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Telefonica (TEF) Q2 Earnings Increase, Revenues Down Y/Y

Telefonica, S.A. TEF reported mixed second-quarter 2021 results, wherein the bottom line increased but the top line declined on a year-over-year basis. With gradual store openings post the COVID-19 lockdown, factors such as Telxius Tower sale, Virgin Media-O2 JV in the U.K., accretive customer base, growth investments, debt-reduction initiatives, streamlined operations along with high fiber and contract accesses spurred its operating momentum. Despite such positive endeavors, shares of the Madrid-based company failed to impress investors as its shares fell 0.7% to close the trading session at $4.50 as on Jul 29.

Bottom Line

In the June quarter, the Spain-based telecom giant’s net income was €7,743 million or €1.37 per share compared with €425 million or €0.07 per share in the year-ago quarter. The year-over-year drastic surge was primarily driven by higher operating income. Virgin Media and Telefonica U.K.’s O2 mega merger deal, continued improvement in customer experience, growth focused investments, delivery of inclusive connectivity and enhanced infrastructure drove its operating momentum.

Further, adjusted earnings per share came in at 11 cents compared with 13 cents in the prior-year quarter.

Telefonica, S.A. Price, Consensus and EPS Surprise

Telefonica SA Price, Consensus and EPS Surprise

Telefonica, S.A. price-consensus-eps-surprise-chart | Telefonica, S.A. Quote

Revenues

Quarterly total revenues declined 3.6% year over year to €9,964 million ($12,004 million), mainly due to changes in the perimeter of consolidation following the creation of Virgin Media-O2 JV in the U.K. and the sale of Telxius Towers. Unfavorable forex dynamics posed a major headwind as well. However, the top line surpassed the consensus estimate of $11,417 million.

Results by Business Units

Telefonica Espana: Revenues in Spain inched up 0.6% year over year on a reported basis to €3,045 million. The upside was driven by higher service revenues with strength across IT and wholesale. Rebound in B2B communications and solid handset sales acted as tailwinds. OIBDA (operating income before depreciation and amortization) margin declined to 38% from 40% in the year-ago quarter. Capital expenditures (CapEx) increased 27% to €386 million.

Telefonica Deutschland: Revenues jumped 5.8% to €1,893 million. The improvement was driven by healthy traction in the Mobile business supported by a recovering economy post the COVID-19 lows. Robust demand for fixed-mobile substitution products played a vital role as well. OIBDA margin was 32.5% compared with 31.4% in the year-ago quarter. The rise was mainly due to the segment’s effective cost management and strong revenues along with investment in network marketing campaigns. CapEx rose 11.6% to €280 million.

Telefonica UK: Revenues decreased 34.1% year over year to €1,076 million, due to COVID-19 related travel restrictions. However, this was partially offset by improved handset revenues resulting from gradual store openings post the pandemic lockdown. OIBDA margin was 34.6% compared with 30.4% in the year-ago quarter, driven by solid top-line growth, continued cost control efforts with enhanced direct trading, which resulted in commissions savings. CapEx declined 10.3% to €166 million. The segment continues to focus on 5G deployment and network enhancement initiatives.

Virgin    Media-O2 U.K.: Closing of the Virgin Media-O2 U.K. JV in the quarter boosted the segment’s commercial momentum on the back of its augmented network footprint. Revenues of this newly added segment increased 3% to €2,951 million, fueled by strong wholesale B2B revenue performance and accretive customer base. OIBDA margin jumped to 35.5% from 35.1% in the prior-year quarter. CapEx increased 19.7% to €554 million.

Telefonica Brasil: Revenues in Brazil fell 3.9% to €1,672 million, primarily due to lower revenues from legacy businesses. OIBDA margin increased to 46.5% from 41.2% in the prior-year quarter driven by strong commercial momentum and digitization efficiencies. CapEx rose 7.6% to €353 million on the back of investments related to enhancing the coverage of mobile and fiber-to-the-home networks.

Telefonica Infra (Telxius): The segment performed well on the back of its solid global infrastructure through    the Derio Communications Hub with new customer additions. Sale of Telxius’ European and Latin American Tower division to American Tower Corporation significantly aided it to reduce its heavy debt burden. Strength in infrastructure assets and co-investments is expected to enable the segment to tap lucrative opportunities in the long run. Also, its robust cable business augmented its international footprint in the reported quarter.

Telefonica Tech: This segment showcased an impressive performance supported by accelerated growth in Cybersecurity and Cloud revenues from Spain and Hispam. Despite the COVID-19 adversities, particularly in the retail sector, the segment’s IoT and Big Data Tech revenues witnessed a significant recovery to bolster digital transformation of businesses. Agreement with TM One for global cybersecurity solutions to cater to the Malaysian B2B market and acquisition of Altostratus Cloud Consulting drove the cybersecurity and cloud business.

Telefonica Hispam: Revenues in this segment increased 6.7% to €2,007 million mainly due to growth across all countries. Higher service revenues were a major tailwind. Further, Chile and Colombia exhibited solid performance on both fiber and contract accesses. OIBDA margin came in at 18.6%, down from 19.2% in the prior-year quarter. CapEx was up 13.5% to €151 million.

Other Details

Quarterly OIBDA came in at €13,469 million, up 306.3% year over year. This was mainly due to €10.2 billion of capital gains from the Virgin Media-O2 U.K. JV and the sale of Telxius Towers, restructuring costs, contingencies in Brazil, favorable court ruling along with goodwill impairment in Argentina. OIBDA margin was 135.2% compared with 32.1% in the year-ago quarter. Operating income surged 999% to €11,353 million from €1,033 million.

Cash Flow & Liquidity

In the first six months of 2021, Telefonica generated €5,112 million of net cash from operating activities compared with €5,288 million a year ago. Free cash flow in the reported quarter totaled €877 million compared with €33 million in the previous quarter, which included spectrum payments.

As of Jun 30, 2021, the company had €14,522 million ($17,249 million) in cash and cash equivalents with €38,141 million ($45,303.3 million) of non-current financial liabilities.

2021 Outlook

Encouraged by an optimistic approach, Telefonica remains on track to meet 2021 financial targets and is in line with management expectations. The company’s revenues and OIBDA are expected to witness marginal growth year over year from a stable position on an organic basis. CapEx to Sales is expected to rebound to normalized levels of up to 15%. The company is committed in its approach to drive core businesses in the U.K., Spain, Germany and Brazil.

Zacks Rank & Stocks to Consider

Telefonica currently has a Zacks Rank #3 (Hold).

A few better-ranked stocks in the broader industry are Telephone and Data Systems, Inc. TDS, BCE Inc. BCE and Swisscom AG SCMWY. While Telephone and Data Systems sports a Zacks Rank #1 (Strong Buy), BCE and Swisscom carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Telephone and Data Systems delivered a trailing four-quarter earnings surprise of 132.1%, on average.

BCE has a long-term earnings growth expectation of 4.7%.

Swisscom has a long-term earnings growth expectation of 2.4%.

Conversion rate used:

€1 = $1.204663 (period average from Apr 1, 2021 to Jun 30, 2021)

€1 = $1.187784 (as of Jun 30, 2021)


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