Last week the Spanish telecommunications company Telefónica (NYSE:TEF) announced its consolidated financial results for year 2013 disclosing that net profits reached €4.59 billion, which translated in a 16.9% increase in comparison to 2012 and overcame analysts’ consensus of €4.4 billion.
Analyzing the figures recently released, revenues decreased in most of the markets in which the global company operates. Total consolidated revenues were €57.06 billion, down 8.5% in the year, with Latin America generating 51% (+9.6% vs 2012) and Europe 47% (-8.6% vs 2012) of the total, respectively. Telefónica seems to continue focusing its efforts on Brazil, which concentrates sales of €12.22 billion last year.
Reducing Leverage and Resuming Dividend Payments
Among the most important facts the company unveiled was the reduction of its net debt. Telefónica's net debt decreased to €45.38 billion, implying a reduction of €16 billion in the last 18 months and adhering to the financial discipline committed by the board after borrowing heavily to expand operations in Latin America and in northern Europe.
As a consequence, the company met its commitment of closing the year with a debt level lower than €47 billion and took the leverage ratio to 2.36; according to the company, it is not taking into account the sale of its operations in Czech Republic and in Ireland that materialized at the beginning of 2014 and which takes the mentioned ratio to 2.31.
In addition to that, the company announced a dividend payment of €0.75 per share; in 2012, Telefónica had decided to scrap its dividend payments due to deteriorating market conditions for Spanish companies that would not allow Telefónica to access free cash and could have caused problems to refinance debt along with a downgrade of its credit rating. The dividend scrap saved the company more than €6 billion.
Telefónica seems to have chosen a diversified strategy to expand growth and benefits for its shareholders.
With more than 320 million customers distributed in 23 countries, the company has increasing interests in Latin America, which account for 68% of its client base and, in particular, for Brazil. Along with the mentioned region, the mobile data business continued to be the main motor of growth in earnings; following Cesar Alierta, Telefónica´s CEO, mobile data traffic is expected to multiply by 11 in the coming five years.
In terms of focus, the disinvestment in non-strategic assets implemented in the last two years shows that the time of aggressive take-overs may have finished and a period of financial discipline and restraint in terms of geographical expansion begins. According to company statements, Telefónica will concentrate its efforts in growing revenue through extending the commercial offering to new services in the digital world, increasing efficiency through cost-cutting and financial discipline, including investments in projects with value added, and modernizing networks and systems.
With a P/E ratio of 11.44, there are reasons to believe the company may generate good returns for its shareholders. The mentioned ratio is better that those of other competitors such as Orange (NYSE:ORAN)'s 9.76 and Vodafone (NASDAQ:VOD)'s 9.77.
However, the company still has to perform better in ratios such as ROE (17.17), which is well below Vodafone's (26.70), profit margin (7.86%) and operating margin (8.07%). It is expected that the trimming of its high debt in the medium-term, if accompanied by other good management and commercial policies, could deliver better results.
Opportunities and Challenges
In terms of opportunities, Telefónica can take advantage of its high penetration in the Latin American market adding value to its current client base as well as extending services. Moreover, alliances with other players, such as smartphones manufacturers, could serve as a way to retain and attract customers. As said, the development of data services for different platforms could also be a source of revenues.
Coming to the challenges, the instability of exchange rates in Latin America seen in the last months will affect the company income statement. At the same time, margins in the sector tend to narrow due to high competency; just to mention two important players in Europe: Vodafone and Orange, and one competitor in Latin America: América Móvil (NYSE:AMX).
To sum up, any strategy that the company follows should go along with an innovative partner that provide the alliance with the spark, willingness and spirit of a growing and aggressive start-up.