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Telef’onica Achieves a Net Profit of 3,001 Million Euros in 2014, is Now Back on the Path to Organic Growth of Income (+2.6%) and OIBDA (+0.2%) and Announces the Beginning of a New Cycle

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In the results presentation, C’esar Alierta, Chairman and CEO of Telef’onica (NYSE:TEF) (LSE:TDE), has emphasized that “the execution of our transformation strategy in recent years, coupled with the evident change in trends which is underway, lead us to upgrade the level of our ambition for the next two years. The evolution of our operations, the strength of our Balance Sheet and the current environment all present clear signs of improvement and are reflected in the acceleration of the Company’s profitable and sustainable growth”.

Telef’onica announces its operating and financial guidance for 2015 and ambition for 2016
Operating guidance 2015 and ambition 2016 criteria (p.7)

Base 2014 Operating guidance 2015 & ambition 2016 Guidance 2015E Ambition 2016E
42,853MEUR Revenues >7% >5%

CAGR 2014-16E

32,6% OIBDA margin

Limited margin erosion
around 1 p.p. (to allow for
commercial flexibility if

Stabilising in 2016

16,7% Capex / Sales Around 17% Around 17% (-2 p.p. 2017E vs.2016E)
Financial Guidance 2015 & Ambition 2016 Guidance Ambition2016E
Net Financial Debt / OIBDA <2.35x <2.35x

Telef’onica announces the distribution of a dividend of 0.75EUR per share in 2015 and 2016

Telef’onica will propose the adoption of the relevant corporate resolutions with the aim to:

  • In 2015, amortise Treasury stock for a total of 1.5% share capital and distribute a dividend of 0.75 euros per share. Payable in the fourth quarter of 2015 (0.35 euros per share in the form of a voluntary scrip dividend) and in the second quarter of 2016 (0.40 euros per share in cash).
  • In 2016, amortise Treasury stock for a total of 1.5% share capital and distribute a dividend of 0.75 euros per share in cash, in both cases subject to the closing of the proposed sale of O2 UK.
  • Total income of 50,377 million euros for the whole of the year showing widespread acceleration in organic growth in almost all countries. At the same time, efficiency and simplification measures have secured solid profitability, with OIBDA of 15,515 million euros and an OIBDA margin of 30.8% for the whole of the year.
  • In the fourth quarter, both income (12,399 million euros) and OIBDA (3,190 million euros) have been affected by the adjustment of the exchange rate in Venezuela, which has taken 2,187 million euros from income and 1,379 million euros from OIBDA, this also affected by the provision of restructuring costs.
  • Telef’onica’s investment has 16.9% organic y-o-y growth, and totalled almost 9,500 million euros in 2014, which includes 1,294 million euros spectrum acquisition. This investment effort represents a considerable step forward towards the modernisation and differentiation of the company’s networks, and strengthens the company’s transformation into a Digital Telco that will ensure more sustainable future growth.
  • Telef’onica has maintained a strong financial discipline in 2014. At year end, total debt was 45,087 million euros, impacted by the exchange rate in Venezuela, which increased debt by 2,341 million euros. Debt would stand at 31,705 million euros and the debt ratio (net financial debt over OIBDA) at 2.15 times after the closing of the proposed sale of O2 UK and the FX change in Venezuela.
  • Growth of net profit in 2014 compared to 2013 was affected by several extraordinary factors which took place mainly in the fourth quarter (non-recurrent provisions, adjustment of the exchange rate in Venezuela and provision of restructuring costs, among others). Setting aside these effects, consolidated net profit was 4,462 million euros (-18.6%).
  • In 2014, Telef’onica’s free cash flow translated into 3,817 million euros, equal to 0.83 euros per share, meaning the Company is able to comfortably cover 2014 cash dividend payments, as it represents just 55% of FCF per share.
  • In operating terms, the company at the end of 2014 had 341 million accesses, showing y-o-y growth of +6%. Particularly relevant is the performance of high-value services, with y-o-y growth of +11% and +39% in contract mobiles and smartphones, respectively.
  • Spain, Brazil and Germany have consolidated their position as the Telef’onica Group’s major markets, where the company has managed to strengthen its competitive position:
    • In Spain, last year marked a turning point, consolidating the stabilisation of income, which reached 3,038 million euros between October and December (12,023 million euros for the whole of the year), with a clear trend of quarter-on-quarter improvement. This is the result of Telef’onica Spain’s competitive differential positioning in the fiber, in the mobile contract and in the pay TV segments.
    • In Brazil, Telef’onica has strengthened its competitive position in the market, especially in the higher value segments, which will consolidate with the purchase of GVT. In 2014, the company captured more than half of all new mobile contract customers and 38% of the LTE market, while at the same time pushing forward the deployment of fibre (4.1 million property units connected) and has significantly increased paid-TV clients (+20%). Its main financial items grew year-on-year in organic terms, despite the impact of regulation (+0.5% and +0.9%, income and OIBDA, respectively).
    • The final quarter of 2014 showed the potential of the newly established Telef’onica Germany, after the integration of E-Plus on 1 October. The company is now established as the leading carrier in the mobile market, with 47.7 million accesses, and has shown stability in income in the fourth quarter resulting from the success of data monetisation.

