Telefónica's Net Profit Totals 3,145 Million Euros up to September and the Company Meets Annual Earnings and Debt Reduction Targets 3 Months in Advance

MADRID--(BUSINESS WIRE)--

Telefónica TEF TDE:

• Telefónica's revenue grew in organic terms for the second quarter in a row and showed significant acceleration by increasing 2.1%. Business momentum and the results of the company transformation plan allowed revenue, which grew 0.4% year-on-year to 42,626 million euros, to achieve the target forecast for the end of 2013 a quarter in advance.
• By region, both Latin America and Europe continued to improve their year-on-year revenue performance rates. Telefónica Latin America showed organic growth of 10.9% in the quarter while Telefónica Europe improved by 1.7 percentage points compared to June.
• The OIBDA also shows the first positive results of the transformation plan and thanks to the good performance of revenue and to the ongoing generation of savings and efficiencies, continues its stabilization in the third quarter and closed September with a total of 14,100 million euros (-0.4% organic). The OIBDA margin also sustained its high levels of profitability in the first nine months of the year (33,1%).
• In reported terms, evolution of the aforementioned entries for the first nine months was particularly affected by exchange rate fluctuations, above all, by devaluation in Venezuela and depreciation of the Brazilian real and the Argentine peso, which subtracted around seven percentage points from revenue and OIBDA performance. Taking into account the impact of perimeter changes and exchange rates, reported revenue fell by 8.4% and OIBDA by 10.7%.
• In spite of the mentioned impacts from perimeter and exchange rates, free cash flow would have reach 4,706 million euros in the first nine months of the year, in line with the same period in 2012, if we exclude spectrum payments of 1,305 million euros.
• Including spectrum payments, free cash flow, which reached 3,401 million in the first nine months of the year, represents a ratio per share of 0.75 euros and reflects the sustainability of the dividends policy designed by the company, which on 6 November, paid out 0.35 euros per share for the first tranche.
• The company's financing activity, which was very intense during the first nine months of the year, exceeded 10,000 million euros and thanks to its favourable liquidity situation, Telefónica has maturities covered for the next two years.

• At the end of September, Telefónica Group's customer base reached 320.3 million accesses (+2%) and in mobile access, strong year-on-year growth of the contract sector stands out: 9% across the group and 79% in Latin America. Mobile broadband access now accounts for 27% of mobile accesses, reaching 67.4 million accesses in September (+41%).
• In Spain, revenue continued to gradually stabilise its evolution and the intense effort to transform the business continues to be reflected as significant improvements to efficiency, allowing an OIBDA margin of 50.2% reached in the quarter.
• Brazil beat a new record for the company with a net quarterly gain in mobile contracts of 1.5 million accesses, which represents capturing 64,5% of the market growth. At the same time, the landline segment continued to improve its operating evolution, also accelerating customer acquisition in fixed services.
• Germany has been able to improve its mobile commercial traction in the quarter, with total net additions almost doubling the figure achieved in the previous quarter, reaching a total access base of 25.4 million at the end of September. There is also a broader adoption of LTE-enabled handsets, that represents approximately 55% of total shipments in the third quarter vs. 40% in the second quarter, which is an encouraging trend for further data monetisation.
• The third quarter was also positive for Telefónica Digital, which has signed new deals, such as M2M with the British Government worth 1.5 billion pounds sterling, and for Telefónica Global Resources, which has significantly increased the percentage of sites connected to high-speed to 60%, among other achievements.
• Investment grew by 5.6% over the first nine months of the year to 6,019 million euros and is still mainly allocated to areas of growth and transformation (83%).

Telefónica's results for the first nine months of 2013, presented to the market today, show the first results of the company transformation plan, started a year ago. Telefónica has earned a net profit of 3,145 million euros and achieved its annual revenue and debt targets a quarter in advance. Organic revenue up until 30 September grew by 0.4%, exceeding the growth target estimated for the end of the year and debt stood at 46,101 million, thanks to a dramatic reduction of almost 10,000 million euros in just one year. This figure increases by close to 4,000 million euros if operations after the end of the quarter are considered and which bring net debt to 44,634 million euros. The debt target set for the year anticipates that the figure will not exceed 47,000 million euros.

