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Telefonica (TEF) Q1 Earnings Increase, Revenues Fall Y/Y

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Telefonica, S.A. (TEF - Free Report) reported mixed first-quarter 2021 results, wherein the bottom line jumped but the top line declined on a year-over-year basis. Despite store closures and lower revenues due to the COVID-19 pandemic, the company managed to attract investor attention as its shares gained 3.1% to close the trading session at $4.97 as on May 14.

Bottom Line

In the March quarter, the Spanish telecom giant’s net income was €886 million or €0.15 per share compared with €406 million or €0.06 per share in the year-ago period. The year-over-year surge was mainly driven by higher operating income. Continued improvement in customer experience, smart capital allocation and enhanced infrastructure drove its operating momentum.

Further, adjusted earnings per share came in at 22 cents compared with 12 cents in the prior-year quarter.

Telefonica SA Price, Consensus and EPS Surprise

Telefonica SA Price, Consensus and EPS Surprise

Revenues

Quarterly total revenues declined 9% year over year to €10,340 million ($12,464 million), primarily due to the adverse impact of COVID-19 pandemic and unfavorable forex dynamics. However, the top line surpassed the consensus estimate of $12,129 million.

Results by Business Units

Telefonica Espana: Revenues in Spain slipped 0.9% year over year on a reported basis to €3,050 million, affected by the COVID-19 pandemic. However, revenues improved sequentially driven by lower erosion in Business communications and solid handset sales along with higher service and retail revenues. OIBDA (operating income before depreciation and amortization) margin declined to 39.2% from 39.8% in the year-ago quarter. Capital expenditures (CapEx) declined 2.9% to €334 million.

Telefonica Deutschland: Revenues inched up 0.2% to €1,850 million. Despite COVID-19 related woes, the improvement was driven by higher Mobile business and Fixed business revenues. Robust demand for high value handsets was a vital factor as well. OIBDA margin was 30.1% compared with 28.8% in the year-ago quarter. The rise was mainly due to the segment’s effective COVID-19 cost management. CapEx rose 1.8% to €228 million.

Telefonica UK: Revenues decreased 10.8% year over year to €1,552 million, due to store closures as a result of country-wide lockdown due to the pandemic. Reduced handset sales were a major headwind. However, this was partially offset by an increase in online trading. OIBDA margin was 35.2% compared with 29.7% in the year-ago quarter, driven by cost control with enhanced direct trading, which resulted in commissions savings. CapEx increased to €768 million with continued focus on 5G deployment and network enhancement initiatives.

Telefonica Brasil: Revenues in Brazil fell 25.7% to €1,645 million, primarily due to the impact of COVID-19 and the legacy fixed businesses. Moreover, OIBDA margin decreased to 42.7% from 42.9% in the prior-year quarter. CapEx declined 12.5% to €295 million.

Telefonica Infra (Telxius): The segment performed well on the back of its solid global infrastructure through the Derio Communications Hub. Sale of Telxius Tower division to American Tower Corporation significantly aided it to reduce its heavy debt burden. Strength in infrastructure assets and co-investments is expected to enable the segment to tap lucrative opportunities in the long run. Also, its robust cable business augmented its international footprint in the reported quarter.

Telefonica Tech: This segment showcased an impressive performance supported by accelerated growth in Cybersecurity and Cloud revenues from Spain and Hispam. However, its IoT and Big Data Tech revenues took a major hit as a result of the COVID-19 pandemic.

Telefonica Hispam: Revenues in this segment fell 12% to €1,939 million mainly due to the impact of COVID-19. Nevertheless, there have been improvements across all countries, especially Chile, Peru and Colombia. OIBDA margin came in at 20.4%, down from 22.8% in the prior-year quarter. CapEx was up 7.7% to €350 million. Notably, sale of Hispam's wholesale DTH business and fiber vehicle launch in Chile are expected to strengthen the segment’s IPTV business with significant savings.

Other Details

Overall, OIBDA came in at €3,417 million, down 9.1% year over year. This was mainly due to higher restructuring costs, along with the negative impacts of the COVID-19 pandemic. OIBDA margin was 33% compared with 33.1% in the year-ago quarter. Operating income was up 27.8% to €1,394 million.

Cash Flow & Liquidity

In the first three months of 2021, Telefonica generated €2,556 million of net cash from operating activities compared with €2,259 million a year ago. Meanwhile, free cash flow in the reported quarter was hampered by spectrum payments of €694 million in the U.K., Spain, Chile and Germany.

As of Mar 31, 2021, the company had €4,940 million ($5,793.2 million) in cash and cash equivalents with €40,451 million ($47,437.1 million) of non-current financial liabilities.

2021 Outlook

With an optimistic approach, Telefonica remains on track to meet 2021 financial targets and is in line with management expectations. The company’s revenues and OIBDA are expected to remain stable year over year on an organic basis. CapEx to Sales is expected to rebound to normalized levels of up to 15%.

Zacks Rank & Stocks to Consider

Telefonica currently has a Zacks Rank #4 (Sell).

A few better-ranked stocks in the broader industry are BCE Inc. (BCE - Free Report) , MYR Group Inc. (MYRG - Free Report) and UGI Corporation (UGI - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

BCE has a long-term earnings growth expectation of 5%.

MYR Group delivered a trailing four-quarter earnings surprise of 55.2%, on average.

UGI Corporation delivered a trailing four-quarter earnings surprise of 58.2%, on average.

Conversion rate used:

€1 = $1.205309 (period average from Jan 1, 2021 to Mar 31, 2021)

€1 = $1.172706 (as of Mar 31, 2021)

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