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Telefonica's Net Profit Grew Over 36% in the First Nine Months of 2005 to Euros 3.25 Billion

Posted on: Friday, 11 November 2005, 03:03 CST

Grupo Telefonica We are revising our 2005 revenue guidance upwards in light of growth which is significantly outstripping that of our European peers. Our revised target is in excess of 15% compared to earlier guidance of 12% to 15% This figure already exceed total earnings recorded in fiscal 2004, a year in which the Company recorded record net profit

-- Grupo Telefonica's revenues rose 24.2% compared to the first

nine months of 2004, with growth accelerating notably in the

last quarter.

-- Group profit growth also picked up pace, with Operating income

before depreciation and amortisation (OIBDA) up 20%

year-over-year, and Operating income (OI) up 24.5%.

-- Free cash flow rose 13.4% to Euros 7.61 billion.

-- In the third quarter alone (June-September), net profit jumped

53.3%, while revenues, OIBDA and OI advanced 32.3%, 27.8% and

29.1%, respectively.

-- In terms of organic growth, revenues, OIBDA and OI grew by

9.9%, 6.7% and 16.6%, respectively, reflecting the Company's

solid operating performance.

-- Significant year-over-year growth of 37.8% in the customer

base to 147.7 million total accesses, of which 89 million

corresponded to mobile telephony customers and 4.4 million

related to retail ADSL lines in Spain, Latin America and the

Czech Republic.

-- Capex increased 38.3% to Euros 3.33 billion, driven primarily

by investment in broadband, both in Spain and Latin America,

and by investment to expand mobile network capacity in Spain,

Brazil and Mexico.

-- Telefonica de Espana has also revised its revenue guidance

upwards from its initial range of +0.5% to +2% to an estimate

of over 4%.

The economic and financial results of the Telefonica Group corresponding to the first nine months of 2005 reflect a sharp acceleration in the growth of revenues (+24.2% year on year) and the profitability of operations (OIBDA +20% year-on-year and OI +24.5% year-on-year), in a quarter characterized once again by the strong commercial activity developed primarily in high growth businesses (mobile and broadband). The solid performance of operations have led to an increase in the Operating free cash flow at a double-digit rate (+13.4% year-on-year) up to 7,613 million Euros and to record a net income of over 3,200 million euros, up 36.2% on the previous year.

Once again this quarter, the results reflect the diversification of being an integrated operator. The cellular business remained the main contributor to revenues (+41.7% vs. January-September 2004), whereas the fixed operators are the main contributors to profitability, with a significant increase in OI compared with September of the previous year (Telefonica de Espana Group +29.9% and Telefonica Latinoamerica Group+ 34%, excluding the sale of CTC mobile business in July 2004).

Revised guidance upwards

As a result, Telefonica Group upgrades its revenue(1) growth target for 2005, from the initial range of 12% to 15% to a new forecast of over 15%. The remaining Group targets for 2005 are unchanged: OIBDA(1) growth +10%/+13%(2), OI(1) growth +12%/+18%(2), and CapEx(1) around 4,600 million euros.

By business lines, Telefonica de Espana Group upgrades its revenue growth target for 2005, from the previous +0.5%/+2% to a growth of over 4%. Consolidated financial targets for Telefonica Moviles Group and Telefonica Latinoamerica Group are unchanged.

Clients base

The positive evolution of revenues is based on the strong growth of its client base. As a result, on September 30th the Telefonica Group managed a total of 147.7 million accesses (fixed telephony accesses, data and internet accesses, Pay TV and cellular accesses), compared with the 107.2 million managed in September 2004 (+37.8%). The Czech operator Cesky Telecom contributed already with 8.2 million accesses.

The increase in total accesses was mainly due to growth in cellular accesses. The total number of clients managed by the Telefonica Moviles Group grew by 52% compared with September 2004, to a total of 89.1 million. The highest number of additions was recorded in Latin America, due to the significant stage of development of almost all its markets, reaching 65.6 million clients in the region (+75.7% compared with September 2004), whereas Spain contributed with 19.6 million clients, up 5% on the previous year, which is an important growth in such a mature market as Spain. By the end of the quarter, Medi Telecom recorded 3.8 million clients (+49.2% year-on-year).

Broadband, one of the main levers of growth for the Group, continued to progress notably. By September end, retail ADSL lines in Spain, Latin America and the Czech Republic amounted to 4.4 million, up 55.7% on September of the previous year. By regions, retail ADSL connections in Spain totaled 2.4 million (+67.4% year-on-year). The number of retail ADSL accesses in Latin America grew by 60.7% to reach 1.9 million, of which 1.1 million corresponded to Telesp (0.7 million one year ago).

Revenues and expenses

Revenues amounted to 27,402.2 million euros during the first nine months of the year, 24.2% more than in the same period of the previous year due to the general growth of all business lines, particularly the cellular business. Growth rates clearly accelerated over the third quarter of the year (+32.3% vs. July-September 2004), driven primarily by the positive impact of exchange rates and the incorporation of Cesky Telecom (contributed with 2.3 percentage points to the growth). Hence, in the period January-September, organic growth(3) stood at 9.9% (+10.1% in January-June 2005), with a positive contribution by the Group's main three business lines.

