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Telef’onica Starts a New Growth Cycle in the First Quarter of 2015 and Reaches a Net Income of 1,802 Million Euros (+162%)

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Today, Telef’onica (NYSE:TEF) (LSE:TDE) presented the results from the first quarter of 2015, a period in which the company totalled a net profit of 1,802 million euros, increasing by 2.6 times vs. the same period of the previous year. In addition, the figures for January-March 2015 show tangible progress in most items of the profit and loss account, which is a reflection of the focus on long-term sustainable growth and a result of the intense transformation executed in recent years. At the end of March, total accesses had grown in reported terms by 10% year-on-year, amounting to over 319 million customers, revenue increased by 12.6% to 11,543 million euros, OIBDA increased by 7.7%, reaching the sum of 3,618 million euros, and finally, cash flow stood at 363 million euros after growing by 25.8%.

In the earnings report published today, Telef’onica’s Executive Chairman, C’esar Alierta, stressed that the results of the first quarter “reflect a solid beginning of this new cycle and are leveraged on the improved organic evolution of the business.” Alierta emphasised that this is a generalised growth and indicated that “Spain has already begun its return to growth after reporting in the quarter a year-on-year increase in accesses, which will gradually translate into growth in financials”.

Moreover, in the results report of the first quarter, Telef’onica reiterated its 2015 guidance and ambition for 2016, while C’esar Alierta thanked the continued support of Company shareholders “which has yet again been reflected in the success of our recent capital increases in Telef’onica and Telef’onica Brasil “.

But before starting to analyse the financial and operational results, it is important to note that, since the first quarter of 2015, Telef’onica’s operations in the UK are reported as discontinued operations within Telef’onica Group, and its assets and liabilities are classified as “held for sale” in compliance with International Financial Reporting Standards (IFRS), as a result of the signing in March 2015 of the definitive agreement on the sale of the Company. Likewise, 2014 results are reported following these same criteria.

Also, for better interpretation purposes only, the comparative figures for the first quarter of 2014 of those operations referenced to the Venezuelan bolivar have been restated applying the exchange rate used in the conversion for the full year 2014 results (50 bolivar fuerte per dollar).

On the other hand, the consolidation of E-Plus’ results in T. Deustchland (since 1st October 2014) and the deconsolidation of T. Ireland’s results (since July 2014) affected reported year-on-year evolution.

319.1 million accesses

Telef’onica’s accesses totalled 319.1 million as of March 2015 and posted double digit growth (+10% year-on-year) driven by the incorporation of E-Plus in T. Deutschland and the sustained pace of growth of T. Brasil and T. Hispanoam’erica (+4% year-on-year, in both cases). Also remarkable was T. Espa~na, which posted access growth (+1%) for the first time since the second quarter of 2011.

The high commercial activity during the quarter focused on value customers is reflected in the strong mobile contract (especially smartphones), fibre and pay TV access growth.

Mobile accesses (252.8 million) increased 13% thanks to a strong increase in mobile contract (+18% year-on-year), which already represented 34% of the mobile base (+1 p.p. year-on-year). Smartphones reached 91.4 million as of March 2015, maintaining a strong growth (+57% year-on-year) and reaching a penetration of 38% (+11 p.p. year-on-year). LTE customers stood at 13.7 million (5.1 times year-on-year) and represented 6% of total mobile accesses (+4 percentage points year-on-year).

Retail broadband accesses grew 1% year-on-year to 17.7 million as of March 2015, with positive net additions (55 thousand accesses) for the fourth consecutive quarter. Fibre accesses stood at 2.1 million (2.1 times vs. March 2014), with quarterly net additions of 308 thousand accesses. Pay TV accesses reached 5.5 million (1.5 times vs. March 2014), with quarterly net additions (379 thousand) that more than tripled the gains for the same quarter of the previous year.

Income statement analysis

It is worth highlighting in the first quarter the positive contribution, for the first time in 10 quarters, of exchange rate fluctuations to year-on-year revenue and OIBDA growth, driven by the appreciation vs. the Euro of most Latin American currencies.

