Market Overview

Telefónica's Net Profit Doubles to 3,693 Million Euros between January and June and the Company Raises Revenue Growth Guidance for the Full Year


Telefónica (NYSE: TEF)(LSE:TDE) presented today its results corresponding to the first semester of 2015 and reports a net profit of 3,693 million euros, double the amount reached in the same period of 2014 (+105.4%). Additionally, the Company has raised revenue growth guidance for the full year to >9.5 % (vs. >7% previously).

Telefónica consolidates its new growth cycle quarter after quarter. Up until June, and in reported terms, consolidated revenue grew +12.5% to 23,419 million euros, OIBDA increased +7.2% to 7,320 million euros, and earnings per share (0.75 euros per share) doubled compared to the same period of 2014. At the end of June, Telefónica Group's customer base increased +13% yoy to 329,4 million accesses.

Second quarter numbers of the year confirm the new growth cycle started in the previous quarter and show an acceleration in the organic evolution of revenue and OIBDA growing +4.4% and +3.3% respectively between April and June (+12.4% and +6.8% in reported terms). This growth is based on a generalized improvement of the competitive positioning driven by a high value customer base (fibre, pay TV, LTE, "smartphones") and supported as well by the investments made on modernizing and transforming the networks. In fact, Telefónica Group CapEx during the first half of the year grew +66.4% to 5,094 million Euros.

It's worth highlighting that Telefónica España made solid progress and showed and inflection point in its return to growth by reaching revenue stabilization during the months of May and June. In this respect, the Executive Chairman of Telefónica, César Alierta underlined "the strong recovery in the Spanish business which in May and June reached revenue stabilization for the first time since December 2009".

Similarly, the Executive Chairman stressed that the strength of the new growth cycle "is generated on a solid foundation supported as it is by strong realised investments". In this way, Telefónica Spain has the most extensive Fibre-to-the-home network in Europe with the highest number of connected customers reaching 12.5 million premises passed to June.

Alierta also highlighted "the importance of the incorporation of GVT in Brazil and DTS in Spain during the quarter, two key assets that are going to contribute in strengthening our presence in both markets and leadership in quality services, and will contribute to the generation of future synergies reinforcing our potential for growth in both cases".

2015 Guidance Upgraded

Finally, César Alierta explained that "the strength of the evolution of the business in the first half of the year, coupled with our positioning in order to capture growth opportunities in the coming quarters, have led us to revise our objectives upwards for 2015". Thus, revenue guidance has been upgraded to >9.5 % (vs. >7% previously), with the new dates for the incorporation of GVT and DTS in the consolidation perimeter adding 1.8 percentage point to growth.

On the other hand, as a result of the impact of the new dates for the incorporation of GVT and DTS in the consolidation perimeter OIBDA margin limited erosion has been updated to around 1.2 p.p. (around 1 p.p. previously). Additionally, the CapEx/Sales excluding spectrum guidance is maintained at 17% for 2015 and the Net Debt/OIBDA objective is confirmed at below 2.35x, adjusted for the closing of the sale of O2 UK.

In relation to shareholder remuneration, Telefónica reiterates the dividend for 2015 (0.35 euros per share in the form of a voluntary scrip dividend in the fourth quarter 2015 and 0.40 euros per share in cash in the second quarter 2016). Additionally, the amortization of Treasury stock for a total of 1.5% share capital has been executed in July 2015.

Telefónica also reiterates the dividend for 2016 of 0.75 euros per share in cash and will also propose at the 2016 AGM the amortization of Treasury stock for a total of 1.5% share capital (in both cases subject to the closing of the sale of O2UK).

Customer base: 329.4 million total accesses

As of June 2015, accesses reached 329.4 million and grew 3% year-on-year organic (+13% reported), on the back of T. Brasil's and T. Hispanoamérica's solid growth pace (+4% and +3%, respectively). The strong year-on-year growth trend in high-value customers continued during the second quarter of 2015, especially in mobile contract (+16%), fibre (+4.6x) and Pay TV (1.9x).

On the one hand, mobile accesses stood at 253.6 million and increased 12% year-on-year (+3% organic) on the back of solid mobile contract growth (+16% year-on-year; +6% organic), which already accounted for 34% of mobile accesses. Smartphones totalled 99.2 million as of June 2015 and posted strong year-on-year growth of 56% (+30% organic) reaching a penetration of 41% (+11 percentage points year-on-year). LTE customers (18.6 million; 4.7x year-on-year) represented 8% of total mobile accesses (+6 percentage points year-on-year).

