Telefonica sees decline in first-half profit, to cut 20% of jobs


Telefonica SA (Madrid, Spain), one of Europe’s largest telecoms company, suffered a decline in first-half profit as consumers switched to cheaper providers and regulators pushed tariffs lower.

While lucrative smartphone growth drove a continued boom in Brazil, the business turned in a lackluster performance in its home market of Spain, and also in Britain, Mexico and Venezuela. Some analysts noted a risk to Telefonica's A- credit rating.

"With leverage moving in the wrong direction in a scenario where Standard & Poor's requires deleveraging as a condition to maintain the current ratings, we see growing risks to (Telefonica's) A- status," said Juliano Hiroshi Torii, credit analyst at Societe Generale after the company's first half results on Thursday.

An economic crunch and unemployment of over 21% in Spain has sent the former monopoly's clients to cheaper alternative operators. In Britain the company said an increasingly complex competitive backdrop saw revenue per user decline, while tariff cuts were the issue in Venezuela and Mexico.

Robin Bienenstock, analyst at Bernstein Research, has a $18 per share target on Telefonica stock and has long argued that its dividend policy is not sustainable.

"We continue to think Telefonica will miss one, and possibly both, of its key promises, that they would not pay their dividend out of debt and that their debt level would remain below 2.5 times EBITDA at year end."

Overall, first-half net profit fell 16.3% to $4.5 billion, in line with forecasts, although revenue was below consensus.

The company's shares closed down 0.48 % to $22.18, underperforming a 0.86% rise in the STOXX Europe 600 telecoms index , but off an early low of $21.81.

Despite the debt concerns, Telefonica told analysts it still expected to meet its debt pledges.

Telefonica has a net debt of $78.83 billion, up $1.2 billion since year end. The sale of call center unit Atento -- cancelled because of adverse markets last month -- was one way it had planned to whittle down its burden.

Telefonica said it would reconsider floating Atento once market conditions improve. Spanish bank Santander said on Wednesday it was putting off the listing of its British and Argentine units because of turbulent markets.
Europe's second largest telecoms company has promised a dividend of $2.5 per share in 2012 and has set a minimum shareholder remuneration target of $2.5 per share from then on.

Group revenue rose 6.3% overall, below analyst expectations. Revenue fell in Spain by 6.1% while in Brazil it rose 46%. Chairman Cesar Alierta predicted Brazil alone would soon become the group's main revenue driver.

Markets shrugged off news the merger of fixed and mobile units in Brazil would produce more than $1 billion more savings than originally expected.

Telefonica is about to shed about 20% of its workforce in Spain because of declining revenue and a costly fixed-line operation.

It said earlier this month it would take a $3.8 billion charge for early retirements, also paying unemployment benefit for those laid off.

Telefonica said it would have $1.9 billion of excess cash at the end of the workforce reduction plan.

(editing by Jane Merriman and Andrew Callus) ($1=.6884 Euro)