It is important to stress that results assume constant exchange rates as of 2014 (average FX in 2014). Excludes the impact of hyperinflationary adjustments in Venezuela in both years and O2 UK results for both years after being classified as “discontinued operations”, and considers constant perimeter of consolidation.

First quarter revenues totalled 11,543 million euros in January-March 2015, and grew 12.6% compared to the same period of 2014, driven by T. Deutschland and T. Hispanoam’erica. Exchange rate evolution contributed with 3.2 percentage points to the revenue growth, while changes in the perimeter of consolidation contributed with 5.9 percentage points.

The growing focus on key markets was reflected in the revenue mix, with T. Espa~na, T. Brasil and T. Deustchland accounting for 66% of revenues, increasing local scale and keeping at the same time the Group’s differential diversification and global scale.

In organic terms, revenues increased 3.3% year-on-year, being particularly noteworthy the strong pace of growth of T. Hispanoam’erica (+9.7%) and T. Brasil (+4.3%), as well as the performance of T. Deutschland (+2.9%) and the sustained recovery trend of T. Espa~na (-3.8% in the first quarter of 2015; -4.9% in the fourth quarter of 2014).

Mobile data revenues increased 11.9% in organic terms vs. January-March 2014 (+30.9% reported) and already represented 40% of mobile service revenues, as a result of the higher weight of LTE customers and higher smartphone penetration. Digital service revenues totalled 682 million euros in the first quarter of 2015, and accelerated their organic growth rate for the fifth consecutive quarter up to 33.7% year-on-year. It is worth mentioning the evolution of Video business revenues (321 million euros in January-March 2015; +56.6% organic year-on-year), as a result of the growth in accesses and the improvement in contents, functionalities and network.

Operating expenses, OIBDA and operating income

Operating expenses stood at 8,185 million euros in January-March 2015 and grew 4.0% year-on-year organic (+14.9% reported) fundamentally driven by higher commercial and network and system costs, despite the savings from the simplification of the Company’s operating model and scale.

Gains on sales of fixed assets amounted to 61 million euros in January-March 2015 reflecting mainly the sale of non-strategic towers (39 million euros impact on OIBDA, essentially in T. Espa~na) and the sale of “yourfone GmbH” in Germany (17 million euros of impact on OIBDA).

As a result, the operating income before depreciation and amortisation (OIBDA) totalled 3,618 million euros in the first quarter, increasing 7.7% vs. same period of the previous year. Changes in the perimeter of consolidation contributed with 3.0 p.p., while the evolution of exchange rates with 2.5 p.p. to OIBDA year-on-year growth. OIBDA margin in the first quarter stood at 31.3%, practically stable vs. the same period of the previous year in organic terms (-0.3 p.p.). In reported terms it posted a 1.4 percentage points erosion.

Operating Income (OI) amounted to 1,511 million euros in the first quarter of 2015, growing 3.2% year-on-year in organic terms (-5.0% reported).

Net financial expenses in the first quarter of 2015 amounted to 644 million euros, a 5.1% reduction vs. the same period of the previous year thanks to capturing the fall of euro interest rates and the lower impact from negative exchange rate differences, despite the higher weight of Latin American currencies on the debt (+2.4 p.p. year-on-year). The effective cost of debt over the last 12 months stood at 5.27%, 18 basis points below March 2014.

Corporate income tax in January-March 2015 totalled 385 million euros which, over an income before taxes of 864 million euros, implied an effective tax rate of 44.5%, 13.6 p.p. more than in the first quarter of 2014.

Profit from continuing operations stood at 479 million euros in January-March 2015, and fell 24.2% year-on-year. The profit from discontinued operations stood at 1,304 million euros in the first quarter of 2015 (93 million euros in the same period of 2014), driven by the recognition of 1,185 million euros due to tax deferred assets resulting from the estimated difference in Telef’onica, S.A. between the tax value and the agreed value in the sale of Telef’onica operations in the UK, which are expected to materialize in a foreseeable future when they become definitely deductible upon the sale.

