Telefonica Raises Revenue Forecast as Domestic Sales Rise -- Update

By David Roman

MADRID--Telefonica SA (TEF) on Thursday raised its revenue forecast for the year, as the Spanish telecommunications firm reported higher sales in its home market for the first time in over five years.

Telefonica said the higher forecast is partly the result of the addition of recent acquisitions in Brazil and Spain. At the same time, it reflects strong revenue trends in April-June, when sales totaled EUR11.88 billion ($13.05 billion), up 12% from the same period last year.

That compares with a EUR11.71 billion consensus forecast of analysts polled by Factset. Second-quarter net profit rose 70% to EUR1.89 billion, driven by extraordinary gains related to earlier deals, including tax credits, in Latin America and Europe.

The Madrid-based company said it now expects revenue to rise over 9.5% this year, up from a previous expectation of 7% growth.

Second-quarter sales were bolstered by steady growth in Latin American markets as well as the recent takeover of E-Plus in Germany and the inclusion of Brazil's GVT--a company that Telefonica agreed to buy last year--in the accounts from May. But the company underlined signs of recovery in Spain after a deep economic crisis that led to a collapse in revenue.

Spanish sales fell 1.1% overall in the quarter from the same period of 2014, but rose in May and June by 0.1% and 0.2% respectively, the first such monthly increases since December 2009.

This is important for Telefonica because Spain, for all its troubles, remains a highly profitable market where the company can charge customers more while spending less to expand networks and capabilities than in developing markets such as Brazil.

In Spain, Telefonica has focused its strategy on customers who can afford pricier packages including telephony, super-high speed Internet access and pay-TV. Earlier this month, Telefonica won exclusive television rights to broadcast Spain's top soccer matches next season, a key draw for such clients, for EUR600 million, and immediately marketed a new integrated offering.

This underpins a high gross operating margin in Spain, at 44.4% of sales in the second quarter, compared with a 31.2% margin for the Brazilian operation, Telefonica's second-largest by sales, and a 23.6% margin for the company's German operation, the third-largest.

At the same time, a better Spanish economic outlook is timely, since it should help offset the effects of an expected recession in Brazil this year. Spain's statistics institute said Thursday that gross domestic product expanded in the second quarter by 3.1%, the highest pace since 2007.

Telefonica Brasil, Brazil's top operator by market share, Wednesday posted a 56.4% decrease in second-quarter net profit, largely due to the absence of extraordinary gains that inflated profit in 2014, on revenue of 10.42 billion Brazilian reals ($3.13 billion), up 5.4% year-over-year.

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