Telefónica Increases the Net Income by 69.6% as of September, Reaching 4,577 Million Euros

Telefónica (NYSE:TEF)  (LSE:TDE) increases the net income by 69.6% reaching 4,577 million euros in the first nine months of the year, according to the numbers presented today. Also, the growth tendencies remain in the main items during the January-September period. Thus, the consolidated revenues of the Group increased nearly +12% in reported terms reaching 35,337 million euros, while the OIBDA grew 5.7% reaching 11,013 million euros, with a margin of profitability of 31.2%.

Regarding the third quarter, in other words the period of time between July and September, the revenues in Spain once again grew for the first time in the last seven years (+0.2% y-o-y). At the same time, the consolidated results of the Group show acceleration in the organic growth rhythm -in other words, assuming exchange rates and constant perimeter-, levered by solid fundamentals.

In this sense, between July and September the year-on-year organic growth in revenue (+4.8%), OIBDA (+4.8%), and operational cash flow (+6.6%) is significantly greater than that of the previous quarters thanks to a solid impulse to the commercial activity focused on clients and value services (fiber, pay TV, LTE, "smartphones"). Furthermore, the savings obtained from the integration synergies, mainly in Germany, are already starting to produce tangible results. In reported terms, all of this translates into the fact that the year-on-year growth rate in revenue remains strong (+10.8%), OIBDA (+2.9%), and free cash flow (+3.6%) in spite of the negative rate impact of the evolution of the exchange rates during the quarter.

In the results presented today, César Alierta, Executive Chairman of Telefónica, has explained that "third quarter results reflected further acceleration in organic growth figures derived from increased commercial momentum, mainly in high-value products and services", and has emphasized the better performance of the Spanish business, "which returned to year-on-year revenue growth after 7 years of intense business transformation", and that it "represents an improvement of commercial activity in virtually all services".

Finally, César Alierta has indicated that "business performance is in line with guidance for 2015, which we upgraded in the previous quarter", meaning that the company reiterates its compliance commitment as well as the dividends policy for 2015 and 2016.

Focus on higher-value customers

At the end of September, the accesses stood at 327.2 million, an increase of +12% in reported terms (+1% organic y-o-y), levered on the sustained growth of T. Hispanoamérica and T. Deutschland. Worth mentioning is that compared to the previous quarter, accesses decreased slightly due to the application of more restrictive criteria when calculating the prepay customer base in Brazil. Furthermore, the strong y-o-y growth of the value clients continues to stand out, mainly "smartphones" (+52.3%), pay TV accesses (+75.4%), and LTE and fiber accesses which both multiplied more than four times.

By segment, mobile accesses totalled 251.4 million and grew +12%, on the back of mobile contract (+17%) which already represent 35% of all mobile accesses. "Smartphones" increased 1.5 times compared to last year, reaching 108.8 million in September 2015, representing an increase in the penetration of 12 p.p. year-on-year up to 46%. LTE clients (23.6 million; 4.3 times y-o-y) represent 10% of all mobile accesses.

For their part, retail broadband accesses stood at 20.9 million, growing +19% with respect to September 2014. There is a net gain of 192 thousand accesses in the quarter, supported by T. Brasil, T. Hispanoamérica, and T. Spain.

Fibre accesses reached 5.8 million (4 times with respect to September 2014), reaching a record net addition of 385 thousand accesses, supported by T. Spain (+230 thousand) and T. Brasil (+148 thousand), while pay television accesses totalled 8.2 million (1.8 times y-o-y), reaching a net profit of 124 thousand clients in the quarter.

Income statement analysis

Third quarter year-on-year evolution reflected the consolidation of GVT's results in Telefónica Brasil and DTS' in "Other companies and eliminations” (both since 1 May 2015), as well as E-Plus' in T. Deutschland (since 1 October 2014). Likewise, Telefónica’s operations in the UK are reported as discontinued operations within Telefónica Group since January 2014, and their assets and liabilities are classified as "held for sale" in compliance with International Financial Reporting Standards (IFRS), as a result of the signing in March 2015 of the definitive sale agreement.

