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FOCUS: Telefonica Strong Customer Growth Produces An Excellent Quarter

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Telefonica's first quarter numbers contrast sharply with those produced by France Telecom and Deutsche Telekom, both of which were covered in the last issue (117) of The Mobile World Briefing. Those companies struggled to achieve any kind of revenue of profit growth, but Telefonica has, for the 17th successive quarter, produced revenue growth of 7% or better, on an organic basis. That the inorganic growth is just 1.1% (from 13,747m to 13,896m) is neither here nor there, given what happens further down the P&L. A 149m increase in Q1 revenues has been augmented by a 121m reduction in costs and a further 119m fall in the depreciation charge. Thus, Operating Profits emerge at 3,099m, 14.4% up. That emerges as a 17.9% rise at the Pre Tax level ( 2,331m) while after tax and minorities, the gain is 22.4%. With 132m fewer shares in issue, earnings end up 26.2% higher, at 0.33.

Almost every part of the company has shown growth. The client base is now 233.5m against 206.7m one year ago, an increase of 26.75m. By far the largest part of this stems from the mobile side, which added 24.1m to reach 171.7m, but Telefonica has even managed to increase its fixed line base (albeit by a very modest 89k). This net number hides several rather more marked changes, with Spain, Brazil, Argentina and Chile losing over 300k lines, while Peru, Colombia and the Central American operations added over 400k.

Turning to the mobile side, Telefonica reported seven figure growth in no fewer than nine markets. Brazil, Mexico and Peru head the list, with 5.29m, 3.94m and 3.11m respectively, the others being Argentina, Germany, Central America, Colombia, Spain and Venezuela, in that order.

It is worth noting that Telefonica includes the whole of Vivo's 34m customers in its 172m total and also, the whole of Medi's base despite having well under 50% equity interests. Presumably, the justification here is that both are JVs (with Portugal Telecom) and that the JV holding companies control the two operators. Perhaps too, there is the suggestion that Telefonica has significant influence over PT (through its 10% stake). A more conservative approach might be to include just half of the Vivo and Medi bases, in which case the number drops to 152m, which is perhaps perilously close to the America Movil total.

The battle for market leadership in Latin America between Telefonica and America Movil continues: operationally, the Mexican company is still winning as the chart makes clear, with net additions over the year of 26.3m against Telefonica's 19.4m. America Movil has added more connections in Mexico (+2.65m), Colombia (+1.88m) and Brazil (+1.28m) with Telefonica only winning by a sizeable margin in Peru (+0.96m). The picture remains the same if only the first quarter numbers are taken, the most marked change being in Brazil, where Vivo is fighting to regain market share.

However, the picture changes if the metrics are financial. Telefonica's revenue in the region rose by 12% year on year to ‚2,762m, while EBITDA was up 19% at ‚849m. America Movil's numbers look good enough in Mexican Pesos - revenues up 21%, EBITDA up 18% - but not translated into something a little more robust, such as the Euro. On this basis, the improvements shrink back to 5.1% and 2.7% respectively, suggesting that Telefonica is perhaps placing a greater emphasis on profitability.

The two tables reproduce two sets of data that Telefonica has published for the first time. The first shows minutes of use in each of the company's ten Latin American markets. Three show marginal year-on-year declines, but the rest are up, with all but one up by double digit percentages. The second table shows ARPUs and unfortunately, these have not moved in line with usage and are down in seven of the ten markets, with only Brazil and Chile showing improvements. The numbers are, of course, quite heavily influenced by exchange rate movements and over the year, the currencies of Argentina, Colombia, Mexico, Uruguay and most especially Ecuador all weakening against Telefonica's Euro.

In Europe, Telefonica added a total of 4.16m new customers during the year, with Germany (+1.82m) and Spain (+1.195m) contributing the bulk of the increase. The company now has well over 60m customers in its six main markets but this increase in scale has not been matched on the financial side, where revenues are just 2.2% up and EBITDA 2.0% up, at ‚5.94bn and ‚1.98bn respectively. (This is not a number Telefonica reports, but is derived from the combined revenues of Telefonica's Spanish mobile business and those of the O2 Group.) The principal reason was that ARPU dropped in all of Telefonica's major markets, from ‚31.70 to ‚30.50 in Spain, from ‚20.50 to ‚17.70 in Germany and from ‚33.30 to ‚31.10 in the UK. The good improvement in the Czech Republic (from ‚17.70 to ‚19.40) was not sufficient to offset this.

Telefonica v America Movil: Net Additions, Year to 31st March 08

Telefonica: AMPU per month, Latin America

Telefonica: ARPU per month, Latin America

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