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

Telefonica S.A. TEF reported mixed second-quarter 2018 results wherein the top line fell year over year but the bottom line increased. The Spanish telecom giant’s quarterly net income improved 9.9% to €902 million or €0.16 per share ($1,075.4 million or 19 cents per share) primarily due to lower operating expenses.

Telefonica SA Price, Consensus and EPS Surprise

Telefonica SA Price, Consensus and EPS Surprise | Telefonica SA Quote

Results were affected by net positive impacts in OIBDA (operating income before depreciation and amortization) with a favorable court ruling in Brazil and the partial goodwill impairment and tax asset reversal in Mexico.

Revenues

Quarterly GAAP revenues decreased 6.3% year over year to €12,144 million ($14,489 million), although organic revenues were up 2%, driven by strong pace of growth from handset sales and solid service revenues.

OIBDA came in at €4,237 million ($5,051.7 million), up 1.9% year over year despite weak revenues on lower operating expenses. Quarterly OIBDA margin was 34.9% compared with 37.7% in the year-ago quarter. Operating income was up 14.4% to €2,059 million ($2,455 million).

Segmental Performance

Telefonica Espana: Revenues in Spain increased 0.2% on a reported basis to €3,167 million ($3,776 million). OIBDA margin was 40.5%, reflecting solid commercial traction and churn reduction.

Telefonica Deutschland:  Revenues decreased 0.7% to €1,758 million ($2,096 million). OIBDA margin was 27.2% compared with 26% in the year-ago quarter with increasing monetization of mobile data growth.

Telefonica UK: Revenues were up 1.9% year over year to €1,638 million ($1,953 million). OIBDA margin in the U.K. was 27.5% compared with 27% in the year-ago quarter due to continued success with customer-led mobile-first strategy along with sustained levels of loyalty and customer spend.

Telefonica Brasil: Revenues in Brazil decreased 16.7% to €2,522 million ($3,007 million) owing to regulatory impacts. OIBDA margin improved to 50.5% from 34.1% due to solid performance in commercial businesses.

Telefonica Hispam Sur: Revenues from this segment were down 14% to €1,798 million ($2,143.7 million) owing to competitive intensity in Peru and Chile and lower interconnection rates in Peru. OIBDA margin declined to 28.2% from 28.6%.

Telefonica Hispam Norte: Revenues from this segment declined 1.7% to €1027 million ($1,224.5 million) owing to regulatory impact in Mexico. OIBDA margin decreased to 17.1% from 28.1% due to regulatory woes.

Telixus: Revenues were €186 million ($221.8 million), up 2.2% owing to higher cable business. OIBDA margin decreased to 47% from 47.9%.  

Cash Flow and Liquidity

In the first six months of 2018, Telefonica generated €6,101 million of cash from operations, up 2.5% year over year. Free cash flow was €1,548 million, down 4.8%.

As on Jun 30, 2018, Telefonica had cash and cash equivalents of €3,662 million ($4,277 million) and non-current financial liabilities of €46,798 million ($54,662.9 million).

Guidance Reiterated

Telefonica reiterated 2018 guidance and continues to expect revenues to grow around 1% year over year. OIBDA margin is anticipated to expand 0.5%.

Zacks Rank & Stocks to Consider

Telefonica currently has a Zacks Rank #5 (Strong Sell). Better-ranked stocks in the broader industry include Comtech Telecommunications Corp. CMTL, Micron Technology, Inc. MU and Swisscom AG SCMWY. While Comtech and Micron sport a Zacks Rank #1 (Strong Buy), Swisscom carries a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Comtech has a long-term earnings growth expectation of 5%. It beat earnings estimates in each of the trailing four quarters, the average being 123.7%.          

Micron has a long-term earnings growth expectation of 8.2%. It beat earnings estimates in each of the trailing four quarters, the average being 5.9%.   

Swisscom has a long-term earnings growth expectation of 2.5%.

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€1=$1.192279 (Period average from Apr 1, 2018 to Jun 30, 2018)

€1=$1.168060 (As on Jun 30, 2018)

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