Telefonica Profit Miss Shows Obstacles to Strategy Overhaul

(Bloomberg) --

Telefonica SA reported profit that missed estimates, highlighting that a plan to reinvent itself globally is nevertheless vulnerable to increased competition in Spain, its biggest market.

The phone company reported operating income before depreciation and amortization of 3.67 billion euros ($3.96 billion euros) in the fourth quarter, falling short of the 4.18 billion euros forecast by analysts. Impairments from Mexican and Argentine operations, along with staff cuts and other restructuring measures, were a drag on earnings.

The carrier, based in Madrid, is pledging to maintain sales growth and cut debt as it undergoes a shift to focus mainly on four key markets.

Investors have been punishing the company, with its shares down about 15% over the past year compared to a 7.3% increase for the Stoxx 600 Telecommunications index. The slide prompted Chairman Jose Maria Alvarez-Pallete to announce in November a new strategy to focus on Spain, Brazil, the U.K. and Germany, which generate the bulk of sales, and place other Latin America activities into a separate division.

Telefonica shares fell 4.9% to 6.22 euros at 10:09 a.m. in Madrid.

Thursday’s report flagged the difficulties the company has in the region, an area once seen as a potential engine of expansion. Oibda in the quarter was hit by a combined 445 million euros of impairments from Mexico and Argentina. A further 266 million euros of impairments came from staff cuts and other restructuring measures, part of the broader move to streamline the company.

Performance in Spain raised some points of concern for analysts including Nawar Cristini at Morgan Stanley and Michael Bishop at Goldman Sachs Group Inc. Growth in average revenue per user slowed to 0.2% from 1.6%, while revenue from the consumer division dropped 1.2%.

The company faces increased competition from Orange SA and attacks from Vodafone Group PLC and Masmovil Ibercom SA at the lower end of the market. Revenue growth in the country gained 0.4% overall, helped by business sales.

On Thursday it forecast stable earnings and revenue for this year after reporting a mixed result for 2019: profit gained 1.9% while sales increased 3.2%; the company had guided for growth of about 2% in both cases.

A bright spot in the quarterly report was the decline in net debt for an 11th straight quarter, to 37.74 billion euros, indicating that Pallete is continuing a push to lower leverage with cash generation.

(Updates share price in fifth paragraph, adds details on Spain in eighth.)

To contact the reporter on this story: Rodrigo Orihuela in Madrid at rorihuela@bloomberg.net

To contact the editor responsible for this story: Jennifer Ryan at jryan13@bloomberg.net

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