Telefonica: A shift towards added value

Over the last year, Telefonica has left the UK and Italy while strengthening its position in Spain (purchase of DTS from Prisa), Brazil (acquisition of Vivendi’s GVT) and Germany (integration of E-Plus).

The other key factor of the company’s business focus lies in its preference for integrated value-added services (broadband, fibre, pay-TV) and its firm bet on content, including pay-per-view shows (sports and movies). As far as the latter is concerned, betting on football seems crucial, starting with the Spanish league. This appears to be decisive for profitable growth in Spain and other markets in America and Asia.

Telefonica Chairman César Alierta said the first quarter results “reflect a solid start to Telefónica’s new growth cycle and are leveraged on the business’ improved organic evolution…more generalised growth. Spain has already begun its return to growth with a year-on-year increase in accesses during the quarter. This growth will gradually be reflected in our financial results.”

Both the income statement and the balance sheet’s performance are in line with forecasts and declared commitments, and perhaps better in the opinion of various analysts. First quarter turnover was 11,543 million euros, with like-for-like organic growth of 3.3% and 12% if other factors are included (for example, exchange rate effect).

 Net income for the period amounted to 1,802 million euros, more than double that registered a year earlier due to the capital gains from the sale of O2 in the UK. Operating income (1,511 euros) is on a par with the first quarter of 2014, although there are changes in the composition of this item.

It is worth pointing out that despite the new network investments and the purchases in Brazil, Germany and Spain, the amount of net debt (the company has stated its commitment to reducing indebtedness) is still around € 45,000 million euros. But it has cut the average price of its debt and extended maturity dates.

The average cost of the firm’s debt is 5.27%, with a comfortable liquidity position.

In summary, Telefonica is in the process of shifting its business focus towards providing a more advanced, value-added product in markets where it already is, or aspires to be, the market leader. It has taken a decision to enter the pay-TV and contents market: a telecommunications company which needs to make further inroads into a digital market in constant transformation.

And sooner rather than later, Cesar Alierta will have to think about his replacement as chairman. He will also have to consider renewing both the board and the executive management’s structure, bringing them more in line with Telefonica’s markets, targets and aspirations.