Telefonica turns profitable as revenues shrink

After reporting losses a year earlier, Spain’s Telefonica entered profitable territory last quarter, with net income of €1.38 billion ($1.77 billion), while chipping away at its mountain of debt.

The company had reported losses of €429 million in the third quarter of 2011, largely due to expenses incurred as a result of laying off thousands of workers in its domestic market.

It also managed to lower its net debt by €2.3 billion, to €56 billion, and anticipates a further reduction of €3.2 billion, following several divestments and the IPO of Telefonica Deutschland.

After reporting losses a year earlier, Spain’s Telefonica entered profitable territory last quarter, with net income of €1.38 billion ($1.77 billion), while chipping away at its mountain of debt.

The company had reported losses of €429 million in the third quarter of 2011, largely due to expenses incurred as a result of laying off thousands of workers in its domestic market.

It also managed to lower its net debt by €2.3 billion, to €56 billion, and anticipates a further reduction of €3.2 billion, following several divestments and the IPO of Telefonica Deutschland.

Even so, the operator’s net debt worked out to be 2.56 times operating income before depreciation and amortisation (OIBDA) for the first nine months of the year, and more than twice as much as Telefonica (Madrid, Spain) reports in equity, making it a substantial source of worry for investors.

Telefonica has already cancelled the payments of remaining dividends this year as it whittles away at its borrowings, aiming for a net debt to OIBDA ratio of 2.35 for the full financial year.

The woeful economic climate in Spain and other parts of Europe is not helping. Overall revenues for the third quarter fell 1.6%, to €15.5 billion, compared with the same period in 2011, with European revenues dropping 6.8%, to €7.4 billion, as a result of lower consumer spending.

Latin America presented a happy contrast, however, with third-quarter revenues up 3.8% on last year’s to €7.6 billion.

While Europe’s mobile-phone markets are entirely saturated, Telefonica is still attracting new business in Latin America, growing its customer base to 175 million connections in September from 160 million a year earlier.

What’s more, average revenue per user (ARPU) remained stable in the region, compared with drops of 8.6% in Spain and 10.5% in the UK between the third quarters of 2011 and 2012.