On May 26, 2015, we issued an updated research report on Spanish telecom giant Telefonica S.A. TEF.
The company reported mixed financial results in the first quarter of 2015. Net income declined while revenues rose on a year-over-year basis. For 2015, Telefonica expects total revenue growth of 7% year over year while OIBDA margin is likely to stabilize with an expected annualized erosion of 1%.
Going forward, Telefonica should benefit from favorable factors like widespread adoption of broadband and data services, pricing revision, network enhancement and strategic collaborations. Moreover, the company’s continual focus on organic growth, deleveraging of balance sheet and portfolio optimization should serve it well in the long term.
Recently, Telefonica received the final approval from Brazil’s regulatory authority, ANATEL, related to its takeover of Vivendi’s broadband assets – GVT. The regulatory body gave its go-ahead to the second part of the deal which involves share transfer. For Telefonica, synergies from the acquisition appear quite promising. The GVT deal is expected to put Telefonica in a better position within the broadband segment vis-à-vis stronger rivals like America Movil S.A.B. de C.V. AMX and Oi.
Moreover, Telefonica has teamed up with Alcatel-Lucent ALU and Accenture plc ACN to provide constructive customer care services and enhance the overall customer experience. Telefonica announced a 4-year deal by which it will deploy Alcatel-Lucent's Motive Customer Experience Management (CEM) software to serve its residential customers in Europe and the Latin American countries.
In addition, the company plans to introduce a voice-command web search engine in the second half of 2015. A voice-enabled search facility will allow users to search the Internet using voice commands. Notably, the voice-based web search market is highly competitive. Currently, Google Now dominates the market owing to its high accuracy.
However, over the short term, we remain on the sidelines considering the slow recovery in Europe, heavy capital expenditures, effects of reduction in mobile termination rates, highly leveraged balance sheet and intensifying competition.
We also expect Telefonica to face increased churn rate (customer switch) and lower Spanish revenues owing to MTR (the fee charged by operators for connecting calls) reductions. Further, the unanticipated economic downturn in Spain is likely to weigh on the company’s profits and liquidity, going ahead.
Telefonica currently carries a Zacks Rank #3 (Hold).
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