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Telefonica Profitability to Continue Decline This Year on Weakening Demand

February 24, 2012

Telefonica SA (TEF), Spain’s biggest phone company, predicts its profit margin will continue to drop this year after 2011 earnings slumped because of weakening demand amid the European debt crisis.

Profitability based on operating income before depreciation and amortization, or Oibda, fell to 32.2 percent in 2011 from 42.4 percent, Madrid-based Telefonica said in a statement today. The decline will continue this year, although at a slower rate, the company said.

Rising unemployment and weakening demand prompted Chief Executive Officer Cesar Alierta to slash the Spanish workforce, halt major mergers and acquisitions and cut the dividend in December for the first time in a decade. Telecom Italia SpA (TIT), Italy’s largest phone company, today reduced its 2011 dividend. Telefonica (TEF)’s Oibda dropped to 20.2 billion euros ($27 billion) from 25.8 billion euros in 2010, missing the 21.1 billion-euro average estimate of analysts compiled by Bloomberg.

“The trend in margins is just falling, falling and falling, which is really worrisome,” said Peter Braendle, who helps manage about $60 billion at Zurich-based Swisscanto Asset Management AG. “It shows the tough environment that Telefonica as well as other telecoms are facing.”

Telefonica fell as much as 1.3 percent to 12.72 euros in Madrid trading tand was down 0.5 percent as of 9:30 a.m. Before today, the stock dropped 28 percent in the last 12 months, making Telefonica the fifth-worst performer in the 34-member Bloomberg Europe Telecommunication Index. (BEUTELE)

Recession, Unemployment

Spain, with a 23 percent unemployment rate, will relapse into a recession in 2012 and additional austerity measures may worsen the slump, the European Commission said this week, forecasting the country’s economy will contract 1 percent this year after expanding 0.7 percent in 2011. Private consumption will be “significantly weaker” this year, weighed down by austerity and “persistently high” unemployment, the commission said.

Alierta told investors last year that revenue will rise 1 percent to 4 percent annually through 2013 from an adjusted base of 63.1 billion euros in 2010 and that Oibda is forecast to be in the “upper 30’s” in percentage terms.

Telefonica’s full-year sales rose 3.5 percent to 62.8 billion euros, in line with analyst estimates. Sales will grow more than 1 percent this year, the company said today.

“Telefonica’s guidance for sales growth is still good as this is something you don’t see for the rest of the industry,” Andres Bolumburu, a Madrid-based analyst at Banco Sabadell, said via phone. “The reduction in margins is significant, but still quite reasonable given the difficult environment.”

Dividend Cuts

France Telecom SA (FTE) this week became the latest European phone operator to back away from payout projections to conserve cash amid the European debt crisis, following Telekom Austria AG (TKA) and the cut by Telefonica in December. Germany’s Deutsche Telekom AG (DTE) yesterday confirmed its dividend forecast.

Telecom Italia today reported an 8.7 percent increase in 2011 revenue to almost 30 billion euros, beating analyst estimates, helped by growth in Latin America. The operator forecast “broadly stable” earnings and profit for this year.

Telecom Italia’s board proposed dividends of about 900 million euros for 2011, down from 1.2 billion euros in 2010, “in light of the recent worsening of the macroeconomic climate and the goal to maintain the credit rating,” the Milan-based company said.

Telefonica on Dec. 15 reduced its 2012 dividend forecast by 14 percent, abandoning a policy set up two years ago, as it cited market conditions that have changed “significantly.”

Alierta is also counting on Latin America’s economic growth to win back investors. Sales in Latin America climbed 13.5 percent to 29.2 billion euros last year while Oibda dropped 20.2 percent to 10.9 billion euros.

“2011 has been key in the transformation process of Telefonica,” Alierta said today. “In a difficult environment, our strong diversification and our ability to adapt have allowed us to obtain solid results.

To contact the reporters on this story: Manuel Baigorri in Madrid at;

To contact the editor responsible for this story: Kenneth Wong at

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