Telefónica's Net Profit Grows by 20.6% to 902 Million Euros in the First Quarter of 2013

Telefónica ended the first quarter of 2013 with a 20.6% growth in net profit to 902 million euros, while basic net profit per share increased by 22.2% to 0.20 euros per share. In the presentation of the figures of the Company corresponding to the period January-March, the Executive Chairman of Telefónica, César Alierta, highlighted the advances made in the execution of the Company’s transformation process, already producing visible results which translate into "a progressive stabilisation of the business and a greater degree of diversification, together with the constant improvement in the financial position.”

In the first quarter of the year, the results continued to put in value the growing diversification of the Group. In fact, for the second consecutive quarter, Latin America generated over 50% of the consolidated revenue (which totalled 14,141 million euros) and for the first time Brazil became Telefónica's biggest market in revenue generation. Equally, the results also reflect the benefits of the scale and scope of the Company and the new commercial model based on quality and differential offers in each one of the markets. All of this, together with the considerable effort to simplify and save costs, enables Telefónica to maintain a high level of profitability, with stability of the OIBDA in organic terms (4,567 million euros, -0.1%) and year-on-year growth of the OIBDA margin (+0.5 percentage points) and the operating cash flow (OIBDA-CapEx), which increased by almost double digits year on year. At the same time, Telefónica continues to advance in the launch of new businesses through Telefónica Digital and the projects led by Telefónica Global Resources keep improving operating and commercial processes globally.

With all of this, the results of the first quarter, in line with the company's estimates, make it possible to reiterate the operating and financial targets set for 2013.

Growth in mobile customers with contracts accelerates by up to +8%

Telefónica managed 315.7 million accesses at the end of March, up 2% year-on-year driven by sustained growth in mobile contract, especially in smartphones. Mobile accesses stood at 247.3 million at the end of the quarter (+3% year-on-year), with the contract segment continuing to drive the Company's commercial activity. Contract customers year-on-year growth accelerated by one percentage point from December 2012 to 8% year-on-year, already accounting for 33% of total mobile accesses (+2 percentage points year-on-year). Quarterly contract net additions totalled 1.4 million (excluding the disconnection of 114 thousand contract mobile accesses in the Czech Republic).

Mobile broadband accesses -accesses with a data tariff attached- posted a solid 34% year-on-year growth to surpass 55 million at the end of March 2013 and accounted for 22% of mobile accesses (+5 percentage points year-on-year). One quarter more, it is worth highlighting the strong commercial momentum of smartphones, with net additions of 2.6 million, reaching a penetration rate of 20% of mobile accesses (+6 percentage points year-on-year).

By region, Telefónica Latinoamérica (67% of the total accesses) consolidated as the main contributor to access growth, increasing 3% year-on-year (despite the application of more restrictive accounting criteria for prepay customers), and continued to reinforce its regional leadership in contract customers (+13% year-on-year to 40.7 million), reflecting the better quality of our customer base in the region. Net contract additions in the quarter stood at 1.3 million accesses, 1.5 times more than in the same period of 2012, strengthening the growth in high-value customers.

Analysis of the profit and loss account

It is important to note that Atento Group deconsolidated its results from the Telefónica Group as of the end of November 2012 (following the disposal of the Company during the fourth quarter of 2012), therefore affecting year-on-year comparisons of Telefónica's reported financial results.

Revenues in the first quarter of 2013 totalled 14,141 million euros, an 8.8% year-on-year decrease reflecting mainly the negative impact of exchange rate fluctuations (-5.5 percentage points) following the devaluation in Venezuela effective from 1 January 2013. Changes in the perimeter of consolidation reduced growth by 1.8 percentage points. In organic terms, revenues declined by 1.6% year-on-year, as growth in Telefónica Latinoamérica could not offset lower revenues of Telefónica Europe, still affected by the macroeconomic situation, the intense level of competition and the negative impact of regulation. Excluding the negative effect of regulation (-1.5 percentage points), consolidated revenues declined 0.1% year-on-year.

