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Spanish telecom giant, Telefonica S.A. (TEF - Analyst Report) reported second quarter 2013 earnings of 25 Euro cents per share (33 cents per ADS), down 13.8% year over year. The results were in-line with the Zacks Consensus Estimate.

The company recorded revenues of €14,421 million ($18,828 million) in the second quarter. Revenues fell 6.8% year over year on a reported basis but improved 0.5% on an organic basis.

Adjusted operating income, before depreciation and amortization (OIBDA), fell 9.3% to €4,854 million ($6,337 million), resulting in an adjusted OIBDA margin of 33.7%, down 90 basis points year over year.

Segment Results

Telefonica Latin America: Revenues remained flat year over year at €7,451 million ($9,728 million) in the second quarter. In terms of countries, revenue growth was recorded in Chile (4.4%), Peru (6.0%), Mexico (8.0%), Venezuela (3.5%), Central America (5.6%), Ecuador (6.5%), Uruguay (11.9%) and Argentina (0.5%).

However, revenues from Brazil and Columbia registered a decline of 3.9% and 3.4%, respectively, in the second quarter.

Telefonica Europe: Revenues from Europe slid 10.7% year over year to €6,717 million ($8,769 million). The reported downside was owing to the operator’s Spanish revenues that slipped 13.7% year over year to €3,299 million ($4,307 million).

In Spain, wireless revenues fell 19.5% to €1,348 million ($1,759 million) resulting from less sales of handsets. Wireline revenues came in at €2,207 million ($2,881 million), down 7.4% from the year-ago period.

In the reported period, revenues from the Ireland and Czech Republic declined 10.8% and 7.7% year over year to €141 million ($184 million) and €465 million ($607 million), respectively. Revenues from Germany and U.K. showed a 6.1% and 5.2% decrease to €1,295 billion ($1,690 million) and €1,628 million ($2,125 million), respectively.

Subscriber Statistics

At the end of the second quarter, total customer access reached approximately 311 million, up 1.6% year over year.

On a year-over-year basis, mobile access rose 2.4% to 249.5 million customers. The total Internet and data access fell 1.6% to 19.0 million. Pay-TV access was 3.33 million, flat year over year. Fixed telephony access dropped 1.3% to 39.5 million subscribers.

Liquidity and Capital Expenditure (CapEx)

Telefonica exited the quarter with net debt of about €49.79 billion ($65.00 billion), down from €58.31 billion ($76.13 billion) recorded at the end of Jun 30, 2012. The leverage ratio (net debt-to-EBITDA) stood at 2.40 times compared with 2.36 times in 2012. Capital expenditure was €1,962 million ($2,561 million) in the reported quarter.

Our Take

We expect Telefonica to benefit from its various strategic measures to enhance its operations in the European markets. These steps include expansion of broadband and data services, pricing revision, network enhancements and collaborations with other players.

However, the company continues to face pressure from the slowdown in Brazil operations, adverse regulations, a highly leveraged balance sheet and growing competition from Orange (ORAN - Analyst Report), Vodafone Group Plc (VOD - Analyst Report) and America Movil S.A.B. de C.V. (AMX - Analyst Report).

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

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