O2 Telefónica: Analysts forecast tough 2011; data upgrades continue

While Telefónica presented a glowing picture for its financial performance for the first nine months of the year, market analysts were less upbeat and criticised the company for overpaying for assets and predicted a tough year ahead.

This disapproval was also partly driven by Telefónica missing analyst estimates for the nine month period--net profits rose 65.5 per cent to €8.84 billion, below the 72 per cent rise anticipated by stock market researchers. However, overall revenue was up 6 per cent to €44.28 billion which was in line with expectations.

Noticeable highpoints were the performances from O2 Germany and O2 UK which helped push sales for all of Europe up nearly 12 per cent--largely driven by mobile internet demand from these two larger subsidiaries.

However, revenues from Spain fell by over 4 per cent due, according to Telefónica's country manager, on account of weak economic conditions and stiff competition.

Commenting on the results, Bernstein Research said in a note to investors: "With the macro situation not showing any signs of improving in Spain, and with peers catching up with O2 in the rest of Europe, we are pessimistic that Latin American cash flow growth will be able to compensate for the decline in the domestic business and see a tougher outlook for Telefonica as 2011 progresses."

Further censure came from Societe Generale analyst Saeed Baradar, stating that he was not an enthusiast of a "company that has to overpay for assets as its growth portfolio matures"--a reference to Telefónica's purchase of Portugal Telecom's stake in Vivo Participacoes in order to take full control of the Brazilian mobile operator.

Baradar noted that Telefónica shares had performed well recently, but said, "on the back of these numbers with no incremental positives I expect it to underperform."

Away from these high level viewpoints on the future of O2 Telefónica, the CEO of O2 UK, Ronan Dunne, was more focused on battling with today's problems. The exec said that his company, which was currently spending nearly €1.2 million a day on providing additional data capacity, would increase this by up to 25 per cent in 2011.

While O2 UK has benefited from the huge increase in smartphone use in the UK--revenues in the last nine months to September were up by 5.6 per cent to €5.3 billion--it was also experiencing a doubling in data traffic every four months.

Dunne said O2 UK had the highest proportion of smartphone customers of any operator in the UK and would invest in new infrastructure as well as looking to acquire additional spectrum.

For more:
- see this Press Association article
- see this WSJ article (sub req)

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