As regards revenue, acceleration in the third quarter (+2.1%) means that accumulated growth registered a change of trend compared to the evolution of revenue in the first semester (0.5%). This change has also led to the highest organic growth since the fourth quarter of 2010. Apart from the performance of revenue and the aforementioned improvement in financial flexibility, the third quarter of the year also brought about the stabilisation of OIBDA, due precisely to the good performance of revenue and the ongoing generation of savings and efficiencies.

The company reaffirmed its operating and financial targets and its dividend policy set out for 2013. In this respect, free cash flow per share, which at the end of September was 0.75 euros per share, reflects the sustainability of the dividend undertaken for the year, whose first payment of 0.35 euros per share was made two days ago.

Therefore, free cash flow reached 3,401 million euros in the first nine months of 2013 (4,268 million in January-September 2012) and includes spectrum payments amounting to 1,305 million euros. Excluding this concept, free cash flow would total 4,706 million euros, in line with the same period in 2012.

With regard to operating figures, Telefónica managed 320.3 million accesses at the end of September 2013, with year-on-year growth accelerating to 2%, driven by mobile and pay TV accesses. By region, Telefónica Latinoamérica (68% of the total) maintained a strong commercial momentum, posting growth acceleration for the third quarter in a row to 4% year-on-year.

Mobile accesses stood at 252.2 million at the end of September, up 3%, driven by the strong growth of the contract segment (+9% year-on-year), which now accounts for 35% of total mobile accesses. The Company focus on this high-value segment was evident one more quarter, with quarterly net additions of 2.1 million, 57% higher than July-September 2012. It is important to note that Latin America registered record-high net contract additions in the quarter (+79% year-on-year), further strengthening the Company's leadership in the region in this segment.

Mobile broadband accesses continued posting solid growth (+41% year-on-year), reaching 67.4 million in September 2013, and now accounting for 27% of mobile accesses. It should be highlighted the on-going smartphone adoption in the year, as net additions stood at 15.1 million in the first nine months (+50% year-on-year).

Retail broadband accesses (18.4 million at the end of September) maintained a year-on-year growth rate of 2%.

Accelerated growth in revenue

Before analizing all metrics, it is important highlighting the Atento Group deconsolidation as of November 2012, therefore affecting year-on-year comparisons of Telefónica's reported financial results; and specially, the main metrics year-on-year performance negatively impact in the first nine months by exchange rate fluctuations, mainly due to the devaluation of the Venezuelan bolivar and the depreciations of the Brazilian reais and the Argentine peso. Thus, in the first nine months exchange rates reduced revenue growth by 7.0 percentage points, while the negative impact on OIBDA was 6.9 percentage points in January-September. Moreover, changes in the perimeter of consolidation reduced revenue growth by 1.8 percentage points and OIBDA growth by 1.1 percentage points, both in the first nine months and in the third quarter.

Revenues in the first nine months of 2013 totalled 42,626 million euros, up 0.4% year-on-year in organic terms (-8.4% in reported terms). This growth represents a change in trend compared with the first half (-0.5% year-on-year) triggered by a significant organic revenue growth acceleration in the third quarter to 2.1% (+0.5% in the second quarter and -1.6% in the first quarter).

Thus, Telefónica Latinoamérica further accelerated year-on-year growth (+10.9% year-on-year in the third quarter; +0.6 percentage points compared with the second quarter), whilst Telefónica Europe continued its gradual improvement (+1.7 percentage points compared with the year-on-year change in the second quarter to -7.1% year-on-year). Besides, Telefónica Digital revenue performance was particularly remarkable, growing 17.9% year-on-year in the third quarter in organic terms and including both digital services, already comprised in Telefonica Latinoamérica and Telefonica Europe regions, and subsidiaries and other businesses of Telefonica Digital new businesses. Excluding the negative impact of regulation, consolidated revenues in organic terms increased 2.0% compared with January-September 2012, posting strong growth acceleration in the third quarter to 3.9%. By region, Telefónica Latinoamérica remained the Group's growth driver, accounting for 51% of total revenues in the first nine months (+2.6 percentage points year-on-year).

