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Spanish telecom giant Telefonica S.A. (TEF - Analyst Report) reported first-half 2014 consolidated net income of €1,903 million ($2,609 million) that deteriorated 7.5% from the comparable period last year.

The company recorded revenues of €24,957 million ($32,416 million) in the first half that dropped 12.6% year over year owing to exchange rate fluctuations and change in consolidation perimeters.

In the first half of 2014, consolidated operating expenses increased 11.9% to €17,427 million ($23,892 million) owing to higher network, commercial and systems cost.

In the first half, adjusted operating income before depreciation and amortization (OIBDA) declined 14.5% to €8,055 million ($11,043 million), resulting in adjusted OIBDA margin of 32.3%, down 70 basis points year over year.

Segment Results

Telefonica Latin America: In the first half, revenues in Brazil deteriorated 14.7% to €5,484 million ($7,518.6 million), while in the Hispano-American market, revenues tumbled 13.8% to €7,066 million ($9,687.5 million). OIBDA (Operating income before depreciation and amortization) in the two above mentioned markets declined 16.3% and 11.9% respectively.

Telefonica Europe: In Spain, wireless revenues fell 8.6% to €5,992 million ($8,215 million) due to decline in both wireless and wireline revenues. Wireless revenues were €2,299 million ($3,151.9 million), down 12.7% over the year-earlier period, while wireline business deteriorated 5.5% to €4,184 million ($5,736.3 million). OIBDA in Spain declined 12.2% to €2,745 million ($3,763.4 million) during the first six months.

Revenues from Telefonica U.K. climbed 3.4% to €3,344 million ($4,584.6 million), while in Germany, the same fell 6.6% to €2,284 million ($3,131.4 million). OIBDA performance in UK improved 6.3% while in Germany, it deteriorated 14.6% during the first half.

Subscriber Statistics

At the end of the first half of 2014, total customer access reached approximately 315.8 million, down 0.5% year over year due to the sale of the Czech Republic business and the residential business in U.K.

On a year over year basis, mobile access remained at 249.4 million customers. Total Internet and data access declined 4.5% million from 19 million reported in the comparable period of last year. Pay-TV access totaled 4.2 million, up 26.0% year over year. Fixed telephony access dropped 5.6% to 37.5 million subscribers at the end of the reported period.

Liquidity and Capital Expenditure (Capex)

Telefonica exited first-half 2014 with net debt of about €43.79 billion ($60 billion), down from €45.38 billion ($62.5 billion) recorded at the end of 2013. The leverage ratio (net debt-to-EBITDA) was 2.47 times. Telefonica ended the first half 2014 with cash and cash equivalent of €10,131 million ($13,268.8 million) as compared with €9,977 million ($13,721 million) at the end of Dec 31, 2013.

Capex declined 9.7% year over year to €3.52 billion ($4.80 billion) in the reported period and includes €189 million ($257.9 million) incurred in the acquisition of Spectrum in Colombia and Central America. Operating cash flow (OIBDA-capex) was €4,533 million ($6,186.6 million), down 17.9% during the reported period.

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

The company is expected to benefit from its strategic measures in the European markets, including expansion of broadband and data services, pricing revision, network enhancement and collaboration with other players. However, the company continues to remain under pressure due to slow European recovery, weak domestic operations, slowdown in Brazil, highly leveraged balance sheet and growing competition from peers like 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 #3 (Hold).

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