Telefonica Profit Falls With Europe Dwarfed by Latin America

Telefonica SA (TEF) reported first-quarter profit that missed analyst estimates after losing customers in its home market to discounters, with Latin American earnings surpassing Europe for the first time.

Operating income before depreciation and amortization, or Oibda, dropped 8.8 percent to 5.08 billion euros ($6.6 billion), Spain’s biggest phone company said in a statement today. Analysts in a Bloomberg survey had predicted 5.23 billion euros. The stock declined as much as 3.3 percent.

As Spain struggles to emerge from its worst economic crisis in decades, Chief Executive Officer Cesar Alierta needs to boost Telefonica’s Latin American business because customers in the company’s home market switch to cheaper rivals including Jazztel Plc (JAZ) and TeliaSonera AB (TLSN)’s Yoigo. Madrid-based Telefonica said today that first-quarter Oibda in Spain fell 14 percent while European earnings slumped 15 percent.

“Results were very weak,” Andres Bolumburu, an analyst at Banco de Sabadell, said via phone today. “The performance in Europe was very poor this quarter, especially in the U.K., while Spain continues its decline and Latin America provides positive growth overall.”

Telefonica shares dropped as much as 37.5 cents to 10.95 euros in Madrid and were down 2.7 percent as of 9:05 a.m. The stock had dropped 15 percent this year before today, compared with a 2.9 percent decline of the 34-member Bloomberg Europe Telecommunication Services Index.

Photographer: Angel Navarrete/Bloomberg

An illuminated logo is seen outside the headquarters of Telefonica SA in Madrid, Spain. Close

An illuminated logo is seen outside the headquarters of Telefonica SA in Madrid, Spain.

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Photographer: Angel Navarrete/Bloomberg

An illuminated logo is seen outside the headquarters of Telefonica SA in Madrid, Spain.

Revamp

The CEO in December cut Telefonica’s dividend forecasts by 14 percent, the first reduction in a decade. He announced 6,500 job cuts last year and has halted major acquisitions. At the same time he has sold non-core assets including a stake in satellite company Hispasat.

Today’s earnings show how the Spanish operator is lagging behind other European rivals.

Deutsche Telekom AG, Europe’s second-largest telephone company, yesterday reported earnings that beat analysts’ estimates as a decline in European revenue slowed and the T-Mobile USA unit boosted profitability. Telecom Italia SpA, Italy’s largest phone company, this week said first-quarter profit rose 10 percent, beating analyst estimates, helped by growth in Brazil and Argentina. Vodafone Group Plc (VOD) is scheduled to report earnings for the year ending March 31 on May 22.

Italian Writedown

In Latin America, with markets including Brazil and Chile, Telefonica’s Oibda rose 0.8 percent to 2.55 billion euros. That compares with an Oibda decline of 15 percent to 2.51 billion euros at Telefonica’s European division.

In September, Alierta folded Telefonica’s domestic unit into its European division and shuffled regional chiefs, putting Jose Maria Alvarez-Pallete in charge of Europe and giving Santiago Fernandez Valbuena responsibility for Latin America.

Telefonica’s net income fell 54 percent to 748 million euros. Earnings were hit by a 337 million-euro after-tax charge for a writedown of the company’s indirect 10.5 percent stake in Telecom Italia SpA. (TIT)

Alierta has repeatedly said he’s comfortable with Telefonica’s Telecom Italia holding. He told investors in April last year that the alliance with the Italian operator would generate 1.5 billion euros in cost savings from joint purchasing of handsets and phone-network equipment for the three years through 2013, compared with 1.3 billion euros for the previous three years.

Declining Profitability

Telefonica, Assicurazioni Generali SpA (G), Mediobanca SpA (MB) and Intesa Sanpaolo SpA (ISP) together own 22.4 percent of Milan-based Telecom Italia through holding company Telco SpA, which values the operator at 1.50 euros a share. Telecom Italia, which yesterday closed at 84.2 euro cents, has been trading below that level since 2008.

The company today reiterated its full-year forecasts. Telefonica said in February that its profit margin will continue to drop this year, although at a slower rate. In the first-quarter, the profit margin based on Oibda declined by 3.4 percentage points to 32.8 percent.

Alierta has said Telefonica won’t pull out from other European countries including Germany, the U.K. or the Czech Republic. He said last year that outperforming rivals in these markets is one of his top strategic priorities in addition to tapping the industry’s growth in Latin America.

To contact the reporters on this story: Manuel Baigorri in Madrid at mbaigorri@bloomberg.net;

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net

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