Strong LatAm growth fails to make Telefonica profitable

Telefonica saw profits decline despite an overall increase in 2011 revenues, the Spain-based operator revealed on Friday.

Group revenues were up 3.5 percent year-on-year to €62.8 billion.

The operator’s Latin American business unit, which now accounts for 47 percent of group revenues, saw growth of 13.5 percent to €29.2 billion.

Growth in the region was driven by Brazil, where revenues increased 28.8 percent to €14.3 billion.

In contrast, revenues in Europe fell 1.3 percent to €15.5 billion, while Telefonica’s home market of Spain saw a 7.6 percent fall to €17.3 billion.

Net income nearly halved – it fell 46.9 percent to €5.4 billion – following what the company called several one-off factors.

The company’s acquisition of Vivo, which boosted profits in 2010 but has now been fully integrated, was one example cited.

However, even when all one-off impacts are stripped out profit still declined 16.6 percent.

“In a difficult environment, our diversification and our flexibility has allowed us to deliver solid results in line with targets,” commented chairman César Alierta.

Unsurprisingly, Europe was the source of much of the company’s ills.

In Spain, lower consumption, lower ARPU and higher pressure on prices aligned with multi-billion redundancy costs in the second half of the year.

Despite the total customer base growing three percent to 58.1 million, the rest of Europe also registered falls.

Revenues declined 14.7 percent in Ireland, 3.8 percent in the UK and three percent in the Czech Republic. Germany was the one bright spot, registering a 4.3 percent rise.

Alierta highlighted “a tough economic backdrop” and “intense competition in a fast-evolving digital industry” as reasons for the poor performance.

Nevertheless, the chairman also highlighted the “essential investments” the company continued to make for “the generation of future revenues”.

Spain was the main beneficiary – capex grew by 44.2 percent to €2.9 billion as Telefonica attempted to arrest the decline in its homeland. However, overall group capex fell 5.7 percent to €10.2 billion.

Total customer numbers increased seven percent to 306.6 million thanks to significant growth in the number of contract and mobile broadband customers.

On the mobile data front, Telefonica said revenues increased 19 percent (in organic terms) and now account for more than 31 percent of the company's total mobile service revenues.

Interestingly, non-SMS data revenues saw a strong 37.5 percent growth (again in organic terms) and now account for more than 52 percent of total data revenues.

Triple-play services led to a five percent increase in fixed broadband lines to 18 million, while pay-TV accesses grew 19 percent to 3.3 million.

Ultimately, Telefonica’s strong regional diversity continued to help its bottom line, although not sufficiently to return the operator to growth.

Nevertheless, its LatAm business will only go one way – mobile broadband penetration, for example, is just 10 percent currently.

Attention now shifts to assessing how Telefonica’s new business model fares.

As European Communications reported last September, Telefonica's Spain business unit is being subsumed into Europe, while new digital and global resources divisions will attempt to drive new revenues and make savings across the group.

It is standard practice for telco leaders to accentuate the positive – Alierta said the company faced 2012 “with a lot of confidence” – but in Telefonica’s case optimism looks well founded.

It is predicting revenue growth of one percent this year, but much more should be expected in future years from perhaps Europe’s most forward-thinking operator.

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