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Press release from Business Wire

Telefónica's Net Profit up 9.4% to 3,775 Million Euros in 1H10 (+16% in 2Q10)

<p class='bwtextaligncenter'> <span class=' bwunderlinestyle'><b>The Company maintained a high level of commercial activity in the quarter and sped up the growth in revenue, OIBDA, and accesses</b></span> </p>

Thursday, July 29, 2010

Telefónica's Net Profit up 9.4% to 3,775 Million Euros in 1H10 (+16% in 2Q10)03:25 EDT Thursday, July 29, 2010 MADRID (Business Wire) -- During the first half of the year, earnings per share increases by 10.1% yoy and the company reiterates its short (2010) and medium-term guidance (2012) as well as its shareholder remuneration commitment through increasing dividend paymentsStepping up the pace: Consolidated revenue rose 5.4% year-on-year in the first half of 2010 to 29,053 million euros, with solid performances from all regions. Growth was stronger in Latin America (+10.2%) and Europe (+10.8%), and the recovery trend gained traction in Spain Expansion of a quality customer base: After incorporating 4.7 million new accesses in the April-June period, doubling the net gain in 2Q09, the number of Telefónica clients approached 278 million worldwide, a yoy increase of 5.2%. We would highlight the excellent performance of wireless contract customers, whose numbers grew 14.9% in organic terms, and already represents 31% of the Group's 211 million wireless accesses Telefónica has 38 million broadband accesses, and registered significant growth in both retail fixed broadband (+25.2%) and in wireless broadband (+84.6%) Consolidated OIBDA registered a notable increase and grew 4% between April and June 2010 (vs. -4.1% in January-March). In absolute terms, consolidated OIBDA stood at 10,905 million euros at the end of the first six months of 2010 Increased diversification: Telefónica Latinoamérica and Telefónica Europe already generate 67% of Group's revenues and 60% of Group's OIBDA The ratio of net debt + commitments to OIBDA stood at 2.3x at the end of June, reflecting the Company's financial soundness Telefónica España invested 2,916 million euros in the first half-year period, mainly on growth and transformation projects. In addition it has acquired additional spectrum in the German market, for which it paid 1,379 million euros. The Group maintained its high cash generation (OIBDA-Capex), which stood at €6,610M, following the acquisition of spectrum, with growing contributions in yoy terms from Latin America (+6.3%) and Europe (+3.1%) During the first half of 2010, Telefónica (NYSE:TEF) (LSE:TDE) made progress with the priorities it had set for the full year, with a significant pick up in growth in financial results, both in terms of revenues and OIBDA, in line with the Company's internal expectations. Therefore, and in line with the Company's aim to leverage growth opportunities in all markets and boost revenues while maintaining high levels of efficiency and profitability, second quarter financial figures showed quickening growth, both in terms of revenues, which posted year-on-year growth of 9% in the quarter (+5.4% for 1H10), driven by solid performances from all the regions, and in terms of OIBDA, which showed positive growth in the second quarter of 2010 (+4% vs. -4.1% in January-March) As a result of the good performance of all income statement items, driven by the intense commercial activity in recent quarters which led to increased growth in accesses and higher value clients (wireless contracts and broadband access), Telefónica's net profit grew over 9% in the first half-year period, to 3,775 million euros at the end of June. Basic earnings per share advanced 10.1% year-on-year to 0.83 euros/share. The company has also reiterated its guidance for the short (2010) and medium term (2012) as well as its shareholder remuneration commitment, through the payment of a dividend amounting to 1.40 euros per share for 2010 and a minimum dividend payout of 1.75 euros per share in 2012. The intense commercial activity drove net ads higher and reduced the churn rate With a gradual economic recovery in those markets in which Telefónica operates, and thanks to a major commercial push over the last few quarters, total accesses reached 277.8 million by the end of June 2010, with year-on-year growth at 7.2% in organic terms (reported +5.2%). By region, of particular note are the expansion of the customer base at Telefónica Latinoamérica (+9.5% year-on-year) and Telefónica Europe (+6.1% year-on-year in organic terms; +14.6% reported). Telefónica maintains its commercial momentum across all its markets and the Company has added more than 13.4 million new customers since the beginning of the year (9 million in organic terms; 2.4 times higher than in the first half of 2009). Particularly noteworthy are the net adds posted in the second quarter, which reached 4.7 million accesses (4.8 million in organic terms; 2.2 times higher than the figure for the same period last year). This performance reflects not only the increased commercial efforts of the different Group companies, which increased the total number of gross adds by 16.2% year-on-year in the first six months of 2010 (+15.6% in the second quarter), but also the continued improvement in total churn, which has