The cellular business recorded revenues of 12,050 million euros in the January-September 2005 period, 41.7% more than in the same period of the previous year. Revenues from the Telefonica de Espana Group amounted to 8,728.6 million euros over the first nine months of the year and grew 5.1% year-on-year, highlighting the performance of revenues from Internet and broadband services (+29.1%). In the first three quarters of 2005, the Telefonica Latinoamerica Group totaled revenues of 5,913.5 million euros, an increase of 18.1% over the previous year in current euros, with a significant contribution from the exchange rates.

By geographical areas, Spain remained the main contributor towards consolidated revenues with 53.6% of the total, although this was down 8.8 percentage points over the same period in 2004. This decline was due to the higher contribution from Latin America (40.8% vs. 33% twelve months ago) because of the geographic diversification achieved after the acquisition of the BellSouth Latin American operators. In the other hand, following the acquisition of Cesky Telecom, revenues from the Chezh Republic represented 1.9%, after the consolidation of the period July-September 2005.

Changes in the consolidation perimeter following the purchase of the 10 BellSouth operators in Latin America and Cesky Telecom, together with increased commercial intensity by the Telefonica Group and the exchange rate effect, pushed operating expenses upwards to total 16,758.1 million euros by September, 26.8% higher than during the same period of the previous year (+23.2% in the first half of 2005).

By items, supplies expenses increased by 32.9% (+29.9% in constant euros vs. +29.2% in June) associated with the cellular business (higher interconnection expenses and incorporation of BellSouth Latin American operators) and with Telefonica de Espana Group due to the purchase of equipment (ADSL and Imagenio). Personnel expenses recorded a year-on-year increase of 7.2% in comparison with the January-September 2004 period (+5.3% excluding the exchange rate effect). The average Group workforce at September stood at 185,763 employees, with a 21.3% variation. External services expenses recorded a 37.7% increase in relation to the first nine months of the previous year (+33.7% in constant euros, +34.7% in January-June 2005) due to intensified commercial efforts in an environment of high competition and growth in the fixed and cellular business.

In the first nine months of 2005, the Telefonica Group reported a gain on sale of fixed assets for 177.6 million euros, primarily corresponding to the items accrued in the first half of the year: capital gains from the sale of Radio Continental, Radio Estereo (both from the ATCO Group), Infonet, the sale of 1.2% of the TPI share capital and the sale of real state.

OIDBA and OIBDA margin

The consolidated operating income before D&A (OIBDA) accumulated at the end of the third quarter amounted to 10,944.5 million euros, a 20% growth in relation to the same period in the previous year, accelerating the variation rate of the first six months of the year (+15.3%). Hence, in the July-September period, OIBDA rose significantly versus the third quarter of 2004 (+27.8%).

In terms of profitability, the cumulative OIBDA margin reached 39.9% at September, lower than the 41.3% recorded in January-September 2004, mostly due to the fall in the cellular business OIBDA margin (-6.6 percentage points to 35.1%). However, it is important to note the improved margin as a percentage of revenues of the Telefonica Group in relation to that obtained during the first half of the year (+1.8 percentage points) also mostly due to the cellular business (+1.9 percentage points).

The cellular business OIBDA totaled 4,226.5 million euros in the January-September 2005 period, 38.6% of the total OIBDA and up 19.4% in relation to the previous year. The Telefonica de Espana Group (31.9% of total OIBDA) recorded OIBDA of 3,486.2 million euros over the first nine months of the year (Terra operations contributed with 14.8 million euros), an 8% year-on-year increase. At Telefonica Latinoamerica, OIBDA (24.6% of consolidated OIBDA) stood at 2,688.6 million euros (Terra's Latin American operations contributed with +6.5 million euros), representing a 1.9% increase over the first nine months of 2004.

By regions, Spain represented 60.3% of consolidated OIBDA, down 8.3 percentage points on September 2004. Latin America, however, increased its contribution to 35.6% (33.7% twelve months ago). The Czech Republic after the incorporation of Cesky Telecom since July 2005, represented +2.3% of the consolidated OIBDA.

Depreciation recorded a 14.6% year-on-year growth (+9.2% in the first half 2005) to reach an absolute figure of 4,820 million euros in January-September 2005. As a result of the evolution of OIBDA and depreciation, operating income (OI) for the January-September 2005 period stood at 6,124.5 million euros, a year-on-year growth of 24.5% and 3.2 percentage points higher than January-June 2005. Organic growth(4) stood at 16.6% compared with +17%(5) in June.

As a result of the evolution of OIBDA and depreciation, operating income (OI) for the January-September 2005 period stood at 6,124.5 million euros, a year-on-year growth of 24.5% and 3.2 percentage points higher than January-June 2005. Organic growth(6) stood at 16.6% compared with +17%(7) in June.

