Telefonica Increases Net Profit By 11.6% And Reduces Debt By The Sixth Consecutive Quarter

TelefónicaJosé María Álvarez-Pallete, Executive Chairman of Telefónica

Telefónica today presented its results for the period January-September, which stand out for the high-value commercial activity during these months and for the improved growth trends, which allows the Company to upgrade its revenue growth guidance to around 2% (vs. around 1% previously), despite the negative impact from regulation (approximately 0.9 p.p.). It reiterates the OIBDA margin guidance (y-o-y expansion of around 0.5 p.p.), CapEx/Sales excluding spectrum (around 15%) and the dividend announced for 2018. Also relevant is the reduction in net debt (-9.7% vs 3Q17) and the financing activity of the first nine months of the year, close to €12,400m.

Revenues in the quarter stood at €11,699m (-8.3% vs 3Q17; €35,776m in January-September, (-7.9% vs 3Q17) and accelerated y-o-y growth to 2.7% in organic terms (+2.2% in January-September). They are based on improving mobile service revenues (+1.2% in the quarter; +0.9% in January-September) and the strong progress in handset sales (+20.7% in the third quarter; +19.0% in the nine months). Mobile data revenues increased in the quarter by 7.8% y-o-y in organic terms (+7.9% in January-September), and already represent 61% of mobile service revenues (+4 p.p. y-o-y in organic terms). Excluding the negative impact of regulation (-1.0 p.p. in the quarter and -1.1 p.p. in January-September), revenue growth would have accelerated to 3.7% y-o-y in organic terms in the quarter (+3.3% in the nine months).

Operating expenses totalled €7,980m in the quarter and decreased 10.2% y-o-y in reported terms (-10.6% in January-September 2018).

Operating income before depreciation and amortisation (OIBDA) totalled €4,038m in the third quarter, decreasing by 1.4% y-o-y. In January-September, OIBDA amounted to €12,035m (-2.0% y-o-y). In organic terms, OIBDA increased by 4.1% y-o-y in the quarter (+3.8% in January-September), reflecting the positive revenue evolution, savings from digitalisation and simplification, and cost containment efforts.

Excluding the impact from regulation (-1.3 p.p. in the third quarter and -1.9 p.p. in January-September), OIBDA would have risen by 5.4% y-o-y in organic terms in the quarter and 5.7% in the first nine months. OIBDA margin stood at 32.7% in the quarter in organic terms 34.5% (+0.4 p.p. y-o-y; 34.5% reported, +2.4 p.p. In January-September, it reached 32,5% organic (+0.5 p.p. y-o-y; 33.6% reported, +2.0 p.p. y-o-y).

In this regard, net profit in the third quarter reached €1,139m and grew 35.8% y-o-y (€2,721m in January-September; +11.6% y-o-y).

Moreover, the depreciation of foreign currencies against the euro, in particular the Brazilian real and Argentine peso, had a negative impact on the Company’s reported results. In the third quarter, the exchange rate evolution (excluding the hyperinflation adjustment) reduced y-o-y growth of revenues by 8.1 p.p. and OIBDA by 9.5 p.p. (-8.5 p.p. and -9.8 p.p. respectively in January-September). However, the negative impact of the depreciation of currencies at OIBDA level decreased significantly in terms of cash flow generation, since the depreciation also entailed lower payments in terms of CapEx, taxes, interests and dividends to minority shareholders.

Reported variations of the consolidated financial statements for January-September 2018 reflected the adoption of IFRS 15 and 9 since 1 January 2018 (results of January-September 2017 are reported following prior accounting standards). Organic variations excluded the impact of the accounting change to IFRS 15 in 2018 (-€23m in revenues and +€15m in OIBDA for the third quarter; -€50m and +€36m respectively in the first nine months). The accounting change to IFRS 9 had no significant impact on the results.

