, US$55 million is for broadband investment, US$50 million for digital television over ADSL, US$35 million for fixed telephony, US$30 million for corporate services, and US$30 million for other projects (see Spain: 5 April 2006: Telefónica Broadband Clients Hit 3 mil. Mark). Its Latin American broadband customer base has been expanding fast; the company aims to reach 3.7-4.1 million broadband subscribers by end-2008. In 2005, Telefónica's broadband customer base in the region almost doubled. It estimates that this will grow by 29.2% y/y to 1.55 million users by end-2006.