Telefonica net profit down 27% as costs rise

Spanish telecoms giant Telefonica SA Thursday posted a 27% drop in second quarter net profit as it continued to suffer from plummeting revenues in crisis-hit Spain and rising operating costs, as well as a writedown of its stake in Telecom Italia SpA. Madrid-based Telefonica, Europe's second-largest telecommunications company by market value after U.K.-based Vodafone Group PLC, said net profit fell to EUR1.54 billion from EUR2.12 billion in the same period last year, missing analysts' expectations.
"Results were worse than expected mainly on (Telefonica's Spanish) domestic operations," BPI analysts said in a note to clients."European results were also a disappointment with margins significantly below expectations." Operating expenses rose 4% to EUR10.13 billion, with personnel expenses up 5.7%. Meanwhile, Telefonica's revenue increased just 2.2% to EUR15.45 billion, as falling sales in its troubled Spanish home market were partially offset by soaring revenue in high-growth but fiercely competitive Latin American markets.
Telefonica also took a EUR353 million impairment charge to account for a previously announced 18% cut in the book value of its stake in Telecom Italia, another former telecom monopoly that is facing tough domestic market conditions. Telefonica holds this stake jointly in an investment vehicle which also comprises several Italian companies. Telefonica's revenue in Spain, currently one of the slowest-growing economies in the world, fell 6.6% in the quarter, while revenue in the rest of Europe dropped 3.5%. Latin American revenue increased 12%. Operating income before depreciation and amortization fell 1% to EUR5.73 billion. As a result, Telefonica's Oibda margin, its most closely watched performance measure, fell to 37.1% from 38.3%.
Telefonica shares reacted negatively and at 1320 GMT were down 1.4% to EUR15.50, among the worst performers in Spain's blue-chip IBEX-35 index. Telefonica, with a market value of EUR71 billion, is Spain's largest company and the most liquid stock in the local market. Its shares have been under pressure on Spanish sovereign debt concerns and have fallen close to 5% so far this year.
Still, Telefonica Chairman Cesar Alierta said he anticipates the company will still meet ambitious annual guidance for profitability, adding that a recent deal with unions to lay off as many as 6,500 staff in Spain should ensure the domestic unit's competitiveness. In addition, Telefonica said it's not anticipating further Oibda decreases in the second half, as it should benefit from the planned sale of Spanish non-core assets, and noted the Oibda margin shouldn't drop below 36% for the year. It also reiterated its dividend target, one of the highest in the sector, with a yield of over 10%.Meanwhile, the ongoing merger of Telefonica's mobile and fixed-line units in Brazil will generate synergies of EUR3.7 billion-EUR4.6 billion,"significantly higher" than previously estimated, Alierta said.

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