On the other hand, retail broadband accesses reached 20.8 million, a 2% increase compared to June 2014 in organic terms (+18% reported). Fibre accesses stood at 5.4 million (4.6 times vs. June 2014; 1.4 times in organic terms) and reached organic quarterly net additions of 301 thousand accesses (+32% year-on-year). Pay TV accesses (8 million; 1.9 times year-on-year) recorded organic quarterly net additions of 263 thousand customers, driven by T. Brasil and T. Hispanoamérica.

Income statement analysis

It is important to highlight that year-on-year evolution during the second quarter reflected the consolidation of GVT's results in Telefónica Brasil and DTS' in "Other companies and eliminations" (both since 1 May 2015), as well as E-Plus' in T. Deutschland (since 1 October 2014) and the deconsolidation of T. Ireland's results (since July 2014). Likewise, Telefónica's operations in the UK are reported as discontinued operations within Telefónica Group, and their assets and liabilities are classified as "held for sale" in compliance with International Financial Reporting Standards (IFRS), as a result of the signing in March 2015 of the definitive sale agreement

Likewise, the Company has decided to adopt the exchange rate of the Venezuelan bolivar set at SIMADI at the end of the first six month-period of 2015, as being the most representative among the available exchange rates as of that date, impacting second quarter financial results. As of 30 June, this rate was set at 197 Venezuelan bolivars fuertes per dollar. This change in the conversion of the financial information implied a reduction in the quarter of 397 million euros in revenues and 90 million euros in OIBDA, with the purpose of adapting the results of the first half of the year to the new exchange rate.

As a result, the year-on-year variation of the exchange rates during the second quarter of 2015 is especially affected by the aforementioned SIMADI adoption and the depreciation of the Brazilian reais and the Colombian peso vs. the euro. Thus, the evolution of exchange rates detracted 2.7 percentage points from revenue and OIBDA year-on-year growth in April-June. In January-June 2015, FX contributed with 0.2 percentage points to year-on-year revenue growth and detracted 0.2 percentage points from OIBDA growth, as the aforementioned negative impacts were partially offset by the appreciation of the other Latin American currencies vs. the euro.

It is also important to highlight that organic growth assumes constant exchange rates as of 2014 (average FX in 2014). Excludes the impact of hyperinflationary adjustments in Venezuela in both years and O2 UK results for both years after being classified as "discontinued operations", and considers constant perimeter of consolidation.

Revenues stood at 11,876 million euros in the second quarter of 2015 and increased 4.4% year-on-year in organic terms (+12.4% reported), accelerating vs. the previous quarter (+1.1 percentage points), on the back of better contribution from Telefónica España (+0.8 percentage points) and Telefónica Brasil (+0.3 percentage points). In January-June revenues reached 23,419 million euros, +3.9% year-on-year in organic terms (+12.5% reported). Changes in the perimeter of consolidation contributed 10.2 percentage points to year-on-year growth in the second quarter and 8.1 percentage points in the first half.

Per segment, T. España, T. Brasil and T. Deutschland represented 66% of revenues during the first six months of 2015. Telefónica Hispanoamérica represented 30%, 1 percentage point more compared to the same period of the previous year despite the lower weight of Venezuela, which already represented less than 1% of the total.

Mobile data revenue year-on-year growth accelerated in the quarter 5 percentage points vs. the previous quarter to 17.3% (+28.8% in reported terms) and already represented 42% of mobile service revenues (+5 percentage points year-on-year), on the back of higher smartphone penetration (+11 percentage points year-on-year) and a growing weight of LTE customers (+6 percentage points compared to June 2014). Non-SMS data revenue improved year-on-year organic growth by 8 percentage points to 26.6% (+35.8% reported) and already represented 82% of data revenue. It is important to highlight LTE's potential, with LTE traffic already representing 13% of mobile data traffic in the second quarter of the year and penetration over accesses still at 8%, due to the significant increase in unit per user consumption vs. 3G, generating double-digit ARPU uplift.

Operating expenses totalled 8,425 million euros in April-June 2015 and increased 4.4% year-on-year in organic terms (+14.6% reported), driven by growth in T. Hispanoamérica and T. Brasil, and despite the savings generated by T. Deutschland and T. España. In January-June 2015, expenses amounted to 16,610 million euros, and increased 4.2% year-on-year in organic terms (+14.7% reported) mainly as a result of higher network and system expenses.

