Telefónica is now the biggest European operator in terms of revenue, but the stock market continues to give the company the thumbs down.
After registering a 3.5 percent year-on-year increase in revenues during 2011, to €62.8 billion, the Spain-based operator overtook rival Deutsche Telekom, which saw sales fall six percent to €58.6 billion over the same period.
Telefónica’s Latin American business unit, which now accounts for 47 percent of overall group revenues, saw growth of 13.5 percent during the year.
On the back of last year’s structural reorganisation, which saw the creation of the London-based Telefónica Digital division, the company has pushed ahead with several m-commerce deals this quarter and launched an HTML5 partnership with Mozilla.
It has also signed a number of M2M and cloud deals, plus a network sharing agreement in Germany with DT.
However, the company’s stock price has continued to decline – it has fallen 40 percent in the last 12 months.
The root of this apparent paradox is the company’s home market of Spain, which accounts for 28 percent of the group’s overall revenues.
Private consumption continues to weaken, weighed down by austerity, high unemployment and this week’s news that the country is back in recession.
This contributed to the company's 2011 profits falling over 16 percent, once one-off impacts were stripped out.
“Spain’s importance in Telefónica’s portfolio weighs heavily on group financials and the growth prospects and bright spots elsewhere in the portfolio, notably in Latin America, are insufficient to significantly lift the group’s overall performance,” said Milan Sallaba, partner at KPMG’s Telecoms, Media and Technology practice.
However, Carlos Abad, MD of Arthur D. Little’s Spain practice, believes the operator is being harshly judged.
“Telefónica’s value is penalised in excess because of its Spanish nationality and the generally bad market sentiments towards the country,” he said.
“Telefónica has, of course, exposure to the severe recession in Spain, but has acted very decidedly to reduce payroll, retain clients and lower acquisition costs eliminating subsidies.”
In Lat-Am, as well as the UK and Germany, Abad says the company’s efforts may be undervalued.
However, Gartner’s Fernando Elizalde warned that growth in the group’s Lat-Am could also be tempered.
“The global economic conditions are impacting the economies in LatAm, with de-acceleration [already occurring] in Brazil,” he said.
“In Argentina, there are threats from the government to partly nationalise the Argentinian arm of Repsol, a Spanish oil conglomerate, which may extend to other Spanish companies, such as Telefónica Argentina.”
To counter this, Elizalde said it was important that Telefónica to spend capex on 4G licenses and infrastructure as well as reducing debt through the disposal of assets such as Portugal’s Zon or call centre Atento.
Frost & Sullivan analyst Craig Cartier believes the company’s determination to invest in market-leading programmes, such as the launch of O2 Wallet in the UK, provide grounds for optimism.
“If these efforts are any indication, investor concern about Telefónica’s lagging stock price doesn't seem to have slowed the company down,” he said.
“Telefónica is the highest profile carrier in Europe to continue to challenge players like Google and Apple.”
KPMG’s Sallaba agrees: “The company understands that innovative business models, scale and intellectual capability will be key contributors to deciding whether it will be able to reignite significant earnings growth going forward or slowly converge towards a more utilitarian business model and cost profile.”
Concludes Arthur D Little’s Abad: “Telefónica has been far sighted and bold, and should start generating a significantly positive news flow soon.”
You can read more about the financial performance of the world’s major operators in the Q2 issue of European Communications. Click here to ensure you receive your copy.