Also to take into account is the depreciation of most Latin American currencies against the euro, especially the Brazilian real, the Venezuelan bolivar and the Colombian peso, that had a negative impact on the year-on-year evolution of third quarter results, detracting 8.1 and 7.8 percentage points from reported revenue and OIBDA growth respectively (-2.6 percentage points and -2.8 percentage points respectively in January-September 2015). Also, the aforementioned changes in the perimeter of consolidation (inclusion of E-Plus, GVT and DTS) contributed 13.5 percentage points in the quarter to reported year-on-year revenue growth and 7.2 percentage points to OIBDA growth. In January-September 2015 changes in perimeter contributed 9.9 and 5.7 percentage points to reported year-on-year revenue and OIBDA growth, respectively.

Finally, organic growth comparisons assume constant exchange rates as of 2014 (average FX in 2014). Excludes the impact of hyperinflationary adjustments in Venezuela in both years and O2 UK results for both years after being classified as discontinued operations, and considers constant perimeter of consolidation.

Revenues amounted to 11,919 million euros in the third quarter of 2015 and sequentially accelerated their year-on-year organic growth by 0.4 percentage points to 4.8% (+10.8%). The main growth drivers were mobile data revenues, T. Hispanoamérica (accelerated to 12.6% year-on-year), T. Brasil (sustained mid-single digit growth) and T. España (grew year-on-year for the first time since the third quarter of 2008). In January-September revenues reached 35,337 million euros and increased +11.9% compared to the same period of the previous year (+4.2% in organic terms).

Per segments, T. España, T. Brasil and T. Deutschland represented 65% of revenues in January-September 2015, while T. Hispanoamérica represented 30%, stable compared to the same period of the previous year.

Mobile data revenues continued to accelerate their year-on-year growth in the quarter to 19.3% (+16.3% in January-September) and represented 44% of mobile service revenues, leveraged on higher smartphone penetration and the growing weight of LTE customers. Non-SMS data revenues improved their growth rate to 26.8% year-on-year organic (+24.3% in the first nine months) and represented 82% of data revenues. Data monetisation therefore continued to contribute to the acceleration of Group revenues.

Operating expenses in July-September 2015 stood at 8,434 million euros, up 14% (+4.8.% in organic terms), driven by the higher commercial momentum and an environment marked by the depreciation of most Latin American currencies against the dollar, partially offset by the savings resulting from integration synergies in T. Deutschland. In January-September 2015, operating expenses (25,043 million euros) increased 14.5% (+4.4% year-on-year organic) mainly as a result of higher network and system costs and other operating expenses

Gains on sale of fixed assets reached 29 million euros in the quarter including the sale of real estate assets in Spain and the sale of non-strategic towers in T. Hispanoamérica. During the first nine months the year this caption reached 118 million euros and primarily included the aforementioned sale of real estate assets in Spain (51 million euros of OIBDA impact), the sale of non-strategic towers (47 million euros of OIBDA impact) and the sale of "yourfone GmbH” in Germany (15 million euros of OIBDA impact).

OIBDA growth improvement

Operating Income Before Depreciation and Amortisation (OIBDA) of the July-September period stood at 3,693 million euros (+2.9% year-on-year reported) and continued to accelerate sequentially its year-on-year organic growth in 1.4 percentage points to 4.8%. In January-September 2015, OIBDA totalled 11,013 million euros (+3.5% year-on-year organic; +5.7% reported). In January-September the OIBDA margin reached 31.2%, virtually stable in organic terms compared to the same period of 2014 (-1.8 percentage points in reported terms).

Depreciation and amortisation stood at 2,104 million euros in the third quarter and increased 18.8% (+3.5% organic), mainly due to the depreciation of the new spectrum acquired in Brazil and Spain and the higher investment effort. In the first nine months it amounted to 6,356 million (+4.2% year-on-year organic; +20.8% reported). Operating Income (OI) of the July-September period totalled 1,589 million euros. In January-September 2015, operating income reached 4,657 million euros (+2.6% year-on-year organic; -9.6% reported).

Net financial expenses in the first nine months of 2015 totalled 1,897 million euros, 1.7% lower than the same period of the previous year. The effective cost of the debt in the last twelve months, excluding exchange rates differences and the positive impact of the divestment in Telecom Italia, S.p.A., stood at 4.91%, 54 basis points below year-on-year.