Gains on sales of fixed assets totalled 28 million euros in the second quarter of 2015 (10 million euros in April-June 2014) mainly due to the sale of real estate assets in Spain (19 million euros impact in OIBDA). During the first half of 2015 this item reached 89 million euros (49 million euros in the same period of 2014) and primarily includes the sale of non-strategic towers (40 million euros of OIBDA impact), the aforementioned sale of real estate assets in Spain and the sale of "yourfone GmbH" in Germany (17 million euros of OIBDA impact).

OIBDA boosted by greater sales, synergies, and the program for simplification and efficiencies

Operating income before depreciation and amortization (OIBDA) in April-June 2015 amounted to 3,702 million euros (+6.8% year-on-year reported) and posted a year-on-year organic growth of 3.3%, accelerating vs. the first quarter (+0.9 percentage points), driven by T. España's contribution improvement and by T. Deutschland's strong growth rate. In the first half of 2015 OIBDA totalled 7,320 million euros (+7.2% year-on-year; +2.9% organic). The changes in the perimeter of consolidation contributed 6.7 percentage points to year-on-year OIBDA growth in April-June and 4.9 percentage points in the first half.

OIBDA margin in the second quarter stood at 31.2%, with a year-on-year organic erosion of 0.3 percentage points. In January-June, the margin reached 31.3% (-0.3 percentage points in organic terms vs. the same period of 2014).

Depreciation and amortization in April-June reached 2,145 million euros and increased 24.5% year-on-year (4,252 million euros in the first six months; +21.8%) affected by the incorporation of GVT, DTS and E-Plus into the perimeter of consolidation. In organic terms, it grew 7.4% year-on-year in the quarter (+4.6% in January-June 2015) predominantly due to the depreciation of the new spectrum acquired in Brazil and Spain and the higher investment effort.

The Operating income (OI) amounted to 1,557 million euros and fell 1.7% vs. to the second quarter of 2014 in organic terms (-10.8% reported). In the first half of 2015, operating income reached 3,068 million euros (+0.6% year-on-year organic; -8% reported).

Net financial expenses in the first half of 2015 totalled 1,129 million euros, 8.5% lower than the same period of the previous year. In the second quarter of 2015, net financial expenses accelerated their year-on-year drop compared to the previous quarter by 7.5 percentage points to -12.6% (485 million euros), despite the negative impact resulting from the adoption of the exchange rate set at SIMADI, mainly due to the positive impact caused by the divestment in Telecom Italia S.p.A. and the lower cost of debt in euros. During the first six months corporate income tax amounted to 71 million euros (230 million euros in the same period of 2014).

Profit from continuing operations stood at 1,385 million euros in April-June 2015 and increased 16.9% year-on-year. In the first half of the year, it reached 1,864 million euros (+2.6% vs. the same period of 2015). Profit from discontinued operations totalled 537 million euros in the quarter (88 million euros in the same period of 2014). Thus, in January-June it reached 1,841 million euros, with 1,320 million euros from deferred tax assets resulting from the estimation of the difference in Telefónica, S.A. between the fiscal value and the agreed value regarding the sale of Telefónica's UK operations, which are expected to materialize in the foreseeable future when they are finally made deductible in the sale.

Profit attributable to minority interests detracted 31 million euros from second quarter net income, down 80.9% year-on-year mainly due to the higher result attributed to minority interests in Brazil in 2014 and by the negative results attributed to T. Deutschland minorities. In January-June they detracted 12 million euros from the net income (-94% year-on-year).

Thus consolidated net income reached 1,891 million euros in April-June 2015 (1.7 times higher year-on-year) and 3,693 million euros in January-June (2.1 times higher). This translated into basic earnings per share of 0.37 euros in the quarter (+62.1% vs. the same period of the previous year) and of 0.75 euros up to June (2 times year-on-year).

Strong investments focused on ultrafast networks (Fibre and LTE)

CapEx in the first half of 2015 stood at 5,094 million euros (+12.6% year-on-year organic) and included 1,589 million euros in spectrum acquisitions (1,195 million in Germany and 204 million in Argentina, both in the second quarter; 135 million in Ecuador and 6 million in Chile in the first quarter; 49 million in Spain in the first six-month period). Growth and transformation projects continued being the main focus, reaching 76% of total investment (+5 percentage points year-on-year in organic terms).