dropped to 2.2% up to June 2010 (-0.1 percentage points versus the first half of 2009). The lower churn across all services was driven by quality improvements and successful customer loyalty and retention programmes. Considering access type, mobile accesses of the Telefónica Group rose 9.7% year-on-year in organic terms (+5% reported) to 211 million by the end of June 2010, with 8.9 million organic net adds in the first six months of 2010 (+76.2% compared to the same period in 2009). Organic net adds over the last three months were particularly significant at 4.5 million accesses. Moreover, for the second quarter in a row, and as a result of the Company focus on higher-value customers, there was a significant rise in contract net adds to account for 59% of total net adds in the second quarter (56% in the first half vs. 46% in the first half of 2009). This has left a total of 64.3 million contract customers (+14.9% year-on-year in organic terms), which represents 31% of Group mobile accesses. At the same time, mobile broadband accesses continue to grow strongly, reaching 17 million (+84.6% year-on-year) as of June 30th. By region, it is worth highlighting that 2010 first-half net adds increased year-on-year across all regions, with a particularly solid performance at Telefónica España, where the figure was more than 4 times higher, reaching 453 thousand accesses over the six-month period (264 thousand in the second quarter). Net adds in Latin America exceeded 7.2 million accesses, almost tripling the first-half figure in 2009. Net adds in the second quarter of 2010 reached 3.5 million. Retail fixed broadband accesses totalled 16.4 million, with organic growth of 9.2% year-on-year (+25.2% reported). There were 0.8 million net adds in organic terms in the first half (2.9 million in reported terms), 30.4% more than during the same period in 2009. Especially noteworthy were the first-half net adds at Telefónica Latinoamérica, which rose 71.5% year-on-year to almost half a million accesses thanks to the consolidation of the improving trend in Brazil and Colombia and continued growth in Peru, Argentina, and Chile. Meanwhile, Telefónica España net adds for the first six months of 2010 reached 143 thousand, 1.7 times the figure for the same period last year. Bundles of voice, broadband, and TV services remain key to Group strategy and churn control. In Spain, nearly 90% of retail fixed broadband accesses are bundled as part of either a dual or triple service package, while in Latin America 57% of broadband accesses are bundled as part of a dual or triple package. Pay TV accesses stood at 2.7 million at the end of June 2010, up 8% year-on-year in organic terms (+10.4% reported), while fixed telephony accesses exceeded 41.7 million (-4.7% year –on-year in organic terms; In reported terms, these accesses remained virtually flat year-on year). The trend of increased revenue growth has solidified Increased commercial activity over the last few months boosted accesses and usage growth, enabling the consolidation of the acceleration in Group revenue growth in the first half. Revenues rose to 29,053 million euros in the first six months, a year-on-year organic growth of 2% (+0.9% in the first quarter), with an improved performance in the second quarter across all regions. Organic revenue growth has been driven by significant increases at Telefónica Latinoamérica and Telefónica Europe, which contribute 2.5 percentage points and 0.8 percentage points to organic growth respectively, showing an acceleration in their year-on-year growth rates compared to the first three months of the year. Meanwhile, Telefónica España year-on year decline in revenues, in comparable terms, slowed slightly in the second quarter to -3.4% in the first half of the year, with a better performance in both the wireline and wireless businesses. In reported terms, revenues were up 5.4% year-on-year in the first half of 2010 (+1.7% in the first quarter of 2010). This performance reflects the positive contribution from foreign exchange rates (+2.2 percentage points) despite the sharp depreciation of the Venezuelan Bolivar and the consolidation of Hansenet and Jajah from the first quarter of 2010 (positive contribution of 1.1 percentage points). The Group continues to diversify its operations. It is important to highlight the fact that Telefónica Latinoamérica and Telefónica Europe account for 67% of Group revenue, and that Telefónica España now only accounts for 32%. By service, broadband connectivity revenues (both fixed and mobile) and revenues from applications and new services continue to increase their contribution to the Group figure. Telefónica Group's operating expenses amounted to 18,763 million euros over the first six months of the year, 5.5% more than in the same period in 2009 in organic terms (+10% in reported terms). Supply expenses in the first half of 2010 rose 3.9% year-on-year to 8,334 million euros. Personnel expenses amounted to 3,793 million euros for the first half, and external service expenses amounted to 5,611 million euros over the first six months. The average number of employees over the first six months was 261,649. Excluding Atento, Telefónica Group's average workforce was 125,792. Elsewhere, within Telefónica Group's strategy framework of launching global