Telef’onica presented today FY 2014 results, a year in which the company has taken key steps and obtained visible results in its strategy of transformation towards becoming a Digital Telco. Both investment and the management of the assets portfolio have focused on increasing its competitive positioning in higher-value sectors and markets, translating into an acceleration in income growth throughout the year. At the same time, it has maintained its strict cost management and obtained significant savings from the simplification of the new operating model, resulting in positive OIBDA growth in organic terms.

Total revenues for the year stood at 50.377 million euros and this consolidates widespread acceleration of organic growth in the fourth quarter in almost all countries. As such, this figure grew, in organisational terms, by +5% between October and December with an increase of +2.6% for the whole year. At the same time, efficiency and simplification measures have secured solid profitability, with OIBDA of 15,515 million euros (+0.2% organic y-o-y) and an OIBDA margin of 30.8% for the whole of the year.

Taking all this into account, the net profit of Telef’onica at the end of 2014 totalled 3,001 million euros (-34.7%), a figure which was affected by several extraordinary factors, which came into play mostly in the fourth quarter. Non-recurrent provisions for the October-December period deducted 1.088 million euros from this figure, and include the impact of the exchange rate adjustment in Venezuela, the provision of restructuring costs and the adjustment to the Telco’s valuation, among other factors. Setting aside these effects for the year, consolidated net profit was 4,462 million euros (-18.6%).

In the results presentation report, Telef’onica’s Chairman and CEO, C’esar Alierta, has stressed that “results in the fourth quarter of 2014 represent the culmination of a period of intense transformation that has strengthened the Company, its growth potential and its financial position in just over two years“.

He also explained that “this transformation was carried out from the core of the business, thanks to an intense CapEx effort that has allowed us to adapt to the evolution of our customers’ technological needs which are characterised by a booming data usage“.

Strong growth in higher value segments

Total accesses reached 341 million at December 2014, up 6% year-on-year, after incorporating the customers of E-Plus in T. Deutschland and posting solid growth at T. Hispanoam’erica, T. Brasil and T. UK. By services, commercial momentum focused on high value customers remained high in the quarter and was reflected in sustained growth of mobile contract (smartphones and LTE), fibre and Pay TV accesses.

Mobile accesses totalled 274.5 million, up 8% vs. 2013, driven by the strong growth of the mobile contract segment (+11% reported), which continued to increase its weight and accounted for 36% of mobile accesses. Particularly noteworthy in the fourth quarter was the performance of T. Espa~na, which posted mobile contract net additions (+57 thousand) for the third quarter in a row and for the first time in the full year since 2011. Smartphones maintained a strong growth momentum (+39% year-on-year) and stood at 90.4 million, reaching a penetration of 35% over the total access base.

Retail broadband accesses totalled 17.7 million, with net additions of 11 thousand accesses in the quarter (138 thousand accesses in 2014 in organic terms). Fibre accesses stood at 1.8 million at December 2014 (2.1 times greater vs. December 2013), after posting record net additions in the quarter of 308 thousand accesses, up 16% quarter-on-quarter, boosted by T. Espa~na (248 thousand accesses). Finally, pay TV accesses totalled 5.1 million and grew 48% in organic terms.

Main results

It is important to highlight the Company’s decision to adopt the exchange rate of the Venezuelan bolivar set at the previously denominated SICAD II at the end of 2014, as being the most representative among the available exchange rates as of that date, for the monetary translation of the accounting figures of cash flows and balances, impacting fourth quarter financial results. In the last auction of the quarter this rate was set at 50 bolivars per dollar. In the fourth quarter, the evolution of exchange rates was especially impacted by the aforementioned change to SICAD II and, to a lesser degree, the depreciations of the Argentine peso and the Brazilian real against the euro. Thus, the negative impact of exchange rates reduced year-on-year revenue and OIBDA growth by 20.4 percentage points and 23.9 percentage points respectively (12.1 percentage points and 13.1 percentage points in January-December 2014).

