• ‘Show me the money’ the key message in Spain.
  • Positivity in Germany and UK.
  • Brazil trading up.
  • LatAm carve-out progressing.

Big Four providing a solid foundation

Big Four providing a solid foundation

Source: Telefónica

With its Q1 FY20 results, Telefónica has begun pulling out selected growth trend metrics relating to the four markets at the core of its evolving business: Brazil, Germany”, Spain, and the UK. This added a more positive sheen to quarterly performance and while there was a 5% reported revenue decline, management was able to highlight a flat performance for its main areas of focus.

The core four can also be seen as (slightly) more vibrant profit centres. Reported OIBDA fell by nearly 12%, and organic performance was down by approaching 2%. However, even in testing times the major markets reported a near 1% rise in OIBDA, and are also performing positively in terms of the Group’s central guidance measure of operating cash flow. 

Individually, the four major markets are facing their own challenges.

  • Telefónica España, as a microcosm of the Group as a whole, is focused on cash generation, and will be targeting its opex and capex investment to support efficiency projects that are expected to deliver “benchmark cash conversion”. However, non‑converged services in the consumer segment were said to be a drag on the OB, while the lockdown‑related restrictions on retail also contributed to the end of a streak of service revenue and profit growth going back ten quarters. In recent presentations, the OB has distinguished between three tiers of convergence customers based on their level of spending, and given a rough breakdown on the size of each group in the composition of the customer base. However, continued questioning on performances in each tier appears to have become an onerous obligation, with analysts often appearing to obsess on minutiae of different strands. Chief Operating Officer Ángel Vilá indicated that commercially sensitive information is at risk of being divulged through the disclosure of the customer mix, perhaps suggesting that the level of big spenders in the base is going to take a hit as discretionary spending tightens and the OB responds to competition.
  • The performance of Telefónica Deutschland was tagged as “robust” as the OB aims to emerge from a period of consolidation and build commercial momentum. COVID‑19 considerations may dampen progress, but the O2Free tariff portfolio is bolstering the mobile contract base, and the fixed broadband business is picking up in the wake of partnership agreements signed during recent years’ consolidation efforts.
  • Telefónica UK is considered to be outperforming the local market. As the focus shifts towards the planned merger with Virgin Media, the Group was keen to talk the business up as having the most mobile customers in the country, and a track record of revenue and profit growth going back four years. However, the consequences of the coronavirus pandemic have not yet been fully accounted for in the country, due to the later timing of lockdown implementation compared to other European markets. The JV project is also likely to cause disruption to its recent single‑minded focus (see separate report).
  • Brazil is redoubling its traditional focus on the premium end of the market, and appears confident that its recent plans for infrastructure investment, through partnership, franchising, and inorganic activity, will move forward despite the harsh economic impact of the global pandemic (see separate report).
  • While Latin America markets appear to be the area where Telefónica is most exposed to the negative effects of the coronavirus pandemic, owing to the continued dominance of prepaid mobility services, the Group insisted it is making good progress on its plan to self‑isolate the Telefónica Hispanoamérica business. The operational work to carve out the business has gathered pace, as demonstrated by recent share buybacks and ownership changes (Telefónicawatch, #142). The preparations for a financial spin‑off are underway, with the prospect of smaller OB sales still not ruled out. The current pandemic‑driven uncertainty is “not ideal”, according to Chief Financial Officer Laura Abasolo. But with “months and months” of work still to be conducted in teeing up any spin‑off, Abasolo was hopeful that market conditions may be calmer once decisive action can be taken. The planned UK JV may also be relieving pressure to act in the region (see separate report).
Telefónica Group, performance by unit, Q1 FY20
 RevenueChange (reported)OIBDAChange (reported)Operating cash flowChange (reported)
Sources: Telefónica and Telefónicawatch.
Notes: OIBDA excludes management and brand fees. España and HispAm figures for periods within FY19 are estimated (not fully consolidated). Following the consideration of the Argentine and Venezuelan economies as hyperinflationary from an accounting perspective, the operations are adjusted by inflation and are to be accounted at their corresponding closing exchange vs. the euro. Group consolidated results deconsolidate the results of Telefónica Nicaragua from 1 May 2019 and Antares from 1 February 2019.

España

€3,078m

-1.5%

€1,225m

-9.6%

€881m

-9.6%

Deutschland

€1,846m

3.8%

€532m

1.9%

€308m

14.1%

UK

€1,739m

2.8%

€516m

2.4%

€295m

-7.5%

Brasil

€2,215m

-13.6%

€951m

-9.4%

€614m

-6.1%

HispAm

€2,204m

-8.4%

€502m

-21.2%

€177m

-47.9%

Infra (Telxius)

€207m

-5.5%

€135m

4.7%

-€20m

-116.7%

Other companies, eliminations

€77m

-60.5%

-€100m

-249.3%

€23m

-30.3%