The profit from continuing operations in the third quarter reached 566 million euros (-31.6% year-on-year) and 2,430 million euros during the first nine months of the year (-8.1% compared to the same period of 2014). Profit from discontinued operations totalled 347 million euros impacted by the cessation of depreciation and amortisation since the signing of the final sale agreement of Telefónica’s operations in the UK. Thus, in January-September it reached 2,188 million euros, with 1,257 million euros corresponding to deferred tax assets resulting from the estimation of the difference in Telefónica, S.A. between the fiscal value and the agreed value regarding the sale of Telefónica’s UK operations, which are expected to materialize in the foreseeable future when they are finally made deductible in the sale.

Profit attributable to minority interests detracted 29 million euros from third quarter net income, 51 million less than in the same period of the previous year. During the first nine months of 2015, minorities reduced net income by 41 million euros (-85.4% year-on-year).

As a result, consolidated net income in July-September reached 884 million euros (-1.9% year-on-year) and 4,577 million euros in January-September (+69.6% year-on-year). Thus, basic earnings per share stood at 0.91 euros in the first nine months (+63.5% year-on-year) and 0.17 euros in the quarter.

Strong investments in ultrafast networks and service quality

CapEx totalled 7,101 million euros in the January-September period (+44.4% year-on-year) and included 1,587 million euros of spectrum acquisitions. Investments continued to be focused on growth and transformation projects (deployment and expansion of 3G, 4G and fibre network coverage as well as an improvement in broadband and pay TV service quality), which reached 76% of the total (+2 percentage points year-on-year organic).

The operating cash flow (OIBDA-CapEx) amounted to 1,686 million euros in the third quarter and improved sequentially its organic year-on-year growth by 7.0 percentage points to 6.6%. In January-September, it reached 3,912 million euros (5,499 million euros excluding spectrum), 1.3% less than in the same period of 2014 in organic terms (-28.8% reported).

Financial position

Net financial debt stood at 49,691 million euros as of September 2015 and decreased 1,547 million euros in the quarter. The leverage ratio (net debt over OIBDA) considering the closing of the sale of O2 UK, stood at 2.32 times.

During the first nine months of the year, Telefónica's financing activity in capital markets stood at about 12,975 million euros equivalent and was mainly focused on financing the GVT acquisition as well as on strengthening the liquidity position and actively managing the cost of debt, through the extension of the maturity of the credit lines and the reduction of credit margins.

Telefónica maintained total undrawn committed credit lines with different credit entities for an approximate amount of 9,462 million euros, with around 8.9 billion maturing in more than 12 months, which, along with the adjusted cash position, placed liquidity at 16.2 billion euros.

Digital Services and Telefónica Global Resources

Considering year-on-year changes in organic terms, in the third quarter of 2015 digital services revenues stood at 1,069 million euros and grew 24.6% year-on-year organic (2,690 million euros in January-September; +27.5% year-on-year). It is worth noting that the Video business revenues stood at 652 million euros, 25.6% more than in July-September 2014 (1,514 million euros in the first nine months of the year; +34.2% year-on-year) driven by strong growth in pay TV accesses, which include the integration of DTS and GVT from the second quarter.

During the third quarter of 2015, Telefónica Global Resources (TGR), technological reference and business growth lever, continued with the accelerated technologies deployment that enables the best end-to-end digital experience. Additionally, it successfully executed transformation projects, with special emphasis on delivering efficiencies.

UBB deployment continued expanding its reach, and as a result, premises passed with fibre totalled 13.4 million in Spain and 16.6 million in Brazil. Also, the takeover of DTS provides complete coverage in Spain for the pay TV service. Regarding LTE, population coverage in Europe and Latin America reached 71% and 40% respectively; LTE sites in service reached 30,827 and 96% of 3G and LTE base stations were connected at high-speed to the transmission network.

Finally, and with regard to operating simplification and efficiency, satisfactory progress was made yet another quarter, having eliminated 313 applications, closed 4 data centres, increased the virtualisation level by 7 percentage points and reduced physical servers by 9% (all of them year-on-year organic).

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