Profit attributable to minority interests increased first quarter net income by 19 million euros (-37 million euros in January-March 2014).

As a result, consolidated net income in the first quarter of 2015 amounted to 1,802 million euros, increasing by 2.6 times vs. the same period of the previous year. Basic earnings per share stood at 0.38 euros in January-March 2015 vs. 0.14 euros in the first quarter of 2014.

Investment increased by 25.8% year-on-year

CapEx stood at 1,682 million euros in the first quarter (+25.8% year-on-year) and included 161 million euros from spectrum acquisitions in Ecuador, Spain and Chile. The Company continued focusing its investments primarily on growth and transformation projects (76% of total investment), driving network modernisation and differentiation.

Operating cash flow (OIBDA-CapEx) stood at 1,937 million euros in the first quarter of 2015, down 4.2% vs. the same period of 2014.

Operations with minority shareholders totalled 26 million euros in the first quarter of 2015 and dropped by 93 million euros year-on-year, mainly due to the payment of dividends in Brazil in the first quarter of 2014. Free cash flow amounted to 363 million euros in the first quarter of 2015 and increased 25.8% year-on-year.

Strengthening of financial position

Net financial debt stood at 45,627 million euros as of March 2015, a 540 million euros increase compared to December 2014. The leverage ratio (net debt/OIDDA) in the last 12 months at the end of March 2015 stood at 2.73 times. This ratio would stand at 2.13 times, considering the closing of O2 UK sale.

During the first quarter of 2015, Telef’onica’s financing activity in capital markets stood at around 6,570 million equivalent euros, and was mainly focused on strengthening the liquidity position and actively managing the cost of debt through the extension of the maturity of the credit lines and the reduction of margins. At the end of March 2015, the Group maintains a comfortable liquidity position to accommodate the next debt maturities.

After first quarter closing, it is worth to mention the capital increases in Telef’onica, S.A., for a total of 3,048 million euros, and Telef’onica Brasil, S.A. for 16,107 million Brazilian reais, related with the financing of the acquisition of GVT.

Telef’onica maintains total undrawn committed credit lines with different credit entities for an approximate amount of 11,239 million euros, with around 10,402 million maturing in more than 12 months, which, along with the adjusted cash position, places liquidity at 16.9 billion euros.

Digital Services and Telef’onica Global Resources

During the first quarter of the year Digital Services accelerated their year-on-year growth to 33.7%, to a total of 682 million euros. With regards to progress in this area it is worth to highlight that the Video business revenues amounted to 321 million euros in the first quarter of 2015, significantly improving year-on-year organic growth to 56.6%, driven by a strong increase in the access base (+53% in organic terms). Thus, penetration of Pay TV over consumer fixed broadband base stood at 41% (+15 percentage points year-on-year). In the Financial Services area, revenues reached 71 million euros, a 7.3% increase in organic terms. Security revenues stood at 65 million euros in the quarter, with an organic year-on-year growth of 76.0%. Lastly, M2M revenues during the first quarter totaled 37 million euros while Cloud business revenues (83 million euros) increased 31.8% in organic terms, compared to the first three months of 2014.

During the first quarter of 2015, Telef’onica Global Resources advanced significantly towards the technological transformation of the Company’s network infrastructures and IT, building a differential network and offering the best customer experience.

The global Network and Operations unit continued focusing its efforts on the deployment of ultra-broadband (UBB), on the management of global network platforms (Video, M2M and Cloud) ensuring end-to-end availability, and on the progress of network virtualisation initiatives (platforms and customer equipment). Thus, premises passed with fibre totalled 16.1 million (+86% year-on-year). In terms of LTE, coverage in Europe and Latin America reached 65% and 28% respectively. For its part, the global IT unit continued to focus on, on the one hand, application and process transformation, “doing things once” in Corporate applications and through Global Architecture and, on the other, on enabling capabilities for the efficient use of information (Big Data and Business Intelligence).

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