Financial expenses amounted to 1,129.2 million euros in the first nine months, 7.7% above the same period in the year before, that is, 80.8 million euros more. 165 million euros are due to the 16% increase in the average net debt, and the remaining 87 million euros are related to the increase in the Latam debt (higher after the acquisition of the BellSouth assets and the increase in the interest rates in Brazil) with savings of 171 million euros as a consequence of better exchange and interest rates in the Group.

The Telefonica Group's net financial debt at the end of September 2005 stood at 28,676.1 million euros. 56% of the increase in debt during the year was due to the free cash flow after dividends of 2,770.6 million euros, 25% due to the appreciation of the dollar and the Latin American currencies against the euro throughout the first nine months of the year, which accounted for 1,240.6 million euros of the increase in debt. The remaining 19% corresponds to the changes in the consolidation perimeter after the acquisition of BellSouth subsidiaries in Argentina and Chile and Cesky Telecom. Total debt (including guarantees and labor commitments for a total of 3,720.6 million euros) amounted to 32,396.7 million euros, equivalent to 2.13 times OIBDA annualized for the period, including Cesky Telecom.

The tax provision totaled in the first nine months of the year 1,455.3 million euros (29.1% tax rate), although the cash outflow for the Group will be reduced even further as negative tax bases are compensated for.

The results attributed to minority interest deducted 296.2 million euros from the net income for the January-September 2005 period, in comparison with the -220.2 million euros of the same period in 2004. This 34.5% increase is mainly due to: 1) the participation of minority interests in the net income of Cesky Telecom since July 1st 2005, 2) the positive net income of Terra Networks in January-June 2005 compared with the losses of the previous year (Telefonica S.A. merged with Terra Networks, S.A. in July 2005, by absorption of the second one by the first one) and 3) the higher net income achieved by Telesp.

As a result of all the described items on the profit and loss account, the net income for the first nine months of 2005 totaled 3,253.3 million euros, up 36.2% on January-September 2004 after recording a net income of 1,418.2 million euros in the third quarter of the year (+53.3% year-on-year).

Cumulative CapEx by the end of the third quarter of the year amounted to 3,330.6 million euros and increased by 38.3% (organic growth(8) +19.3%) in comparison with the same period of 2004 due to the generalized growth in all business lines. The year-on-year growth of the Telefonica Latinoamerica Group (+51%) and the Telefonica de Espana Group (+16.7%) is due to the greater level of investment in the broadband business. The cellular business grew by a year-on-year 35.8% due to increased network capacity in Spain, Brazil and Mexico and the GSM network deployment in Colombia. (1) All projections refer to local currency (constant exchange rates) and exclude changes in consolidation other than assets acquired to BellSouth in Argentina & Chile in 2005 (TEM), and Atrium (T.Latam). (2) In terms of guidance calculation, Operating Income and Operating Income before D&A exclude other exceptional revenues/expenses not foreseeable in 2005. Personnel Restructuring and Real Estate Programs are included as operating revenues/expenses. (3) Assuming constant exchange rates and including the consolidation of the Latin American assets acquired to BellSouth in Argentina, Colombia, Chile, Ecuador, Guatemala, Nicaragua, Panama, Peru, Uruguay and Venezuela in the cellular business and Atrium in the Telefonica Latinoamerica Group from January 1st 2004. Cesky Telecom has been included in the period July-September 2004. (4) Assuming constant exchange rates and including the consolidation of the Latin American assets acquired to BellSouth in Argentina, Colombia, Chile, Ecuador, Guatemala, Nicaragua, Panama, Peru, Uruguay and Venezuela in the cellular business and Atrium in the Telefonica Latinoamerica Group from January 1st 2004. Cesky Telecom has been included in the period July-September 2004. (5) The organic growth published in January-June 2005 (+12.6%) was modified given that this figure did not include depreciation corresponding to the intangible assets of BellSouth Latin American operators in the cellular business. (6) Assuming constant exchange rates and including the consolidation of the Latin American assets acquired to BellSouth in Argentina, Colombia, Chile, Ecuador, Guatemala, Nicaragua, Panama, Peru, Uruguay and Venezuela in the cellular business and Atrium in the Telefonica Latinoamerica Group from January 1st 2004. Cesky Telecom has been included in the period July-September 2004. (7) The organic growth published in January-June 2005 (+12.6%) was modified given that this figure did not include depreciation corresponding to the intangible assets of BellSouth Latin American operators in the cellular business. (8) Assuming constant exchange rates and including the consolidation of the Latin American assets acquired to BellSouth in Argentina, Colombia, Chile, Ecuador, Guatemala, Nicaragua, Panama, Peru, Uruguay and Venezuela in the cellular business and Atrium in the Telefonica Latinoamerica Group from January 1st 2004. Cesky Telecom has been included in the period July-September 2004.

Source: Business Wire

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