Telefónica Posts Net Profit of 776 Million Euros in the First Quarter of 2016 and All Business Units Show Profitable Growth

Today Telefónica (NYSE:TEF) (LSE:TDE) announced its results for the first quarter of 2016, a period in which the company reached a net profit of 776 million Euros and made significant progress in terms of profitable and sustainable growth. Between January and March, Telefónica registered an improvement in the organic performance of its consolidated revenue, which totalled 10.784 million Euros or a +3.4% year-on-year increase, and an overall growth of the OIBDA in all its business units, resulting in a consolidated of OIBDA 3,376 million Euros and an OIBDA margin of 31.3% (+0.6 percentage points).

In reported terms, we should emphasize the impact of the variations in the exchange rates over the performance of the main financial items, which take 16 percentage points off the evolution of revenue and 14.8 percentage points off the OIBDA, although this impact is neutral in terms of cash generation. Additionally, the year-on-year variation of the net profit at the end of the first quarter was significantly affected by a non-recurrent positive fiscal impact in the first quarter of 2015. Excluding this impact, the net profit for the quarter rose by 26%.

In the results report released today José María Álvarez-Pallete, Executive Chairman of Telefónica, explained that "in a context of intense technological disruption and transformation, our first quarter results reflected a strengthening of the business across the board and of the capacity of our platforms which is enabling us to reach more customers with higher value products and services”. In addition, Álvarez-Pallete emphasized the "the significance of the return to OIBDA growth in Spain during the quarter” as well as the fact that "the growth of the OIBDA is taking place in all the business units”.

Finally, the Chief Executive of Telefónica said that "the results are in line with our expectations for the year-end and enable us to reiterate our guidance and the dividend of €0.75/share for 2016”.

322 million total accesses

Commercial activity in the quarter continued to focus on high-value customers and services. As such, accesses at March grew by 1% year-on-year and totalled 321.9 million, with a greater proportion of higher quality customers, who continued to be the main lever for growth: mobile contract (+5%), smartphones (+26%), pay TV (+7% organic), fibre and VDSL (+34% organic) and LTE (2.5x). Also, it is worth nothing the sequential improvement of churn, across all services, and average revenue per access (+5.2%).

On the one hand, mobile accesses stood at 246.9 million, with increased weight of contract over total accesses to 37% following positive growth in all regions. Smartphones increased to 115.1 million, increasing their penetration 11 percentage points year-on-year to 49%. LTE customers (35.6 million) represented 15% of total mobile accesses (+9 percentage points year-on-year) and recorded net additions of 5.9 million (+39% year-on-year). On the other hand, fibre and VDSL accesses stood at 7.9 million and represented 38% of total fixed broadband, while the total pay TV base increased to 8.4 million with a penetration of 40% over total fixed broadband.

Income statement analysis

The performance of the main financial variables in the first quarter was affected by the depreciation of the Latin American currencies against the euro, particularly the Brazilian real, Argentine peso, the Venezuelan bolivar and the Colombian peso. The evolution of exchange rates deducted 16 percentage points and 14.8 percentage points from reported revenue and OIBDA performance, respectively. These depreciations also reduced payments in euros related to CapEx, taxes and interest, with the exchange rate variance having a positive impact on free cash flow generation in the first quarter. On the other hand, changes in the consolidation perimeter (incorporation of GVT and DTS) contributed 5.8 percentage points and 4.2 percentage points to reported year-on-year revenue and OIBDA growth, respectively.

Revenues totalled 10,784 million euros and reflected a solid organic year-on-year growth rate of 3.4%. T. Hispanoamérica maintained double digit growth rates (+11.3%), while T. España accelerated its year-on-year trend 2.1 percentage points vs. the previous quarter to 0.2%. Excluding the impact of regulation, revenues would have increased by 4.4% organic year-on-year.

Mobile data revenues grew 19.9% organic year-on-year in January-March and represented 48% of mobile service revenues due to higher smartphone penetration and the growing weight of LTE customers. It is worth highlighting non-SMS data revenue performance (+28.8% year-on-year in the quarter), representing 86% of total data revenues. Also, mobile data traffic growth accelerated to 51%. The main driver of this growth was the increase in LTE customers (15% of total mobile customers), with higher average usage and ARPU uplift of more than 15%.

Operating expenses (7,651 million euros) increased by 2.7% organic vs. the first quarter of 2015 and decelerated by 2.3 percentage points versus the previous quarter reflecting efficiencies and integration synergies, despite higher expenses in T. Hispanoamérica related to higher commercial intensity, inflationary pressure and the impact of the appreciation of the US dollar against local currencies.

Evolution of OIBDA and profitability

Operating Income Before Depreciation and Amortization (OIBDA) totalled 3,376 million euros in the first three months of 2016, sequentially accelerating its year-on-year growth to 5.5% organic (+1.7 percentage points vs. the previous quarter), underpinned by the strong progress of T. Brasil (+8.2%) and the positive performance of T. España (+2%; +9.5 percentage points vs. the previous quarter). It is also particularly worth noting an across the board OIBDA growth, since in the first quarter all business units have increased year-on-year.