By region, Telefónica Latinoamérica accounted for 51% of consolidated revenues (+2.7 percentage points year-on-year), registering a sustained strong organic growth of 6.8% year-on-year underpinned by the steady growth of the mobile business. Telefónica Europe contribution to revenues fell to 47% of the total (-1.5 percentage points year-on-year). Telefónica España's contribution continued to decline, standing at 23% of consolidated revenues (-2.1 percentage points year-on-year), with Brazil ahead of Spain for the first time as the main market in terms of revenue contribution.

Several initiatives were implemented during the first quarter towards sustainable and distinctive revenue growth model, particularly focused on fixed and mobile connectivity and new digital services. Mobile data revenue maintained a strong growth in organic terms (+9.5% year-on-year) and accounted for 37% of mobile service revenues, 3 percentage points more than in the first quarter of 2012. Non-SMS mobile data revenues increased 21.9% in organic terms and already represent 62% of total mobile data revenues (56% in the first quarter of 2012).

Improvements in efficiencies deriving from the process of transformation of the Group

Operating expenses amounted to 9,824 million euros, down 8.8% vs. January-March 2012. In organic terms, this decline fell to 1.9%, in line with the year-on-year rate of decline posted in the previous quarter, being the third quarter in a row with cost reductions. This evolution is largely explained by the Company’s transformation process reflected in expenses in efficiency gains.

By components, supplies decreased 3.9% year-on-year in organic terms (-8.9% year-on-year in reported terms), the same as in the previous quarter, reflecting lower mobile interconnection costs, especially at Telefónica Europe, and lower handset sales related to the transformation of the commercial model. Subcontract expenses fell 2.6% year-on-year in the quarter in organic terms (-3.8% reported) due to the reduction in commercial costs, especially in subsidies, advertising and customer care expenses on the back of simplification across the board. Finally, personnel costs increased 4.7% in organic terms compared with the first quarter of 2012 (-15.6% in reported terms) mainly as a result of higher costs in Latin America due to the negative impact of inflation in some countries in the region. At the same time, the Company continued to implement restructuring plans in several countries, which are reflected in non-recurrent expenses in the first quarter of the year (58 million euros, principally in Brazil, UK and Czech Republic, vs. 42 million euros in the first quarter of 2012).

The average headcount was 132,726 employees, stable compared with the first quarter of 2012 (-0.4%) excluding the impact of the deconsolidation of Atento, which was sold in the fourth quarter of 2012. Including Atento, the average headcount fell by 54% year-on-year.

Gains on sales of fixed assets in the first quarter of 2013 amounted to 26 million euros. In the first quarter of 2012 this item totalled 136 million euros, mainly explained by the sale of non-strategic towers in Spain and Brazil for 123 million euros.

High profitability

Operating income before depreciation and amortisation (OIBDA) reached 4,567 million euros, virtually unchanged in organic terms (-0.1%) compared with the same period of 2012 (-10.1% reported). It is worth highlighting Telefónica Latinoamérica's solid growth in organic terms in the first quarter of 2013 (+7.7% year-on-year), already accounting for 53% of consolidated organic OIBDA (+3.9 percentage points compared with March 2012).

OIBDA margin stood at 32.3%, up 0.5 percentage points in organic terms compared with the first quarter of 2012, maintaining the year-on-year growth trend for the second quarter in a row and highlighting the solid execution and sustainability of the Company's transformational initiatives and the tangible benefits of scale.

In the first three months of 2013, operating income (OI) totalled 2,066 million euros, down 2.9% year-on-year organically (-17.7% in reported terms).

Profit from associates amounted to 18 million euros in the first quarter, while net financial expenses fell 17.6% year-on-year up to March thanks to the reduction in average debt in the period (and the lower cost of gross debt due to lower interest rates and the smaller weight of higher rate currencies. Corporate income tax in the first quarter of 2013 stood at 451 million euros, which, over an income before taxes of 1,410 million euros, implied an effective tax rate of 32%. Profit attributable to minority interests declined by 9.5% year-on-year.

