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Spanish telecom giant Telefonica S.A. (TEF - Analyst Report) reported fourth quarter 2013 adjusted earnings of 31 Euro cents per share (42 cents per ADS) that improved from 11 Euro cents (15 cents per ADS) earned in the comparable quarter last year.

Adjusted earnings for the year were €1.01 ($1.39), up 16.1% year over year.

The company recorded revenues of €14,436 million ($19,647 million) in the fourth quarter that dropped 8.8% year over year. Revenues for the year declined 8.5% year over year to €57,061 million ($78,555 million). Weak performance by all the segments has been blamed for the revenue decline.

In the fourth quarter, adjusted operating income before depreciation and amortization (OIBDA) declined 8.7% to €4,977million ($6,774million), resulting in adjusted OIBDA margin of 34.5%, up 10 basis points year over year.

In 2013, adjusted OIBDA declined 10.1% year over year to €19,077 million ($26,263 million), reflecting an adjusted OIBDA margin of 33.4%, down 60 basis points.

Segment Results

Telefonica Latin America: Latin American revenues decreased 6.7% year over year to €7,410 million ($10,085.0 million) in fourth quarter 2013, owing to declines in Brazil (12.6%), followed by Chili (10.1%), Uruguay (9.8%), Argentina and Mexico (each 4.7%), Ecuador (3.7%), Columbia (2.1%) and Peru (1.9%). However, revenues from Venezuela and Central America registered an improvement of 6.1%.

Telefonica Europe: Revenues from Europe slid 10.0% year over year to €6,739 million ($9,172 million). The reported downside was owing to revenue decline in every country where it has a presence.

In Spain, Wireless revenues fell 11.9% to €3,195 million ($4,348 million) resulting from the transformation process undertaken by the company. Wireless revenues were €1,226 million ($1,668 million), down 18.9% over the year-earlier period, while wireline business deteriorated 4.8% to €2,243.0 million ($3,052 million) during the quarter.

Revenues from the Czech Republic declined 14.0% year over year to €437 million ($594.0 million) while from Ireland it declined €143million ($194million) in the reported period. Meanwhile, revenues from Germany and U.K. showed a 7.4% and 3.7% decrease to reach €1,243 million ($1,691million) and €1,742million ($2,370 million) respectively.

Subscriber Statistics

At the end of 2013, total customer access reached approximately 323.1 million, up 2.0% year over year.

On an annualized basis, mobile access rose 3.0% to 254.7 million customers. Total Internet and data access declined 1.5% to 19.1 million. Pay TV access reached 3.60 million, up 8.0% year over year. Fixed telephony access dropped 1.7% to 39.34 million subscribers at the end of the reported quarter.

Liquidity and Capital Expenditure (CapEx)

Telefonica exited 2013 with net debt of about €45.38 billion ($62.5 billion), down from €51.25 billion ($65.90 billion) recorded at the end of 2012. The leverage ratio (net debt-to-EBITDA) was 2.36 times, same as in 2012.

CapEx declined 0.7% year over year to €9.39 billion ($12.92 billion) in the reported period. Operating cash flow (OIBDA-CapEx) was €9.68 ($13.32) billion, down 17.8% year over year.

Future Outlook

In 2014, Telefonica expects revenue growth while OIBDA margin will stabilize with an expected annualized erosion of 1%. Additionally, the company expects net financial debt of less than €43 billion.

Our Take

Telefonica continues to remain under pressure due to intensifying European woes, weak domestic operations, slowdown in Brazil, adverse regulations, 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 carries a Zacks Rank #4 (Sell).

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