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Spanish telecom giant, Telefonica S.A. reported third quarter 2013 earnings of 24 Euro cents per share (32 cents per ADS), down 22% year over year.

The company recorded revenues of €14,063 million ($18,558 million) in the third quarter. Revenues fell 9.5% year over year on a reported basis but improved 2.1% on an organic basis.

Adjusted operating income, before depreciation and amortization (OIBDA), fell 12.6% year over year to €4,678 million ($6,173 million), resulting in adjusted OIBDA margin of 33.3%, down 120 basis points year over year.

Segment Results

Telefonica Latin America: Revenues were down 6.8% year over year at €7,101 million ($9,370 million) in the third quarter. In terms of countries, Brazil declined 15.1%, Argentina declined 2.1%, Chile was down 7.3%, Peru was down 3.7%, Columbia slid 5.2% and Mexico fell 6.4%.

Telefonica Europe: Revenues from Europe slid 9.8% year over year to €6,708 million ($8,852 million). The reported downside was due to the operator’s Spanish revenues that slipped 12.1% year over year to €3,204 million ($4,228 million).

In Spain, wireless revenues fell 19.7% as a result of lower mobile service revenues. Wireline revenues were down 5.2 % year over year.

In the reported quarter, revenues from Ireland and Czech Republic declined 11.1% and 7.6% year over year, respectively. Revenues from Germany and the U.K. showed a 7.0% and 4.4% decrease, respectively.

Subscriber Statistics

At the end of the third quarter, total customer access reached approximately 308 million, up 1.9% year over year.

On a year-over-year basis, mobile access rose 3% to 252.2 million customers. The total Internet and data access fell 1.3% to 19.1 million, respectively. Pay-TV access was 3.441 million, up 3.7% year over year. Fixed telephony access dropped 1.9% to 39.8 million subscribers.

Liquidity and Capital Expenditure (CapEx)

Telefonica exited the quarter with net debt of about €46.101 billion ($60.83 billion). The leverage ratio (net debt-to-EBITDA) stood at 2.30 times. Capital expenditure was €6,019 million ($7,943 million) at the end of 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 collaboration 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 #4 (Sell).

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