The Executive Chairman of Telefónica (NYSE:TEF) (LSE:TDE), César
Alierta, emphasised that "our performance in the quarter was in line
with the targets set for the year. First quarter results show visible
progress in the execution of the strategy announced for 2014, based on
further reinforcing the differentiation of our products and services
through a non-replicable infrastructure. In this sense, we are making
significant investments, accelerating our network modernization".
Telefónica's 1Q14 results are in line with the Company's internal
earnings, OIBDA and CAPEX over sales estimates and therefore reiterates
its operational and financial targets for the year, including the
dividend. During the first three months of the year Telefónica moved
forward with the implementation of its transformation strategy and
operating model, the aim of which is to maximise value creation and make
the most of the growth opportunities offered by the digital revolution.
According to Telefónica Chairman César Alierta, "we continue to
improve our financial flexibility, posting the strongest first quarter
cash flow generation in the last three years after registering a solid
year-on-year improvement, despite higher investments, the negative
impact of exchange rates and asset disposals. This allowed to register a
further decline in net debt another quarter, bringing total reduction to
around 16 billion euros over the last 7 quarters".
In this respect, the results presented today by Telefónica reflect the
improvement in the organic growth of its earnings and OIBDA thanks to
the strategy of attracting high-value customers, the efforts being made
to simplify its operation and cost savings. It is also worth
highlighting the continued reduction of the Company's debt level, which
has fallen by 2,657 million euros with respect to December 2013 to
stand, at the end of March of this year, at 42,724 million euros. Were
operations subsequent to the closure of the first quarter to be included
(sale of Telefónica Ireland), the debt would stand at 41,944 million
euros. Therefore, at the end of March the debt ratio (net debt over
OIBDA) stood at 2.30 times, and this would be reduced to 2.27 times were
the aforementioned operations carried out after the close of the quarter
to be included.
Regarding accesses, at the end of March they totalled 313.1 million,
1% less than one year ago, due precisely to the deconsolidation of the
business in Czech Republic and to the sale of the residential business
in the UK, without the effect of which they would have enjoyed a
year-on-year growth of 2%.
By segments, mobile accesses increased by 3% year-on-year in organic
terms to 247.5 million at the end of the quarter thanks to strong
contract access growth (+9% organic), accounting for 35% of the total
(+1 percentage point year-on-year). Particularly noteworthy is T.
Brasil's ongoing progress in capturing high-value customers (+28%
year-on-year in contract customers, with net additions in the quarter up
70% year-on-year). Smartphone (all with a data plan attached)
penetration stood at 30% at the end of March 2014 (+9 percentage points
year-on-year) and retail fixed broadband accesses totalled 17.6 million,
up 2% vs. March 2013 in organic terms. Pay TV accesses (3.6 million)
rose 8% year-on-year, highlighting the performance of T. España
(consolidating its recovery trend for the second quarter in a row) and
the double-digit year-on-year growth of T. Hispanoamérica and T. Brasil.
According to César Alierta, "we are building a more sustainable
growth model leveraged on higher customer satisfaction. The acceleration
in the modernisation of our networks is reflected commercially in the
evolution of our customer base; contract mobile accesses grew almost
double-digit year-on-year underpinned by the acquisition of almost 6
million smartphone customers, doubling the figure of the first quarter
of 2013 while in the fixed business, fibre customer base increased 90%
year-on-year. As a result, the value of our customer base has increased
due to both the improved ARPU and the higher loyalty, leading to a
longer average customer lifetime".
Apart from perimeter changes, exchange rate fluctuations, in particular
the depreciations of the Brazilian reai and the Argentine peso along
with the implicit devaluation of the Venezuelan bolivar, negatively
impacted financial results. Thus, in the January-March period exchange
rates deducted 11.8 percentage points to year-on-year revenue growth and
11.7 percentage points to OIBDA growth.
Revenue organic growth for the fourth quarter in a row
First quarter revenues totalled 12,232 million euros in
January-March 2014, up 1.5% year-on-year in organic terms (-13.5%
reported), posting positive growth for the fourth quarter in a row and
accelerating vs. full-year 2013. Excluding the negative impact of
regulation, organic revenues grew 3.4% compared with January-March 2013.
By services, mobile data revenue growth accelerated compared with the
previous quarter (+8.8% year-on-year in organic terms; +7.8% in the
fourth quarter of 2013), now accounting for 40% of mobile service
revenues, up 2 percentage points compared with the first quarter of
2013. It is also noteworthy the performance of non-SMS data revenues in
January-March 2014, improving year-on-year growth to 23.6% in organic
terms and already accounting for 71% of total data revenues (+8
percentage points year-on-year).
Consolidated operating expenses totalled 8,548 million euros in
the quarter, up 1.5% year-on-year in organic terms (-13.0% reported),
with the pace of year-on-year growth easing for the second consecutive
quarter due to strict cost control and efficiency measures, despite the
high level of commercial activity.
