Telefónica Remains Solid in Q3; Quarterly Revenue Up 5.7% Y/Y

Spain's Telefónica has posted third-quarter results which are in line with the company's targets and allow it to reiterate its guidance for 2008. The group's quarterly revenue was up 5.7% year-on-year (y/y) to 14.993 billion euro (US$18.735 billion), putting year-to-date revenue at 43.141 billion, up 2.7% y/y. Operating income before depreciation and amortisation (OIBDA) was down 15.4% y/y over the quarter, to 5.903 billion, and 6.7% on a year-to-date basis, to 17.026 billion, as one-off gains from asset sales in 2007 distorted the annual comparison.

Telefónica Spain

Telefónica's domestic business generated quarterly revenue of 5.375 billion euro, up 2% y/y, of which the fixed-line segment contributed 3.255 and the mobile segment 2.484 billion. Quarterly OIBDA rose by 0.9% to 2.684 billion euro, lifting the annual figure to 7.857 billion. The year-to-date capex on the home market totalled 1.555 billion euro.

On an operational basis, Telefónica operated 15.5 million fixed-line main lines, down 2.2% y/y, and 5.1 broadband accesses, up 16.8% and representing 112,001 net additions over the third quarter—the company estimates its current broadband market share as 57% and highlights that it has managed to continue a steady migration of 3Mbps clients to 6Mbps subscriptions.

Telefónica Moviles, the mobile unit, reported quarterly net additions of 210,533, of which 94.4% were price plans, and expanded its client base to 23.4 million, up 4.5% y/y—the contract customers now account for 61.7% of the subscriptions, an annual increase of 2.5%. Blended ARPU stood at 30.7 euro, down 5.7% y/y, which was due to a 9.4% fall in voice revenues; in contrast, data ARPU hiked 8.2% y/y to 5.3 euro.

Telefónica Latin America

Telefónica Latin America generated quarterly revenue of 5.780 billion euro, up 14.5% y/y, the main driver for growth being the mobile segment. OIBDA was 2.198 billion, up 14.1% y/y. Year-to-date capex in Latin America was 2.403 billion, 44.4% of the total of 5.406 billion, reflecting the region's potential for further organic growth.

The mobile businesses in these subsidiaries reported 4.8 million net additions in the third quarter and 13.7 million from January to September; the total number of wireless subscriptions increased to 118.3 million, up 26.7%, of which 97.7 million were prepaids and 20.6 million contracts. Particularly strong was the performance by Vivo, the company's Brazilian arm, which entrenched its position as the market leader with 42.3 million customers, nearly 11 million more than a year earlier. On the wired sector, Telefónica had 25.8 million telephony customers, up 1.4% y/y, and 5.9 million broadband ones, up 24.9% y/y; year-to-date broadband net additions totalled 840,000, noteworthy being the Colombian broadband market, which started to take off and on which Telefónica's services, accordingly, grew by 112% y/y.

Telefónica Europe

Telefónica's European branches outside the domestic market gave quarterly revenue of 3.685 billion euro, down 0.6% y/y; year-to-date revenue was down 0.8% to 10.691 billion. The weak U.K. pound and the sale of Airwave unit in April 2007 affected the revenue, and excluding such special impacts year-to-date growth would have been 5.9% y/y. Third-quarter OIBDA decreased 1.1% y/y to 1.039 billion euro. Capex spent on the European markets was 1.380 year-to-date.

In Europe (United Kingdom, Germany, Ireland, Czech Republic, and Slovakia) Telefónica reported 40.4 million mobile subscribers at the end of September, 8.5% more than a year earlier; 22.9 million were on contracts (up 14.5% y/y) and 17.5 on prepaid subscriptions (up 4.5% y/y). In particular, Telefónica O2 U.K. performed well, increasing its customer base by 7.9% y/y to 19.3 million, owing largely to a 13.7% increase among the contract clients, and managing to keep its ARPU (30.6 euro) stable if measured in pounds.

Telefónica's fixed-line telephony accesses numbered 1.952 million, down 11.1% y/y, and broadband accesses 1.036 million, up 80.8%.

Outlook and Implications

• So Far So Good: Overall, Telefónica can certainly be satisfied with its results, which are possibly the most solid of Europe's major telcos (see World – United Kingdom: 11 November 2008: Vodafone Looks to Cut £1-bil. Costs as Net Profit Falls 35%, World – Germany: 6 November 2008: Deutsche Telekom Copes with Crisis, Q3 EBITDA Down 0.5%, France – Europe: 30 October 2008: France Telecom Weathers the Storm with Flat Q3). The domestic unit is doing well amid the economic slowdown, benefiting from its position as an incumbent integrated operator, whereas mobile businesses elsewhere in Europe have managed to migrate an impressive share of prepaid customers to use more lucrative price plans. The Latin American arms continue to drive the group's growth, operating in environments which still provide more than enough scope for further organic expansion. The economic conditions until the end of this year and over the next one will be admittedly unpleasant, but as Telefónica has diversified its presence more successfully than most other players, we expect it to stand its ground.

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