Telefonica, S.A. (NYSE:TEF)
Q2 2014 Earnings Conference Call
July 31, 2014 8:00 AM ET
Executives
Pablo Eguirón – Head, IR
Ángel Vilá – CFO and Corporate Development Officer
Analysts
Georgios Ierodiaconou – Citi
Giovanni Montalti – UBS
Akhil Dattani – JP Morgan
Paul Marsch – Berenberg Bank
Justin Funnell – Credit Suisse
Luis Prota – Morgan Stanley
Fabián Lares – JB Capital Markets
David Wright – Bank of America
Jean-Francois Paren – Credit Agricole
Jerry Dellis – Jefferies
Nick Brown – Goldman Sachs
Keval Khiroya – Deutsche Bank
Operator
Good day, ladies and gentlemen. Thank you for standing by and welcome to Telefonica’s January to June 2014 Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator instructions) As a reminder, today’s conference is being recorded.
I would now like to turn the call over to Mr. Pablo Eguirón, Head of Investor Relations. Please go ahead, sir.
Pablo Eguirón
Good afternoon, and welcome to Telefonica’s conference call to discuss January-June 2014 results. I’m Pablo Eguirón, Head of Investor Relations.
And before proceeding, let me mention that this document contains financial information that has been prepared under International Financial Reporting Standards. This financial information is valid [ph]. This presentation may contain announcements that constitute forward-looking statements, which are not guarantees of future performance and involve risk and uncertainties. Certain results may differ materially from those in the forward-looking statements as a result of various factors. We invite you to read the complete disclaimer included in the first page of the presentation, which you will find in our website.
We encourage you to review our publicly available disclosure documents filed with the relevant securities market regulators. If you don’t have a copy of the relevant press releases and the slides, contact Telefonica’s Investor Relations team in Madrid by dialing the following telephone number, 3(491)-482-8700.
Now, let me turn the call over to our Chief Financial and Corporate Development Officer, Mr. Ángel Vilá, who will be leading this conference call.
Ángel Vilá
Thank you, Pablo. Good afternoon, and welcome to Telefonica’s first half 2014 results conference call. Today with me is Jose Maria Alvarez-Pallete, Chief Operating Officer. So during the Q&A session, you will have the opportunity to address to us any questions you may have.
Telefonica has released today a strong set of results based on the execution of the management priorities established for the year. First, the quarter evidenced a pickup in commercial activity with remarkable momentum in net add, especially Pay TV, mobile contract, smartphones and fiber. We are working on expanding customer value by reducing churn and improving ARPU.
Second, top line grew year-on-year for the fifth consecutive quarter boosted by Telefonica’s Hispanoamerica growing at double-digit and mobile data ongoing expansion.
Third, OIBDA was stable year-on-year. Financing increased their force in commercial expenses with cost savings from efficiencies. As such, OIBDA margins posted a limited decline year-on-year in organic terms both in the semester and in the quarter.
Fourth, spending for network differentiation continues to accelerate. If financial flexibility was sustained benefiting from a strong free cash flow of EUR1.7 billion in the six months to June while net debt stood at EUR43 million after the sale of Ireland closed in July.
Fifth, EPS posted an outstanding sequential improvement, EUR2.26 per share in Q2.
And finally, let me remark that these results are fully aligned with our expectations and therefore our guidance and dividend policy are confirmed.
Let me now start with a summary of key financials on Slide 3.
Reported first half evolution was impacted by negative FX and the deconsolidation of Telefonica Czech Republic. Although in Q2, both impacts slowed down slightly. The first factor, FX, is at 7.9 percentage points in the semester and 10 percentage points in the second quarter to revenue and OIBDA variation. But at the same time, reduced the payments in euros of CapEx, interest, taxes and minorities; therefore, the FX impact on OIBDA is virtually neutralized at free cash flow level.
In organic terms, second quarter revenues posted a consistent performance versus the first quarter, growing 1.3% year-on-year to reach EUR25 billion in the first half, while OIBDA topped [ph] EUR8.1 billion and remained flat. OIBDA margins stood at 32.3%, 50 basis points lower than in the first six months of 2013.
Lastly, net debt stood at EUR43.8 billion at the end of June, EUR6 billion lower than last year’s figure.
On Slide 4, I would like to stress that commercial activity ramped up showing very strong volumes. This way, total net add exceeded EUR2.6 million, growing 40% quarter-on-quarter and posting a better trend in most categories, but especially in high value services such as mobile contract, Pay TV and fiber.
We continue to focus on value and growth levers, as I just said, increasing customer loyalty on the back of customer differential propositions. This strategy translated into a sequential improvement of churn levels across the board.
Slide 5 shows the remarkable growth of future key drivers, highlighting Pay TV momentum up 32% year-on-year. Connected fiber accesses double year-on-year and LTE coverage in Europe reached almost 50% of the population. Smartphone traction continues and penetration expanded 8 percentage points year-on-year to 32%. As such, the strong investments in customer expansion enable to improve customer satisfaction and differentiation, setting the stage for further sustainable growth.