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Spanish telecom giant Telefonica S.A. (TEF - Analyst Report) reported financial results of the first nine months of 2012, with adjusted earnings of €0.77 per share (95 cents per ADS) declining 22.9% year over year.

Net income jumped 26.4% year over year to €3.46 billion ($4.3 billion). However, consolidated revenue, at €46.52 billion ($57.39 billion), edged down 0.3% over the prior-year quarter, in the first nine months of 2012.

Adjusted operating income before depreciation and amortization (OIBDA) rose 10.7% to €15.8 billion ($19.5 billion), resulting in OIBDA margin of 33.9%, up from 30.5% in the year-ago period.

Segment Results

Telefonica Latin America: Latin America continued to grow at a faster pace and remained one of the best performing regions. Revenues increased 5.9% year over year to €22.6 billion ($27.9 billion), driven largely by Venezuela (representing a growth of 26.1%), followed by Ecuador (24.1%), Central America (25.8%), Peru (20.3%), Argentina (18.5%), Columbia (14.1%), Uruguay (9.2%) and Chile (9.8%). However, revenue from the key markets — Mexico and Brazil — registered a decline of 0.8% and 4.4%, respectively, in the first nine months of 2012.

Telefonica Europe: Revenues from Europe slid 6.4% year over year to €22.5 billion ($27.8 billion). The reported downside was owing to the operator’s Spanish revenues that slipped 12.9% year over year to €11.4 billion ($14.1 billion). 

In Espana, Wireless revenue fell 16.2% to €4.9 billion ($4.4 billion) resulting from a reduction in MTRs. Hurt by weak traffic revenue and repositioning of the new tariff portfolio, Wireline revenues stood at €7.2 billion ($8.9 billion), down 9.6% over the year-earlier period.

Revenues from the Ireland and Czech Republic declined 13.9% and 6.1% year over year to €474 million ($584.7 million) and €1.5 billion ($1.9 billion) respectively in the reported period. Meanwhile, revenues from Germany and UK showed a 4.5% and 1.3% increase to reach €3.9 billion ($4.8 billion) and €5.2 billion ($5.6 billion) respectively.

Other companies (ATENTO): ATENTO revenue increased 5.3% to €1.4 billion ($1.7 billion) over the year-ago period.

Subscriber Statistics

At the end of the first nine months of 2012, total customer access reached approximately 308.1 million, up 4.6% year over year.

On an annualized basis, mobile access rose 5.9% to 245.6 million customers. Total Internet and data access grew 1.9% to 19.4 million. Pay TV access reached 3.32 million, up 3.4% year over year. Fixed telephony access dropped 1.5% to 39.8 million subscribers at the end of the reported period.

Liquidity and Capital Expenditure (CapEx)

Telefonica exited the first nine months of 2012 with a net debt of about €56 billion, down from €58.31 billion recorded at the end of the first nine months of 2011. The leverage ratio (net debt-to-EBITDA) improved to 2.56 times.

CapEx fell 14% year over year to €5.7 billion in the reported period. Operating cash flow (OIBDA-CapEx) jumped to €10.1 billion from €7.6 billion in the year-ago period.

Future Outlook

For 2012, Telefonica expects revenue growth to remain flat as compared with fiscal 2011, with lower EBITDA margin decline. Additionally, the company expects leverage ratio (net debt-to-EBITDA) to be equivalent to 2.35 times.

Our Take

Telefonica continues to remain under pressure by intensifying European woes, weak domestic operations, slowdown in Brazil, adverse regulations, highly leveraged balance sheet and growing competition from France Telecom S.A. , Vodafone Group Plc (VOD - Analyst Report) and America Movil S.A.B. de C.V. (AMX - Analyst Report).

We currently have our long-term Underperform recommendation on Telefonica. For the short term (1–3 months), the stock retains Zacks # 5 (Strong Sell) Rank.

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