The operating cash-flow (OIBDA-CapEx) totalled 289 million euros in the second quarter of 2015 (1,717 million euros excluding spectrum acquisitions) and fell 0.4% year-on-year organic (-83.4% reported). In the first half of 2015, it reached 2,226 million euros (3,815 million euros excluding spectrum), 4.7% less than in the same period of 2014 in organic terms (-40.9% reported).

Interest payments in the first half of 2015 (1,402 million euros) fell 9.2% compared to the same period of 2014, mainly due to lower coupon payments and the reduction in the cost of debt. In April-June (496 million euros) they fell 45.2% vs. the first quarter of 2015, due to the seasonality of bond coupons. On the other hand, payment of taxes amounted to 134 million euros in January-June 2015, 248 million euros less with respect to the same period of 2014, primarily due to tax recoveries on definitive tax filings of previous years.

Operations with minority shareholders totalled 400 million in January-June 2015, 146 million euros more year-on-year, fundamentally due to higher dividend payments in Germany. In the second quarter, these operations reached 374 million euros due to dividend payments in T. Deutschland.

All in all, the free cash flow, excluding spectrum payments, reached 1,144 million euros in January-June 2015 (-194 million euros after spectrum).

Financial Position

Net financial debt stood at 51,238 million euros as of June 2015 and increased 5,611 million euros in the quarter, driven mainly by seasonal and non-recurrent extraordinary factors, such as net financial investments including changes in the perimeter of consolidation (acquisitions of GVT and DTS and Telco S.p.A. demerger); spectrum payments; and other factors which include the impact of the adoption of the exchange rate set at SIMADI for the conversion of positions in Venezuelan bolivars, among others.

Including the collection of the full firm value on the sale of O2 UK, the leverage ratio (net debt over OIBDA) would stand at 2.38 times (2.35 times excluding second quarter corporate transactions: acquisitions of GVT and DTS, adjusting corresponding OIBDA, and Telco S.p.A. demerger).

During the first half of 2015, Telefónica's financing activity in capital markets stood at about 11.388 million euros equivalent and was mainly focused on financing the GVT acquisition as well as on strengthening the liquidity position and actively managing the cost of debt, through the extension of the maturity of the credit lines and credit margins reduction.

Telefónica maintains total undrawn committed credit lines with different credit entities for an approximate amount of 8,148 million euros, with around 7,329 million maturing in more than 12 months, which, along with the adjusted cash position, places liquidity at 13.9 billion euros.

Digital Services and Telefónica Global Resources

In the second quarter of 2015, digital services revenues totalled 938 million euros (+27.0 year-on-year in organic terms), reflecting the consolidation from 1 May of DTS and GVT. During the first six months of the year revenues totalled 1,621 million euros, with year-on-year growth in organic terms of 29.7%.

Revenues in the Video business in the second quarter stood at 541 million euros and grew 34.8% year-on-year in organic terms (862 million in the first half of the year; +41.9% year-on-year), leveraged on the expansion of the access base (8 million; +25% year-on-year in organic terms) in Spain, Brazil and Hispanoamerica as well as the inclusion of 1.4 million accesses from DTS and almost 1 million accesses from GVT. With the DTS acquisition, Telefónica consolidates a high-value customer base, expanding its opportunities for cross-selling.

During the second quarter of the year, Telefónica Global Resources continued contributing to a fast and agile development of technologies enabling the best digital end-to-end experience for our customers.

It is important to highlight that the Global Network and Operations Area accelerated ultra-broadband deployments, in both fixed (FTTx) and mobile (LTE) and drove the development, design and certification of homogeneous technological solutions. Thus, premises passed with fibre totalled 12.5 million in Spain and 16.1 million in Brazil. In LTE, population coverage in Europe and Latin America reached 67% and 35% respectively; LTE sites in service surpassed 25 thousand and 89% of 3G and LTE base stations were connected at high-speed to the transmission network. As a result, total data traffic grew 40% year-on-year organic, driven by mobile broadband (+52%) and fixed broadband (+39%). Moreover, average consumption per smartphone in the second quarter increased 30% year-on-year, driven by the higher LTE penetration, which offers a superior customer experience.

In the Global IT area, with regards to efficiency and simplification, 351 applications have been eliminated year-on-year, 4 Data Centers were released, the virtualization level increased 10 percentage points year-on-year organic, having reduced physical servers by 10%.

Miguel Angel Garzón, +34 91 482 38 00

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