initiatives, it is worth highlighting that in the first half of 2010 the Group recorded a positive contribution from the centralization of processes within the Group, reaching 90 million euros at the revenue level and 85 million euros in terms of OIBDA. Gains on sale of fixed assets amounted to 99 million euros in the first half of 2010, and were mainly the result of the disposal of Manx Telecom at the end of June, which generated a capital gain of 61 million euros. As a result, operating income before depreciation and amortization (OIBDA) totalled 10,905 million euros in the first six months (+0.04% year-on-year in reported terms) after a significant uptake in growth in the second quarter to 4% (-4.1% in the first quarter). Foreign exchange rates explain 1.3 percentage point of the year-on-year change, while changes to the consolidation perimeter add another 1.1 percentage points. OIBDA fell 2.3% year-on-year in organic terms over the first six months, showing an improvement of 1.1 percentage points on the first quarter (-3.4%). The year-on-year comparison is skewed by increased commercial activity across all regions, with a strong focus on the contract segment in the mobile business, and the negative impact of regulatory measures and non-recurrent effects, which account for 2.7 percentage points of the year-on-year change. OIBDA margin reached 37.5% over the six-month period, with a 0.8 percentage point improvement versus the first quarter. By region, the highlights are the solid OIBDA growth at Telefónica Latinoamérica, which rose 3.9% in organic terms (+6.1% reported) versus the first half of 2009 and more than offsets the lower contribution from Telefónica España (-5.8% in comparable terms; -9.5% reported), which has been hit by the adverse economic conditions and the increased commercial activity. As a result, 60% of Group OIBDA was generated outside Spain in the first half of 2010. Operating income (OI) for the first six months totalled 6,456 million euros (-0.6% in reported terms), showing an organic growth of 0.2% year-on-year, an improvement on the -2.4% posted in the first quarter. First-half profit from associates rose to 72 million euros, compared to 30 million euros over the same period last year. This improvement is largely due to the better results from the Company's stake in Telco S.p.A and the inclusion of China Unicom's results (in the first half of 2009 the latter was not consolidated under the equity method). Net financial expenses at the end of June 2010 amounted to 1,254 million euros. Demonstrated financial strength At the end of June 2010, the Company's net financial debt totalled 48,412 million euros. The leverage ratio, net debt over OIBDA, is maintained at 2.2x, stable vs. March. During the first half of 2010, the financing activity of the Telefónica Group, excluding short term activity, rose to over 5,400 million equivalent euros considering the euro dollar forex rate at the end of June, with the main objective of financing in advance 2011 debt at the Holding level. At the end of June 30th, bonds and debentures represented 67% on the consolidated financial debt breakdown, while debt with financial institutions reached a 33% weight. In the first of 2010 corporate income tax reached 1,428 million euros, implying a 27.1% accrued tax rate, while losses attributable to minority interests reduced net profit in the first half of 2010 by 71 million euros. As a result, consolidated net income in the first half of 2010 reached 3,775 million euros, an increase of 9.4% versus the same period last year. Basic earnings per share stood at 0.83 euros, 10.1% higher than in the first six months of 2009. Most CapEx was earmarked for transformation and growth projects First-half CapEx (excluding spectrum acquisitions) totalled 2,916 million euros, with investment in growth and transformation projects remaining a priority (77% of total investment, excluding spectrum acquisitions, at the end of June 2010), particularly those aimed at meeting demand for fixed and mobile broadband services. It should be highlighted that in the second quarter of 2010 Telefónica 02 Germany acquired additional spectrum for 1,379 million euros (2 blocks of 800MHz, 1 of 2.0GHz, and 4 of 2.6GHz), which left first-half CapEx (including the investment relating to this spectrum acquisition) at 4,295 million euros. As a result, operating cash flow (OIBDA-CapEx) for the first six months (excluding the spectrum acquisition) remained very strong, at 7,989 million euros. The solid growth at Telefónica Latinoamérica (+6.3% in organic terms to 3,239 million euros) and at Telefónica Europe (organic growth of 3.1% to 1,279 million euros) did not offset the decline at Telefónica España, whose operating cash flow dropped 9.2% in comparable terms to 3,547 million euros. If we include the CapEx related to the spectrum acquisition in Germany, operating cash flow would be 6,610 million euros. Finally, economies of scale and efficient management of operating expenses and CapEx led to an efficiency ratio of 75.3%. This is defined as: (OpEx+CapEx-Internal expenses capitalized in fixed assets)/Revenues. Registro Mercantil Provincia de Madrid, Tomo 12.534, Folio 21, Hoja M-6164, Inscripción 1359ª, del Libro de Sociedades, CIFA-28/015865. Sede Social: Gran Vía 28, 28013 Madrid (España).