Operating income before depreciation and amortisation (OIBDA) in
the first quarter of 2014 amounted to 3,929 million euros, up 0.5%
year-on-year in organic terms (-14.0% reported), with growth
accelerating vs. full year 2013 and posting positive year-on-year growth
for the second consecutive quarter. This performance was underpinned by
sustained revenue growth and cost containment measures, along with
efficiencies and synergies from the new operating model. Excluding the
adverse impact of regulation, OIBDA grew by 1.9% compared with
January-March 2013 in organic terms.
The OIBDA margin stood at 32.1% at the end of the first quarter,
virtually stable year-on-year in organic terms compared with the same
period of 2013 (-0.3 percentage points). Operating income (OI) in the
first quarter of 2014 stood at 1,838 million euros, up 5.2% year-on-year
in organic terms (-11.0% reported).
As a result, consolidated net income in the first quarter
amounted to 692 million euros (-23.2% year-on-year; 16.6% underlying)
and basic earnings per share amounted to 0.15 euros per share (-27.0%
year-on-year; -20.0% underlying).
CapEx up to March totalled 1,555 million euros (-19.9%
year-on-year) and included 187 million euros relating to the acquisition
of spectrum in Colombia and Central America (695 million euros in the
first quarter of 2013, mainly in the UK). In organic terms, investments
rose 29.7% year-on-year, with more than 69% of total investments devoted
to business transformation and growth.
As a result, free cash flow amounted to 339 million euros in the
first quarter, the highest since 2011, posting a significant
year-on-year improvement of 796 million euros.
Financing activity of 5,700 million euros in the quarter
In the first quarter of 2014, Telefónica's financing activity through
bond and loan markets stood at around 5,700 million equivalent euros.
This activity was mainly focused on strengthening the liquidity position
and smoothing the debt maturity profile of Telefónica S.A. for the
following years. Therefore, as of the end of March, the Group maintains
a comfortable liquidity position to accommodate next years debt
maturities. In Hispanoamérica, Telefónica's subsidiaries tapped
financing markets for approximately 124 million equivalent euros in the
first quarter of 2014. Also noteworthy is the 500-million-euro bond
placement by T. Deutschland in January.
Telefónica maintains total undrawn committed credit lines with different
credit entities for an approximate amount of 12,560 million euros, with
around 11,250 million maturing in more than 12 months.
Digital Services and Telefonica Global Resources
In the new area of the Chief Commercial Digital Officer, recently
established to bring digital services to the core of our businesses, we
could highlighted in the B2B area, the M2M agreement signed by
Telefónica with JCDecaux, the world's leader in outdoor advertising, to
bring connectivity and new digital features to a new range of smart M2M
powered solutions for urban environment in Europe and Latin America; and
the one reached with Tesla, an industry-leader of in-car telematics.
Thus, M2M revenue grew by more than 50% year-on-year in organic terms in
the first quarter.
With regards to Cloud services, revenue
advanced by more than 20% organic year-on-year in the first three months
of the year, gradually adding value to our offering. Information
Security revenues grew slightly above 20% organic year-on-year in
the quarter fueled by strong momentum in "CyberSecurity".
It should be also mentioned some strategic investments made as the
creation of "Axonix", the first mobile
Advertising exchange platform owned and powered by a mobile operator;
the one reached with "Saluspot" for
E-health services, which enables to offer free online health advice; and
the Spanish cloud computing start-up "eyeOS"
was acquired, enabling Telefónica to offer an open-source desktop
In Video, within the area of Consumer,
Telefónica acquired for Spain exclusive content rights in Moto GP and
Formula 1. Thus, the strategic focus on fostering Pay TV growth is
delivering positive results with revenues growing in organic terms by
12% year-on-year and accesses by 8% year-on-year in the quarter, and
increasing market share in the main markets where the Company is present.
Additionally, in April the brand of the Digital
Financial Services ("Yaap") to be provided in Spain by the joint
venture established with CaixaBank and Santander was announced. Two
services will be launched in the coming months, "Yaap Shopping", a
virtual showroom helping small businesses, and "Yaap Money", a peer to
peer service that will enable people to send money from one mobile
device to another.
Telefónica Global Resources continued driving the Company's
technological transformation during the quarter, accelerating network
modernisation and simplification, ensuring a higher quality of
infrastructure and systems and enhancing the differentiation of products
and services. In the global Network and Operations
unit sharply accelerated the rollout of ultra-broadband
infrastructure. Homes passed with fibre amounted to 5.8 million, around
80% more than in March 2013, and LTE sites deployment increased by more
than 3 times year-on-year to reach more than 10,200 sites. The global
IT unit is developing the Company's IT transformation strategy
through: (i) consolidation, focusing on the Data Centres, technical
infrastructure and corporate applications; (ii) simplification and
transformation of applications; and (iii) support for transformation
towards a Digital Telco.
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