Telefonica - Mostly Strong Results

This report lays out some of the reasons I (dis)like and have (not/sold) bought this stock. It does not constitute personalized financial advice. Please do your own due diligence or hire a financial adviser, if you're so inclined before making any investment decisions.

Report by Davy Bui

2007, July 31: Mostly strong results.

2007, June 8: Mega telecom with good growth prospects.

Here are the performance measurements I identified in our original report:

Company hits 2007 guidance:
2007 CapEx to stand below 7,814 million euros.
Must improve operating results in Mexico
- Get to positive OI in Mexico
Improve wireless business in Brazil
- Stop the loss in wireless customers
Update on TI acquisition
Watch margins in UK and Germany – if they stay under pressure, then volume must come up
Increased dividends and fully utilize share buyback
Reduce debt levels.
Maintain Spanish market position while increasing the other 2 regions’ contribution to percent OIBDA/OI.

Overall, Telefonica not only maintained guidance but raised it across both top and bottom lines. Revenues expected to increase by 8%-10% (6%-9% previously); OIBDA by 10%-13% (8%-11%) and OI by 19%-23% (14%-20%). Excellent news.

increased by EUR 300M, mostly due to broadband expansion and network capacity. Not ideal but nothing alarming.

Great results from Mexico. Adding market share, lowering churn rates and now at positive OIBDA.
Nothing to suggest these results won't continue their current trend.

They have stopped the slide in market share and generally, had positive results for the quarter.
The big factor looming in this segment is Telefonica's attempt to buy out Portugal Telecom's stake. No news on this front.
Telecom Italia: No news on this front.

Results were as good as can be expected in such a cutthroat environment exacerbated by a hostile regulatory setting.
The EUR 152M fine was provisioned this quarter so no hit going forward.
The UK results were decent as competition is intense. No news on the iPhone.
Germany was very disappointing -- they've replaced the management team there and gave good visibility into a possible turnaround in the 2nd half of 2007.

Share buyback is mostly completed.
Debt levels reduced by nearly EUR 3B and they are on track to hit their reduction target of 2.5 Debt-to-OIBDA levels.
Spanish market position solid but there was little adjustment to the OIBDA distribution between the Espana, Europe and Latin America segments.

Overall, very solid results from the Telefonica team. Client base increased 11% as the double and triple play bundles (duos/trios) are performing. Excluding the gain from the Airwave divestiture, organic growth numbers were solid, which, as management noted, Telefonica's European competitors will be hard-pressed to match. Going forward, we'll be watching the operations in Europe for a turnaround in Germany and the broadband launch in the UK in addition to the noted performance measurements.

DISCLOSURE: Please see our portfolio page for all disclosures.

The Enlightened American

Telefonica - Mostly Strong Results