In addition, the results of E-Plus at T.Deutschland are consolidated from 1 October, affecting, together with the deconsolidation of the results of T. Czech Republic (since January 2014) and T. Ireland (since July 2014), the year-on-year comparison of Telef’onica’s reported financial results. Thus, changes in the perimeter of consolidation contributed with 1.6 percentage points to fourth-quarter revenue growth, while reduced full-year growth by 2.1 percentage points. OIBDA was reduced by 2.3 percentage points in the fourth quarter and by 3.5 percentage points in the full year.

Revenues totalled 50,377 million euros in 2014, with organic growth accelerating in the fourth quarter to 5.0% year-on-year (+2.8% in the third quarter; +2.6% in January-December) and speeding up in all segments. In reported terms, revenues fell year-on-year (-14.1% in the fourth quarter; -11.7% in January-December), affected by the negative impact of exchange rate fluctuations and changes to the consolidation perimeter mentioned above. Most notably, the change to SICAD II in Venezuela had a negative impact of 2,187 million euros on fourth quarter revenues.

Mobile data revenues remained one of the Company’s main growth drivers, increasing by 9.9% in organic terms in 2014 (+10.6% year-on-year in October-December) and accounted for 41% of mobile service revenues (+3 percentage points compared with 2013). Non-SMS data revenues advanced 23.9% year-on-year in organic terms in 2014 (+22.8% in the quarter) and accounted for 73% of data revenues.

In the fourth quarter, a provision of 644 million euros for non-recurrent restructuring and other costs was registered with the aim of enhancing the Company’s future efficiency. As a result, operating expenses totalled 36,149 million euros in January-December 2014, up 3.8% year-on-year in organic terms.

Strong profitability

Gains on sales of fixed assets totalled 327 million euros in 2014 while Operating income before depreciation and amortisation (OIBDA) in January-December 2014 totalled 15,515 million euros, up 0.2% year-on-year in organic terms, reflecting revenue growth and the benefits from the efficiency measures implemented and despite the higher commercial and network expenses mentioned above.

In the fourth quarter, OIBDA amounted to 3,190 million euros, stable year-on-year in organic terms (-35.9% reported), and was affected by one-off factors with a negative impact of 1,379 million euros: the adoption of the exchange rate set at SICAD II (-915 million euros), the provision of 644 million euros for restructuring costs.

In reported terms, OIBDA fell by 18.7% in 2014, impacted by the exchange rate fluctuations, changes to the consolidation perimeter and one-off factors mentioned earlier.
OIBDA margin stood at 30.8% in January-December 2014, with limited year-on-year erosion in organic terms (-0.8 percentage points).

Operating income (OI) totalled 6,967 million euros in 2014, 1.9% higher year-on-year in organic terms.

Share of profit (loss) of investments accounted for by the equity method amounted to -510 million euros in January-December 2014, mainly due to losses booked following the classification of Telco, S.p.A. investment as an asset held for sale in the fourth quarter, while net financial expenses amounted to 2,822 million euros in 2014 (-1.6% year-on-year), of which 293 million euros were due to net negative foreign exchange differences primarily associated with the Company’s decision to adopt the exchange rate of the Venezuelan bolivar set at SICAD II.

Thus, and as a result of all the items and one-off factors explained above, consolidated net income in 2014 amounted to 3,001 million euros (4,462 million euros in underlying terms), down 34.7% year-on-year (-18.6% underlying) and 89.5% year-on-year in the fourth quarter (-29.7% underlying). In the fourth quarter extraordinary effects amounted to 1,088 million euros and included: the impact of the adoption of the exchange rate set at SICAD II in Venezuela (-399 million euros), the provision for restructuring expenses (-405 million euros), the value adjustment of Telco, S.p.A (-257 million euros) and other factors (-26 million euros). Basic earnings per share in underlying terms amounted to 0.93 euros in 2014 and to 0.25 euros in the fourth quarter.

In 2014, the Company remained focused on network differentiation and modernisation, with 75% of total investment in the year, excluding spectrum, devoted to transformation and growth (+6 percentage points year-on-year in organic terms). As a result, CapEx grew 16.9% year-on-year in organic terms and totalled 9,448 million euros, including 1,294 million euros related to spectrum acquisition (primarily in Brazil, Argentina and Venezuela in the fourth quarter and in Colombia and Central America in the first quarter). Operating cash flow (OIBDA-CapEx) totalled 6,067 million euros in 2014.

Financing activity

In 2014, free cash flow amounted to 3,817 million euros in 2014, 4,748 million euros excluding spectrum payments. Net financial debt stood at 45,087 million euros at the end of December 2014, down 294 million euros year-on-year. Excluding the impact of the evolution of the exchange rate in Venezuela, which increased debt by 2,341 million euros, debt would have been reduced by 2,635 million euros. The leverage ratio (net debt over OIBDA1) for the last 12 months at the end of 2014 stood at 2.74 times. Considering the closing of the proposed sale of O2 UK and the FX change in Venezuela, the leverage ratio would stand at 2.15 times.

