Telefonica reported year-end results that were slightly better than analysts’ projections. The firm’s revenue declined 0.8% for the year versus our projection of a fall of 1.4%. While Telefonica’s revenue success in Latin America wasn’t quite sufficient to offset its revenue declines in Europe, it was slightly better than we anticipated. Revenue in Latin America increased 5.5% year over year, driven by solid subscriber growth.
The firm’s wireless subscriber base grew 6% to 176.6 million, while its broadband and television bases each gained 7%, to 8.4 million and 2.4 million, respectively. Even its fixed-line business improved 1% to 24.2 million. At the same time, the wireless average revenue per user (ARPU) only declined 0.2%. Latin America now accounts for 49% of Telefonica’s revenue, and we expect it will continue to be the firm’s revenue growth driver, offsetting most of Europe’s continued losses this year and enabling a return to growth in 2014.
In Europe, Telefonica’s revenue declined 6.5% for the year, led by a 13.2% fall in Spain. With this decline, Spain now only accounts for 24% of the firm’s revenue. While Telefonica’s new fusion product helped its broadband division, the wireless division continues to plummet, with a 15% drop in its subscriber base to 20.5 million. This was exacerbated by an additional decline of 14.9% in ARPU. Spain will continue to struggle due to the severe recession that is ongoing, though its impact on the entire firm is lessening, as Spain’s relative importance declines.
On the margin side, Telefonica’s EBITDA margin was 34% in 2012, versus our estimate of 33.9%. However, where we thought cost cutting might allow some margin improvement in 2013, management now expects additional declines.
Importantly, the firm reduced its net debt to EUR 51.3 billion ($67.1 billion) or 2.4 times EBITDA. Telefonica reiterated that it would reinstate its dividend for 2013, with a payment of EUR 0.75 per share. While we think the worst of Telefonica’s financial issues are behind it, the company still has a lot of debt, which it will continue to have to pay higher interest rates on due to its Spanish headquarters and Spain’s economic problems.
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