Mobile data revenues accelerated to 10.2% year-on-year in the third quarter in organic terms (+9.8% in January-September) and now account for 63% of total data revenues and 37% of mobile service revenues.

Consolidated operating expenses amounted to 29,290 million euros in January-September 2013, up 0.9% year-on-year in organic terms (-7.5% reported) on the back of strong commercial activity in T. Latinoamérica related to the strategic focus on capturing high-value customers. In the third quarter, operating expenses rose 3.0% year-on-year in organic terms.

More in detail, supplies grew 1.2% year-on-year in organic terms (-5.7% reported) in the first nine months of the year, and personnel costs increased 4.6% in organic terms compared with January-September 2012. The average headcount was 130,672 employees, 3.9% lower than the average in the first nine months of 2012 excluding the impact of the deconsolidation of Atento. Subcontract expenses fell 2.0% year-on-year in the first nine months organically (-4.3% reported).

Gains on sales of fixed assets in the first nine months of 2013 totalled 103 million euros (-49 million euros in the third quarter) mainly associated with the capital gain from the disposal of the assets of the fixed business in the United Kingdom (73 million euros in the second quarter), the capital gain from the sale of the stake in Hispasat (21 million euros in the second quarter) and the sale of non-strategic towers in Latin America (39 million euros of impact on OIBDA in January-September), partly offset by the value adjustment of Telefónica Ireland (-16 million euros in the second quarter) and the value adjustment of Telefónica Czech Republic (-56 million euros in the third quarter).

OIBDA stabilisation

Operating income before depreciation and amortisation (OIBDA) in January-September 2013 amounted to 14,100 million euros, virtually unchanged in organic terms (-0.4%) compared with the same period in 2012 (-10.7% reported). There was a year-on-year improvement in organic terms in the third quarter (-0.3%; -0.7% in the second), reflecting revenue growth and the on-going cost containment along with efficiency improvements from the operational transformation process. The OIBDA margin stood at 33.1% in the first nine months, virtually unchanged compared with the same period in 2012 in organic terms.

Depreciation and amortisation totalled 7,414 million euros in January-September 2013 (-4.6% reported) and rose by 2.1% year-on-year in organic. Operating income (OI) in the first nine months of 2013 stood at 6,686 million euros, down 2.8% year-on-year in organic terms (-16.5% reported). In the third quarter, operating income increased 2.1% year-on-year in organic terms.

Share of profit (loss) of investments accounted for by the equity method in January-September (-117 million euros) was affected by the losses reported in the third quarter (-145 million euros), mainly due to Telco, S.p.A.'s adjustments of the value of its investment in Telecom Italia (-157 million euros). In January-September 2012 losses amounted to 486 million euros, with Telco, S.p.A.'s adjustments of the value of its investment in Telecom Italia accounting for 542 million euros. It should be pointed out that these effects were non-cash impacts.

Net financial expenses amounted to 2,129 million euros in the first nine months of the year, of which 101 million euros were due to net negative foreign exchange differences. Excluding this effect, net financial expenses fell 15.1% year-on-year, mainly due to a 11.2% reduction in the average debt. This implies an effective cost of debt excluding foreign exchange of 5.19% over the last 12 months (5.37% at 31 December 2012).

Corporate income tax in the first nine months of 2013 stood at 1,105 million euros which.

Profit attributable to minority interests reduced net income for the first nine months by 190 million euros, 34.7% less year-on-year mainly as a result of the lower profit attributed to minority interests in Brazil, affected by the exchange rate.

As a result, consolidated net income in the January-September period totalled 3,145 million euros (-9.0% year-on-year) and basic earnings per share amounted to 0.70 euros per share (-9.2% year-on-year).

