Telefonica Earnings Drop as Currencies Hurt Latin America Sales

  • Spain sales recovering, South America revenue declining
  • Chairman Pallete faces challenges in Spain, U.K., Brazil

Telefonica SA, Spain’s largest phone company, reported falling earnings in the second quarter as declining currencies in Latin America offset a continuing recovery in its domestic business.

Operating income fell 7.1 percent to 3.92 billion euros ($4.34 billion) excluding depreciation and amortization, the company said Thursday. Analysts predicted 3.9 billion euros, the average of six estimates compiled by Bloomberg. Sales declined 7.7 percent to 12.7 billion euros, compared with an average estimate of 12.6 billion euros.

Chairman Jose María Álvarez-Pallete, who took over from César Alierta in April, is facing challenges including intense competition at home, a two-year recession in Brazil and a need to curb debt to avoid credit-rating downgrades. He also has to rebuild a strategy for the company’s U.K. unit after the division’s planned sale was blocked by regulators.

To revive its Spanish business, Telefonica has announced two price increases this year -- one in the first quarter and another that becomes effective next month. Sales have gradually started to recover in its home market after slumping for seven years. The company’s Internet and data clients in the country rose to 6.06 million from 5.91 million a year ago.

Shares of Telefonica declined 3.2 percent to 8.86 euros at 9:24 a.m. in Madrid.

In the latest increase, the company is raising the monthly price of its Fusion bundles of TV, broadband, wireless and landline service by 2 euros to 5 euros. In exchange, all clients will get the bulk of the carrier’s soccer coverage included in the packages.

The move is part of a strategy of attracting high spenders who subscribe to several services, while putting less emphasis on users who are only interested in a single product such as wireless access. While the company has seen its broadband customers increase over the past year, the number of mobile clients has been declining.

In the quarter, the number of Fusion clients grew to 4.27 million from 3.88 million a year earlier, with revenue per user rising 12 percent to 79.8 euros. The company’s Spanish operating cash flow returned to growth for the first time since the third quarter of 2013.

In Brazil, Telefonica’s second largest-market, the company is also trying to focus on higher-income customers to stem the impact of the local recession. Telefonica is the South American country’s largest wireless carrier. Reported revenue and operating income from Latin America declined as local currencies depreciated against the euro.

The comparison to year-earlier earnings was helped by Telefonica’s purchases of the Spanish pay-TV service DTS and Brazilian Internet provider GVT in May 2015.

Failed Sale

In Britain, Telefonica has to rethink its plan for the O2 division. After the unit’s sale to CK Hutchison Holdings Ltd. was thwarted by European regulators in May, Telefonica initially said it was looking at alternative ways to divest a part or all of the business. Then, following the June 23 British referendum to leave the European Union, the carrier said it would hold on to the unit until market conditions improve.

Proceeds from the planned sale were earmarked for debt reduction. Net financial debt grew to 52.6 billion euros by June 30, up by about 2 billion euros from March 31.

Telefonica reiterated its 2016 sales and margin forecasts.

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