Growth from Latin America Keeps Telefónica's Organic Revenue Stable in Q3

Telefónica has released its results for the third quarter of 2009, reporting revenue of 14.134 billion euro (US$21.211 billion), down 5.7% year-on-year (y/y), and operating income before debt and amortisation (OIBDA) of 5.708 billion, down 3.3% y/y. The OIBDA margin was 40.4%, against 39.4% a year earlier. Of the revenue, 4.898 billion euro (down 8.9% y/y) came from Spain, 3.484 billion (down 5.5% y/y) from other European operations and 5.648 billion (down 2.3% y/y) from Latin America.

In organic terms, Telefónica reports that its year-to-date revenue of 41.721 billion euro was 0.1% higher than in the first nine months of 2008, against the reported y/y decrease of 3.3%. The difference was mainly in the Latin American business unit, of which organic revenue growth of 5.8% y/y was notably bigger than the 1.9% y/y reported, owing to currency fluctuations. Similarly, in organic terms the European operations outside the home market delivered a growth rate of 1.4%.

Operationally, Telefónica had a total of 264.754 million final client accesses as of end-September, up 6.4% y/y. Fixed telephony accesses totalled 41.447 million (down 4.2% y/y), Internet accesses 14.941 million (up 3.8% y/y), mobile accesses 205.883 million (up 8.9% y/y), and pay-TV accesses 2.483 million (up 15.1% y/y).

Outlook and Implications

• Spain is Different: The recent evolution of Telefónica's domestic performance reveals a development which is rather unique among the world's major telecoms groups. The drastic revenue decline what we are experiencing now hides the fact that until the crisis Spain as a telecoms market was extremely profitable, with one of the highest service prices in the European Union (EU). What makes this special is the fact that the dynamics of the business have not actually differed notably from the peer markets, as both the level of competition and the effectiveness of regulation has compared pretty well to the rest of Europe. We believe that what namely once kept the Spanish telecoms prices inflated—and thus the local incumbent's margins high—amid the steady increase in competition was the rapid population growth seen earlier in this decade.
• Prices in Downfall as Demographic Dividend Wears off: Between 2002 and 2008, the Spanish population increased by 8%, or around 4.5 million people, and with the vast majority of this owing to immigration the newcomers were economically active entrants, who at the same time in employment terms were accommodated fairly smoothly by the booming economy. For Spain's largest service provider, Telefónica, this made life much more comfortable, since the steady expansion of the addressable market buffered it from price erosion even when the sector as such turned more and more competitive on the back of new entrants and their investments. When the crisis kicked in, the effect of this "demographic dividend" suddenly wore off, with a large share of the recent immigrants either becoming redundant or leaving the country. The price war which this has triggered has certainly hit Telefónica's revenue hard, but in meanwhile the company can now protect its margins by cutting costs in a way that was not necessary during the fat years. Indeed, Telefónica's domestic OIBDA margin—49%, against 49.9% in the third quarter of 2008—shows that the firm has had a plenty of scope for slashing its cost base.
• Fixed-Mobile Integration in Germany, Expansion in Brazil: Outside Spain, the second half of 2009 has seen a number of interesting strategic developments. Most of all, Telefónica has confirmed its commitment to expand its exposure to Latin America further, by making a takeover bid for GVT, a leading fixed operator in Brazil, which as a market already generated nearly 15% of Telefónica's overall revenue (see Brazil: 5 November 2009: Telefónica Increases Offer for GVT). As well, we believe that it was chiefly a promise of future synergies in the Brazilian mobile market, which last month motivated Telefónica to remain a shareholder in Telecom Italia, which financially speaking has thus far been a somewhat burdensome investment for the Spanish group (see Italy – Spain: 29 October 2009: Telefónica Keeps Telecom Italia Share as Telco Renews Pact for Three Years). Meanwhile in Germany, Telefónica has taken an important step by acquiring Telecom Italia's fixed unit, Hansenet, for 900 million euro (see Germany: 6 November 2009: Telefónica Buys Hansenet from Telecom Italia for 900 mil. Euro). The purchase of Hansenet will, most of all, allow Telefónica to establish a solid foothold in the German broadband market, thus giving it a similar integrated reach previously enjoyed only by Deutsche Telekom and Vodafone.