As a result, consolidated net income up to March 2013 totalled 902 million euros, up 20.6% year-on-year, while basic earnings per share increased 22.2% to 0.20 euros.

Optimisation of investment, aimed at growth

CapEx in the first quarter of 2013 totalled 1,941 million euros (+13.4% year-on-year) and included 695 million euros relating to the acquisition of spectrum in the UK (671 million euros) and Uruguay (24 million euros). In organic terms, CapEx fell 19.5%, though this trend cannot be extrapolated to the rest of the year as a result of a different investment phasing. Once again, the Company devoted the bulk of its investment to growth and transformation projects (82% of the total), prioritising the expansion of fixed and mobile high-speed broadband services.

Consequently, operating cash flow (OIBDA-CapEx) rose 9.6% year-on-year in organic terms in the first quarter of 2013, continuing the growth trend registered in the previous quarter (+6.2% year-on-year).

Financial position

In the first quarter of 2013, Telefónica's net financial debt was negatively impacted by exceptional effects, specifically the devaluation of the Venezuelan bolivar (€873M) and the payments for spectrum auctions (€701M) as well as the recurrent first quarter´s seasonal effect. Nonetheless, the Company continued to undertake proactive management of its portfolio of assets with the aim of accelerating its deleveraging process. Thus, Telefónica's net debt would stand at 51,156 million euros, having been reduced by 653 million euros after the close of the quarter, and the leverage ratio would stand at 2.41 times.

In the first quarter of 2013, Telefónica's financing activity, excluding short-term Commercial Paper Programmes activity, stood at around 5,000 million equivalent euros (nearly 7,000 million euros year to date), so debt maturities are currently covered beyond 2014.The financing activity was mainly focused on financing in advance debt maturing in 2013 and on smoothing the debt maturity profile for 2014 and beyond at the Holding level. Therefore, the Company maintains a debt maturity profile that, along with cash flow generation expectations, is covered beyond 2014. Net debt maturities for 2014 amount to 5,631 million euros, while for 2013 the cash and liquid assets position exceed gross maturities.

Telefónica maintains total undrawn committed credit lines for an amount of nearly 14,200 million euros, with around 11,400 million maturing in more than 12 months. At the end of March 2013, bonds and debentures represented 70% of the consolidated financial debt breakdown, while debt with financial institutions represented 30%.

Telefónica Digital and Telefónica Global Resources

During the first quarter, there were several new developments regarding the mobile operating system based on HTML-5 Firefox OS. The first devices from Alcatel and ZTE followed by LG, Huawei and Sony, will be launched in Spain, Colombia and Venezuela in the third quarter of 2013 and, along the fourth quarter of 2013, in five more countries, including Brazil.

As part of the venture capital initiative, Telefónica Ventures has invested in TaskHub start-up to promote the expansion of its online services platform in the UK. This is the first investment by Telefónica's venture capital division in a start-up company accelerated by Wayra. On the other hand, Sprint and Telefónica have signed a global alliance to create one of the world's largest mobile advertising networks. In addition, Telefónica has presented Smart M2M Solution, an integral, simple and flexible platform that gives global customers a complete and precise view of their business, providing visibility, control and management of M2M connections. Finally Telefónica will be the first telecommunications group in Latin America to provide integrated eHealth services, thanks to the acquisition of Axismed, Brazil’s largest chronic care management Company.

With regard to mobile devices, the global area has consolidated its operating model by leading negotiations at group level, with very positive results, such as the simplification of our portfolio to 159 references, 30 out of which account for 80% of the value. The global procurement unitis advancing on the development and implementation of Telefónica's new procurement model towards an E2E stance for the most relevant categories, including Networks, Systems, Market Products, Devices, Services, Marketing and Advertising.