Telefonica's (TEF) Q1 Earnings and Revenues Decline Y/Y

Telefonica S.A. TEF reported lackluster first-quarter 2018 results as both the top line and bottom line declined year over year on currency woes.

The Spanish telecom giant’s quarterly net income improved 7.4% year over year to €837 million ($1,028.6 million), although earnings per share declined 13.2% to €0.12 (15 cents) due to higher share number of outstanding shares in the reported quarter.

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Revenues decreased 7.2% to €12,190 million ($14,980.5 million) on GAAP basis, although organic revenues were up 1.9% driven by solid growth of handset sales and higher service revenues.

Operating income before depreciation and amortization (OIBDA) came in at €3,864 million ($4,748.5 million), declining 3.9% year over year despite lower operating expenses due to weak revenues. Quarterly OIBDA margin was 31.7% compared with 30.6% in the year-ago quarter. Operating income was up 4.3% to €1,638 million ($2,013 million).

Segmental Detail

Telefonica Espana: Revenues in Spain increased 1% on a reported basis to €3,098 million ($3,807.2 million). OIBDA margin improved to 39.5% from 37.3% on solid commercial traction and churn reduction.

Telefonica Deutschland:  In Germany, revenues decreased 0.2% to €1,767 million ($2,171.5 million). OIBDA margin was 22.8% compared with 22.6% in the year-ago quarter with increasing monetization of mobile data growth.

Telefonica U.K.: Revenues were down 1% year over year to €1,586 million ($1,949.1 million). OIBDA margin in the U.K. was 27.1% compared with 26% 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 14.5% to €2,705 million ($3,324.2 million) owing to regulatory impacts. OIBDA margin improved to 36.3% from 34.9% due to solid performance in commercial businesses.

During the quarter, Telefonica Hispanoamerica was split into two new units in order to more effectively manage the different market situations: Telefonica Hispam Sur (encompassing operations in Argentina, Chile, Peru and Uruguay) and Telefonica Hispam Norte (encompassing operations in Colombia, Mexico, Central America, Ecuador and Venezuela). Intercompany eliminations between T. Hispam Norte and T. Hispam Sur were reported under "Other companies and eliminations".

Telefonica Hispam Sur: Revenues from this segment were down 13.4% to €1,833 million ($2,252.6 million) owing to competitive intensity in Peru and Chile and lower interconnection rates in Peru. OIBDA margin improved to 28.2% from 27.6% due to higher penetration of high-value services, tariff updates in Argentina and favorable macroeconomic environment in the region.

Telefonica Hispam Norte: Revenues from this segment declined 16.8% to €971 million ($1,193.3 million) owing to regulatory impact in Mexico. OIBDA margin decreased to 26.6% from 27.4% due to regulatory woes.

Telixus: Revenues were €180 million ($221.2 million), down 4% due to lower cable business. OIBDA margin decreased to 47.6% from 48.9%.  

Liquidity and Cash Flow

Telefonica ended the quarter with cash and cash equivalents of €4,822 million ($5,941 million) and total debt of €43,975 million ($54,180.3 million).

In the first three months of 2018, Telefonica generated €2,621 million ($3221 million) of cash from operations, down 4.4% year over year. Free cash flow in the reported period was €550 million ($675.9 million), declining 8.7%.

Guidance

Telefonica expects revenues in 2018 to grow around 1.9% year over year. OIBDA margin is anticipated to expand 0.4%.

Zacks Rank & Stocks to Consider

Telefonica currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader industry are SITO Mobile, Ltd. SITO and Cogent Communications Holdings, Inc. CCOI, both carrying a Zacks Rank #2 (Buy) and United States Cellular Corporation USM sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

SITO Mobile has long-term earnings growth expectations of 25%.

Cogent Communications has long-term earnings growth expectations of 10%.

United States Cellular Corporation has long-term earnings growth expectations of 1%. It has a positive earnings surprise history with an average of 306.5% in the trailing four quarters, beating estimates in each.

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