UPDATE 2-Telefonica sees turnaround after showing resilience in 2013

Thu Feb 27, 2014 9:44am EST

* Revenues drop in line with estimates, net profit up

* Weak Latin American currencies, Europe sales weighed

* Growth in Brazil, data, Spain quad-play encouraging

* Sticks to debt reduction, dividend but eyes higher capex

By Julien Toyer

MADRID, Feb 27 (Reuters) - Spain's Telefonica said on Thursday it was seeing signs of a rebound as it posted 2013 results, but analysts warned it remained vulnerable to Latin American jitters and still tough European markets.

Europe's biggest telecom operator by revenue, emerging from a two-year plan which saw it sell assets and cut its dividend to pare high debt and regain financial muscle, returned to organic operating income growth last year, with activity gathering pace in the final quarter.

A solid performance in all Latin American markets, which now account for 51 percent of the group's sales, and sustained growth in mobile data consumption were the main elements of the improvement.

But weaker currencies in Brazil, Argentina and Venezuela dented revenues and operating income, while margins in Europe also came under pressure.

Unfavourable exchange rates are likely to remain Telefonica's main problem in 2014. Europe, however, offers glimmers of hope as economic recovery is expected to accelerate, consumers switch to optic fibre and superfast 4G mobile connections, and regulators could allow consolidation to take place, potentially reducing price wars.

"We expect Spanish (operating income) to continue to improve while the company benefits from European consolidation in the UK, Germany and possibly also Spain going some way to offset downgrades that are likely to come from weak Latin American currencies and another Venezuelan devaluation," said Berstein analysts in a note.

Revenues came in at 57.06 billion euros ($77.98 billion), in line with a Reuters forecast for 56.99 billion euros, and operating income (OIBDA) was 19.08 billion euros, down 10.1 percent but also in line with a forecast 18.96 billion euros.

Net profit jumped 16.9 percent to 4.59 billion euros, after falling in 2012 due to steep writedowns.

Other analysts, though, were more cautious on any prospect of a quick turnaround in mature European markets as the cost of building up new networks will initially pressure results and fierce competition between operators will keep hitting revenues.

Shares in Telefonica were down 2.5 percent at around 1340 GMT, underperforming both Spain's blue-chip Ibex index and European peers.

CAPEX

Telefonica has been involved in a price war in its Spanish home market since it launched an aggressive quadruple-play offer bundling together mobile and fixed telephone, Internet and TV services more than a year ago.

This has eroded traditionally high margins and pressured profits, which the company hopes to recover thanks to new, premium data and TV services.

As with European peers Vodafone, Orange and Deutsche Telekom, however, Telefonica will have to spend billions of euros in building up new optic fibre and superfast 4G mobile networks to carry these offers.

It raised its objective of capEx/sales ratio to 15.5-16 percent this year compared to 14.5 percent in 2013.

The move was made possible by the completion of its debt-cutting plan. Net debt dropped to 45.38 billion euros at the end of 2013, beating a goal to get it below 47 billion euros.

It said it would reduce it below 43 billion euros by year-end and reiterated it hoped to make savings worth 1.5 billion euros by centralising the majority of its business units under a single manager based in Madrid.

In a sign that it would remain financially prudent ahead of expected market consolidation in Europe and Latin America, Telefonica also said 0.35 euro of its unchanged 0.75 euro per share dividend would now come in the form of shares compared with an all-cash payout in 2013.

Telefonica Deutschland said it expected to receive objections on Wednesday from the European Commission to its 8.6 billion euro acquisition of KPN's German E-Plus unit.

Telefonica is also in the middle of a strategy review in Brazil, where it has been given until mid-2015 by the local regulator to loosen its grip on the local market.

Both moves are closely watched as possible triggers for a wave of mergers and acquisitions involving the world's biggest telecoms operators.

Chairman Cesar Alierta said he was confident that what he called existing, outdated telecoms regulations would be updated in order to create single digital telecoms markets in Europe, Latin America and the rest of the world.

"This is going to make a tremendous difference for revenues and the value chain in the near future," he said. "And this is going to happen very soon."

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