Telefonica’s Profitability in Spain Declines on Sales Push

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Telefonica SA posted an increase in first-quarter sales and earnings while profitability in Spain slipped as the phone company spent more on marketing.

Sales rose 13 percent to 11.5 billion euros ($13.1 billion) and operating income increased 7.7 percent to 3.62 billion euros in the quarter, stripping out interest, depreciation and amortization. Analysts had predicted Oibda of 3.59 billion on sales of 11.4 billion euros, the average of estimates compiled by Bloomberg.

Europe’s second-largest carrier has said it expects to start expanding again in Spain in 2015 after slowing the pace of decline last year in its biggest market. The recovery is driven by the country’s economic growth, forecast to be almost double the European Union’s average this year. That’s allowed Madrid-based Telefonica to start raising prices.

Telefonica had “a very decent quarter,” Stephane Beyazian, an analyst at Raymond James, said in an e-mail. “But mixed in Spain due to mobile pressure on margins. Revenue is recovering further, but margins remain under pressure,” in the country, he said.

The stock fell 0.7 percent to 13.21 euros at 1:20 p.m. in Madrid, giving the Spanish carrier a market value of 65.2 billion euros.

Revenue in Spain fell 3.8 percent in the quarter compared with a decline of 4.9 percent in the fourth quarter of last year. The Oibda margin narrowed 2.3 percentage points to 44.5 percent compared with a year earlier.

Spanish Improvement

“Oibda in Spain was below expectations, which in our view reflects the significant commercial push Telefonica is making to stabilize revenue,” Banco Espirito Santo analysts lead by Andrew Hogley said in a note.

Telefonica Spanish unit managed 41.2 million accesses to its services in its home market, which represented growth of 1 percent compared to a year earlier, the first expansion since the second quarter of 2011. In Brazil, sales grew 4.8 percent.

Spanish improvement will hinge partially on the integration of DTS Distribuidora de Television Digital SA, the pay-TV service Telefonica acquired in April. The purchase gives Telefonica a market share of about 85 percent in the domestic pay-TV market.

Earmarked Debt

Net income rose 162 percent in the quarter to 1.8 billion euros, boosted by 1.2 billion euros due to the recognition of tax deferred assets stemming from the sale of 02 in the U.K.

The carrier is now working on completing the acquisition of Brazilian broadband operator GVT, which has been approved by regulators, and the divestment of 02. Proceeds from that sale have been largely earmarked to reduce Telefonica’s debt to a target of about 31.7 billion euros.

“At the current high debt level, Telefonica is in a fragile strategic position with no financial flexibility, and may still require additional equity,” Raymond James’s Beyazian said.

Net debt stood at 45.6 billion euros at the end of March.

(Updates with analyst comment in seventh paragraph.)
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