Telefonica Suffers Domestically

Spanish telecom giant Telefonica (TEF - Analyst Report) is seeing a continuous decline in its domestic market share as customers are switching to cheaper offers from its competitors. This will lead to lower revenues and earnings for the company.

Spanish operations were weak again in February following lackluster performances in January and the fourth quarter of 2010. In the fourth quarter, the company’s earnings missed the Zacks Consensus Estimate as well as the year-ago earnings due to the economic crisis in Spain that affected its domestic wireless business.

Telefonica leads the Spanish mobile market, which includes both mobile phones and datacards. The company is persistently losing share in the mobile market, with 41.46% in February 2011 as compared with 41.58% in January 2011 and 42.27% in December 2010.

In February, Telefonica lost its market share to its rivals –– Yoigo, a unit of Sweden’s Teliasonera AB and France Telecom SA’s (FTE - Analyst Report). The companies added 45,732 and 11,146 subscribers, respectively, in the month. Telefonica was the biggest loser in the month shedding 42,623 customers.

We believe Spain is not working in favor of Telefonica. The economic downturn in Spain has been more than expected and is likely to drag the company’s profits and liquidity. Margins are expected to remain strained for the company’s domestic business, with EBITDA predicted to fall until 2014.

Further, the company’s Spanish revenue continues to be affected by the ongoing reduction in mobile termination rates, which is the fee that operators charge each other to connect calls.

However, weak Spanish operations are expected to be fully offset by strong growth in Latin America and Europe. Latin Americais one of the best performing regions and remains the principal growth region for Telefonica. This segment continues to post healthy subscriber additions on a quarterly basis. Telefonica is particularly well positioned in Brazil and Mexico, and is actively gaining market share from its dominant competitor, America Movil (AMX - Analyst Report).

Moreover, the consolidation of  Vivo Participacoes (VIV - Analyst Report) in October 2010 enables Telefonica to offer full competitive bundled services.  Telefonica has merged Vivo with its Brazilian fixed-line voice and broadband unit Telesp (TSP).

We are currently recommending our long-term Outperform rating on Telefonica supported by the Zacks #1 (Strong Buy) Rank.

Read the full analyst report on TEF

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Read the full analyst report on VIV

Read the full analyst report on TSP