Additionally, the Group has applied hyperinflation accounting to its companies whose functional currency is the Argentine peso for periods ending 1 July 2018. The inflation adjustment on the financial statements is calculated retroactively since 1 January 2018, with a negative impact on the consolidated results of the Telefónica Group in July-September (-€361m in revenues, -€123m in OIBDA, -€112m in OI and -€76m in CapEx) and January-September (-€618m in revenues, -€229m in OIBDA, -€281m in OI and -€123m in CapEx).

Third quarter results have been affected by other factors. In terms of OIBDA, the impacts were as follows: a Brazilian court ruling (€307m), contingencies in Brazil (-€110m), hyperinflation adjustment in Argentina (-€123m), restructuring costs (-€34m), and capital gains on the sale of towers (€24m) and digital companies (€21m).

Debt reduction for the sixth consecutive quarter

CapEx in the first nine months of 2018 totalled €5,680m (+4.7% y-o-y) and included €612m in spectrum payments. In organic terms, it increased by 5.0% and continued to focus on the radical transformation of networks deployment of ultra broadband networks and network virtualisation) and quality improvement. Operating cash flow (OIBDA-CapEx) reached €6,354m in January-September 2018 and increased by 0.7% y-o-y. In organic terms, it grew by 2.9% reflecting the good business performance. Free cash flow reached €2,957m in the first nine months of the year (-8.3% y-o-y) and increased by 0.9% excluding spectrum payments.

Net financial debt at September (€42,636m) decreased for the sixth consecutive quarter, up to €1,594m compared to December 2017, from which €957M were reduced in the third quarter. Year-on-year it decreased 9.7%.

During the first nine months of 2018, the financing activity of Telefónica increased to approximately €12,360m equivalent (without considering the refinancing of commercial paper) and focused on maintaining a solid liquidity position, and refinancing and extending debt maturities (in an environment of low interest rates). Therefore, as of the end of September, the Group has covered debt maturities for the next two years. The average debt life stood at 9.16 years (versus 8.08 years in December 2017).

Intense commercial activity in high value customers 

In a context where connectivity and digitalisation are key to the global digital ecosystem, Telefónica continued developing its platforms and offering a differential customer experience. Telefónica Group’s access base stood at 356.3m at the end of the September, virtually stable y-o-y, after a quarter with a strong commercial momentum both in customer acquisition and quality. This commercial activity in high-value customers accelerated average revenue per access to 3.5% y-o-y in organic terms (+3.0% in January-September), while churn remained stable.

The growth in high value accesses was driven by the strong demand for data, speed and content: i) LTE customers totalled 111.5m (+25% y-o-y); ii) mobile contract accesses (121.6m; +7% y-o-y); iii) “smartphones” (+7% y-o-y; 166.8m); iv) FTTx/Cable (12.8m; +21% y-o-y) represents 59% of total fixed broadband accesses (+10 p.p. y-o-y), with a coverage of 49.0m premises passed with proprietary network (+15% y-o-y); and v) pay TV (8.8m; +6% y-o-y).

The Group’s FTTx/Cable coverage reached 81.0m premises passed at the end of September (49.0m for proprietary network), 20.8m FTTH in Spain, 9.0m FTTx/Cable in Hispam (+45% y-o-y) and 19.3m in Brazil. LTE coverage stood at 75% at September (+6 p.p. y-o-y; 92% in Europe and 69% in Latam) and LTE traffic represented 64% of the total traffic. In parallel, progress has been made towards 5G with the use of Massive MIMO and 4.5G deployment in Germany, Brazil, Mexico and Colombia.

The weight of revenues from services beyond connectivity continued increasing and account for 14% of the Group revenues (+1 p.p. vs. September 2017). Digital service revenues account for €1,630m in Q3; +19.5% y-o-y and €4,901m in 9M; +25.3%. As an example, 63% of processes are digitalised and managed in real time (+8 p.p. y-o-y), improving “time-to-market” and customer experience. Also, digital channel sales (28% of total) increased by 50% y-o-y in overall accesses and by 73% in Fusión.

About the Author

The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.