On the other hand, the Company continued prioritising investments focused on growth and transformation activities (83% of the total) leveraging on the efficiencies achieved in areas such as IT, procurement, churn reduction and improvement of quality indexes. CapEx in the first nine months of 2013 totalled 6,019 million euros (+5.6% year-on-year) and included 997 million euros relating to the acquisition of spectrum in the United Kingdom, Brazil, Spain and Uruguay. In organic terms, CapEx remained stable year-on-year.

Consequently, operating cash flow (OIBDA-CapEx) was virtually unchanged year-on-year in the first nine months in organic terms (-0.6%).

Financial position and financing activity

As a result, free cash flow for the first nine months of 2013 amounted to 3,401 million euros (4,268 million euros for January-September 2012), including spectrum payments of 1,305 million euros (459 million euros up to September 2012). Excluding this impact, free cash flow totalled 4,706 million euros, in line with the same period in 2012. In the third quarter, free cash flow reached 1,949 million euros (2,144 million euros excluding spectrum payments).

Net financial debt stood at 46,101 million euros at the end of September 2013, down 9,905 million euros compared with September 2012, by 5,158 million euros versus December 2012 and by 3,692 million euros compared with June 2013. Including post-closing events (disposal of Telefonica Czech Republic, Telefonica Ireland and Inversis) and excluding the Undated Deeply Subordinated Securities issued in the third quarter to finance E-Plus transaction, net debt stood at 44,634 million euros. The leverage ratio (net debt over OIBDA) for the past 12 months stood at 2.30 times at the end of September 2013.

During the first three quarters of 2013, Telefónica's financing activity, excluding short-term Commercial Paper Programmes activity, has been intense through bond and loan markets executing operations for an amount close to 10,100 million equivalent euros. The financing activity was mainly focused on financing in advance debt maturing in 2014 and beyond and on smoothing the debt maturity profile at the Holding level for the following years while strengthening liquidity position. Therefore, as of September 30th the Company maintains a debt maturity profile that, thanks to its liquidity position, is covered for the next 2 years.

Telefónica maintains total undrawn committed credit lines for an amount close to 14,700 million euros, with close to 12,600 million maturing in more than 12 months. At the end of September 2013, bonds and debentures represented 71% of the consolidated financial debt breakdown, while debt with financial institutions represented 29%.

Telefónica Digital and Telefónica Global Resources

Telefónica Digital has further progressed on the transformation of the Company towards a digital Telco operator with new agreements signed and the launch of new products and services during the third quarter. In August Telefónica was awarded the £1.5bn contract to deliver smart meter communications services in the UK and European Union's antitrust authorities cleared the first joint venture in Europe to offer new Financial Services, established with Santander and Caixabank.

It is also worthy highlight the launch of the first Firefox OS handset in Spain in July, in Colombia and Venezuela in August, followed by Brazil in October and Peru in November; the investment in Rhapsody that presents the opportunity to expand the global footprint of Rhapsody's Napster music service throughout Latin America and Europe; a global partnership with Pinterest in October to bring Pinterest to millions of Telefonica's Android customers; and also a global partnership to offer Telefónica customers exclusive free access to Evernote Premium for twelve months.

In the third quarter of 2013, Telefónica Global Resources accelerated the execution of its global transformation projects. As such, from the Network and Operations it should be highlighted the commercial launch of LTE in UK and Spain, where it was key the effort made to increase the network coverage and demand to cope with customer demand; and the significantly increased of LTE enabled sites, as well as the weight of sites connected with an ultrabroadband network (approximately 60%). Additionally, the network unit continues working in the simplification of network management, in the reduction of failures and in the improvement of customer experience. On top of this, the pilot test of client network equipment virtualization continues in Brazil.

The Global IT unit continues advancing in its IT consolidation strategy, both in Europe and Latin America, with the execution of the deployment, migration and transformation of IT infrastructure project, while the global procurement unit advances in the specification and standardization, as well as in increasing the joint purchases and maximising scale benefits. Finally, the mobile devices unit, progresses in proactively rebalancing the vendors and operating systems map. Its procurement strategy has contributed to contain smartphone prices thanks to the agreement with relevant players.