This way, thanks to revenue growth acceleration, the strict and increasing cost control, along with the synergies from the integration of acquired companies, OIBDA margin stood at 31.3% and presented an organic expansion of 0.6 percentage points vs. the same period of the previous year (stable in reported terms).

Depreciation and amortisation, 2,036 million euros in January-March, increased by 1.5% year-on-year organic, mainly due to the higher level of investments in Brazil and Argentina. As a result, operating income (OI) reached 1,340 million euros, 11.4% higher in organic terms compared to the same period of 2015.

Net financial expenses increased to 661 million euros, 2.8% more than in the first quarter of 2015. The effective cost of debt in the last twelve months stood at 4.66%, 39 basis points lower year-on-year, excluding exchange rate differences and the positive impact of the divestment in Telecom Italia, S.p.A. in 2015.

As such, profit from continuing operations stood at 406 million euros and decreased 15.2% vs. the first quarter of 2015. Profit from discontinued operations totalled 377 million euros. In 2015, this item amounted to 1,304 million euros, with 1,185 million euros corresponding to the impact of deferred tax assets resulting from the estimation of the difference in Telefónica, S.A. between the fiscal value and the agreed value for the sale of Telefónica’s operations in the United Kingdom.

It is important to highlight that Telefónica UK, reported as discontinued operation, experienced a strong operating cash-flow growth in organic terms (+16%), resulting from robust OIBDA performance (+5.5% year-on-year organic). Commercially, the Company continued to expand its high-value customer base, while maintaining the best contract churn in the market, reflecting the high satisfaction level of the client base.

On the other hand, following the income statement analysis, profit attributable to minority interests reduced net income by 7 million euros, driven by the results attributed to minority interests in T. Brasil (+19 million euros in the first quarter of 2015).

As a result of the items mentioned above, consolidated net income for the first quarter of 2016 stood at 776 million euros. Basic earnings per share reached 0.14 euros per share (0.37 euros in January-March 2015).

CapEx increased 7.8% organic year-on-year to 1,503 million euros, with 75% of total CapEx devoted to growth and transformation of networks and systems. Operating cash flow (OIBDA-CapEx) stood at 1,873 million euros and increased by 3.6% year-on-year in organic terms.

Financial position

Net financial debt stood at 50,213 million euros at March 2016 and increased in the quarter by 292 million euros. The leverage ratio (net debt over OIBDA) of the last 12 months at end March 2016 stood at 3.02 times. Considering the closing of the sale of O2 UK, the ratio stood at 2.52 times.

In the first quarter of 2016, Telefónica's financing activity increased close to 1,984 million equivalent euros, without considering the re-financing of commercial paper and short-term bank loans. The activity focused mainly on strengthening the liquidity position and refinancing the debt maturities in an environment of very low interest rates.

Telefónica maintained undrawn committed credit lines with different credit institutions for an approximate amount of 11,370 million euros, with around 10,006 million euros maturing in more than twelve months, which, along with the adjusted cash position, placed liquidity at 17,102 million euros as of 31 March. Moreover, considering the financing activity until April and not taking into account the expected cash generation, Telefónica enjoys a solid liquidity position totalling nearly 20,000 million euros and has already covered all its debt maturities up to December 2017.

Digital Services (year-on-year changes in organic terms) and Telefónica Global Resources

In the first quarter of 2016, Digital Services revenues (1,056 million euros) accelerated their growth to 19% year-on-year (+3.9 p.p. vs. the previous quarter).

Per area, it is important to highlight that video revenues totalled 665.4 million euros, up 17.3% vs. the first quarter of 2015 and improved by 3.3 percentage points their year-on-year change vs. the fourth quarter of 2015. Pay TV accesses totalled 8.4 million at March (4.5 million satellite TV).

In the first quarter of 2016, Telefónica Global Resources continued to accelerate the Group transformation, supporting growth of the operating businesses and enabling end-to-end digitalisation.

The Global Network and Operations area accelerated the deployment of ultra broadband (UBB), the All-IP transformation and continued improving network quality and efficiency. The investment in UBB focused on offering excellent connectivity, increasing speed, reliability and network security. As such, the network is prepared to support the strong growth in data traffic (+46% year-on-year in the first quarter 2016).

At the end of the first quarter, the premises passed with fibre to the home totalled 20 million (15.1 in Spain and 4.7 in Brazil) and the total number of premises covered with fibre in Brazil to 16.8 million, with GVT contributing 12 million premises passed with fibre to the cabinet. Thanks to the 36,529 LTE sites in service, the population coverage reached 50% in the Group (83% in Spain, 76% in Germany, 47% in Brazil and 42% in Hispanoamerica). Furthermore, 96% of the 3G and LTE base stations are connected via IP and fibre links to the transport network. The higher coverage enables service to be provided to 2.5 times more LTE customers year-on-year, reaching 35.6 million.

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