In 2014, Telef’onica’s financing activity through capital markets stood at around 14,740 million equivalent euros and was mainly focused on completing the financing of the acquisition of E-Plus (via the issue of a bond mandatorily convertible into Telef’onica shares for a notional amount of 1,500 million euros and the execution of the capital increase of T. Deutschland), strengthening the liquidity position, actively managing the cost of debt and smoothing the debt maturity profile of Telef’onica S.A. for the following years. Therefore, as of the end of 2014, the Group maintains a comfortable liquidity position to accommodate the next debt maturities.

Telef’onica maintains total undrawn committed credit lines with different credit entities for an approximate amount of 11,545 million euros, with around 10,618 million euros maturing in more than 12 months, which, together with the cash position, increases liquidity to 19.4 billion euros.

Digital Services

Highlights in the area of the Chief Commercial Digital Officer (CCDO) include the following: In the Consumer (B2C) area, revenue from the Video business amounted to 954 million euros in 2014 and grew 29% year-on-year in organic terms due to the improvement in service quality, the ongoing development of new and exclusive content and the growth in Pay TV accesses; Global Device Management continued to foster the acceleration of smartphone adoption, with a special focus on LTE. Thus, in the fourth quarter, 75% of total devices acquired by the Company were smartphones, while 41% were LTE (+24 percentage points year-on-year).

In the Corporate (B2B) area, M2M revenues stood at 183 million euros in January-December 2014 (+41% year-on-year in organic terms), boosted by the growth of M2M accesses (+16% year-on-year organic). Cloud business revenues grew by 25% year-on-year in organic terms to reach 342 million euros. In Information Security, revenues in 2014 stood at 115 million euros, with growth accelerating to 57% year-on-year in organic terms.

Global IT area

In 2014, Telef’onica Global Resources technological transformation strategy obtained visible results and advanced strongly in terms of network and system modernisation towards an all-IP Company. This process is part of an efficient management model focused on simplifying operations and reducing legacy costs, which in turn enables the Company to differentiate its products and services, improving customer satisfaction.

The Global Network and Operations unit continued to accelerate UBB rollout. As a result, premises passed with fibre reached 14.7 million at the end of December, twice vs previous year figure and LTE base stations surpassed 20,100 (10,500 in 2013), with over 80% of 3G and LTE base stations connected at high speed to the transmission network. 4G coverage in Europe stands at almost 60%, while the LTE deployment in Latin America increases to 10 countries. In the fourth quarter, Argentina and Venezuela acquired LTE spectrum. This higher UBB coverage contributed to reach 1.8 million fibre customers (2.1x year-on-year) while LTE customers totalled 13.2 million.

The global IT area continued to successfully manage and execute simplification and transformation through systems processes, applications and integrations. The advances made in IT simplification in 2014, a key driver to accelerate transformation, are shown in continuous progress in reducing, with over 430 applications eliminated and the increase of virtualised servers to 46% (+11 percentage points compared with December 2013) as a result of the infrastructure consolidation process in leading data centers, which results in to a 13% reduction in physical servers.

Operating guidance 2015 and ambition 2016 criteria:

2014 adjusted bases:

  • Exclude:
    • T. UK results from January-December 2014.
    • T. Venezuela results from January-December 2014.
    • OIBDA excludes additionally tower sales and the provision for restructuring costs.
    • CapEx excludes additionally spectrum acquisition, Real Estate Efficiency Plan and the investment in Telef’onica’s Headquarter in Barcelona.
  • Include:
    • E-Plus results consolidated in T. Deutschland results since the fourth quarter of 2014.
    • T. Ireland results from January-June 2014.

2015E guidance and 2016E ambition:

  • Assume constant exchange rates as of 2014 (average FX in 2014).
  • Exclude:
    • T. UK results.
    • T. Venezuela results.
    • OIBDA excludes additionally: write-offs, capital gains/losses from the disposal of companies, tower sales, material non-recurrent impacts and major restructuring related to integration processes in Germany and Brazil and to the simplification program.
    • CapEx excludes additionally spectrum acquisition and Real Estate Efficiency Plan.
  • Include:
    • GVT results consolidated in T. Brasil results since July 2015.

Financing guidance 2015 and ambition 2016 criteria:

Net financial debt / OIBDA both adjusted for the closing of the proposed sale of O2 UK

1 Adjusted for the sale of companies, restructuring costs and also incorporating E-Plus OIBDA corresponding to January-September period (homogenised under the accounting policies of Telef’onica).

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