As filed with the Securities and Exchange Commission on February 23, 2017
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
| ☐ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2016 |
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
| ☐ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 001-09531
TELEFÓNICA, S.A.
(Exact name of Registrant as specified in its charter)
KINGDOM OF SPAIN
(Jurisdiction of incorporation or organization)
Distrito Telefónica, Ronda de
la Comunicación, s/n
28050 Madrid, Spain
(Address of principal executive offices)
Consuelo Barbé Capdevila, Securities
Market and Corporate Governance Legal Department
Distrito Telefónica, Ronda de la Comunicación, s/n, 28050 Madrid, Spain
Tel. +34 91 482 3733, Fax. +34 91 482 3817, e-mail: amv@telefonica.com
Pablo Eguiron Vidarte, Head of Investor Relations,
Distrito Telefónica, Ronda de la Comunicación, s/n, 28050 Madrid, Spain
Tel. +34 91 482 8700, Fax. +34 91 482 8600, e-mail: ir@telefonica.com
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
|
Title of each class |
Name of each exchange on which registered |
| Ordinary
Shares, nominal value 1.00 euro per share* American Depositary Shares, each representing one Ordinary Share |
New
York Stock Exchange New York Stock Exchange |
| Guarantees** by Telefónica, S.A. of the $700,000,000 Fixed Rate Guaranteed Senior Notes Due 2017; $500,000,000 Floating Rate Guaranteed Senior Notes Due 2017; $1,250,000,000 Fixed Rate Guaranteed Senior Notes Due 2018; $1,000,000,000 Fixed Rate Notes Due 2019; $1,400,000,000 Fixed Rate Guaranteed Senior Notes Due 2020; $1,500,000,000 Fixed Rate Guaranteed Senior Notes Due 2021; $750,000,000 Fixed Rate Guaranteed Senior Notes Due 2023; $2,000,000,000 Fixed Rate Guaranteed Senior Notes Due 2036; each of Telefónica Emisiones, S.A.U.; and of the $1,250,000,000 Fixed Rate Guaranteed Senior Notes Due 2030 of Telefónica Europe, B.V. | New York Stock Exchange |
| ● | Not for trading, but only in connection with the listing of American Depositary Shares, pursuant to the requirements of the New York Stock Exchange. |
| ●● | Not for trading, but only in connection with the listing of the $700,000,000 Fixed Rate Guaranteed Senior Notes Due 2017; $500,000,000 Floating Rate Guaranteed Senior Notes Due 2017; $1,250,000,000 Fixed Rate Guaranteed Senior Notes Due 2018; $1,000,000,000 Fixed Rate Notes Due 2019; $1,400,000,000 Fixed Rate Guaranteed Senior Notes Due 2020; $1,500,000,000 Fixed Rate Guaranteed Senior Notes Due 2021; $750,000,000 Fixed Rate Guaranteed Senior Notes Due 2023; and $2,000,000,000 Fixed Rate Guaranteed Senior Notes Due 2036; each of Telefónica Emisiones, S.A.U., and the $1,250,000,000 Fixed Rate Guaranteed Senior Notes Due 2030 of Telefónica Europe, B.V. (each a wholly-owned subsidiary of Telefónica, S.A.) |
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
The number of outstanding shares of each class of capital stock of Telefónica, S.A. at December 31, 2016 was:
Ordinary Shares, nominal value 1.00 euro per share: 5,037,804,990
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
| Yes ☒ | No ☐ |
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
| Yes ☐ | No ☒ |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
| Yes ☒ | No ☐ |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
| Yes ☐ | No ☐ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):
| Large Accelerated Filer ☒ | Accelerated Filer ☐ | Non-accelerated Filer ☐ |
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
| ☐ | U.S. GAAP |
| ☒ | International Financial Reporting Standards as issued by the International Accounting Standards Board |
| ☐ | Other |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
| ☐ Item 17 | ☐ Item 18 |
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
| Yes ☐ | No ☒ |
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report contains statements that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements in this Annual Report can be identified, in some instances, by the use of words such as “will,” “shall,” “target,” “expect,” “aim,” “hope,” “anticipate,” “should,” “may,” “might,” “assume,” “estimate,” “plan,” “intend,” “believe” and similar language or other formulations of a similar meaning or, in each case, the negative formulations thereof. Other forward-looking statements can be identified in the context in which the statements are made or by the forward-looking nature of discussions of strategy, plans or intentions. These statements appear in a number of places in this Annual Report including, without limitation, certain statements made in “Item 3. Key Information—Risk Factors,” “Item 4. Information on the Company,” “Item 5. Operating and Financial Review and Prospects” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk” and include statements regarding our intent, belief or current expectations with respect to, among other things:
| · | the effect on our results of operations of competition in telecommunications markets; |
| · | trends affecting our business financial condition, results of operations or cash flows; |
| · | ongoing or future acquisitions, investments or divestments; |
| · | our capital expenditures plan; |
| · | our estimated availability of funds; |
| · | our ability to repay debt with estimated future cash flows; |
| · | our shareholder remuneration policies; |
| · | supervision and regulation of the telecommunications sectors where we have significant operations; |
| · | our strategic partnerships; |
| · | the potential for growth and competition in current and anticipated areas of our business; and |
| · | the outcome of pending or future litigation or other legal proceedings. |
Such forward-looking statements are not guarantees of future performance and involve numerous risks and uncertainties, and actual results may differ materially from those anticipated in the forward-looking statements as a result of various factors. The risks and uncertainties involved in our businesses that could affect the matters referred to in such forward-looking statements include but are not limited to:
| · | changes in general economic, business or political conditions in the domestic or international markets in which we operate or have material investments that may affect demand for our services; |
| · | exposure to currency exchange rates, interest rates or credit risk related to our treasury investments or in some of our financial transactions; |
| · | existing or worsening conditions in the international financial markets; |
| · | the impact of new accounting standards current, pending or future legislation and regulation in countries where we operate, as well as any failure to renew or obtain the necessary licenses, authorizations and concessions to carry out our operations and the impact of limitations in spectrum capacity; |
| · | compliance with anti-corruption laws and regulations and economic sanctions programs; |
| · | customers’ perceptions of services offered by us; |
| · | the potential effects of technological changes and sector trends; |
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| · | failure of suppliers to provide necessary equipment and services on a timely basis; |
| · | the impact of unanticipated network interruptions including due to cyber-security actions; |
| · | the effect of reports suggesting that electromagnetic fields may cause health problems; |
| · | the impact of impairment charges on our goodwill and assets as a result of changes in the regulatory, business, economic or political environment; |
| · | potential liability resulting from our internet access and hosting services arising from illegal or illicit use of the internet, including the inappropriate dissemination or modification of consumer data; and |
| · | the outcome of pending or future litigation or other legal proceedings. |
Readers are cautioned not to place undue reliance on those forward-looking statements, which speak only as of the date of this Annual Report. We do not undertake any obligation to update any forward-looking statements that may be made to reflect events or circumstances after the date of this Annual Report including, without limitation, changes in our business or acquisition strategy or planned capital expenditures, or to reflect the occurrence of unanticipated events.
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Our ordinary shares, nominal value 1.00 euro per share, are currently listed on each of the Madrid, Barcelona, Bilbao and Valencia stock exchanges (collectively, the “Spanish Stock Exchanges”) and are quoted through the Automated Quotation System under the symbol “TEF.” They are also listed on the London and Buenos Aires stock exchanges. American Depositary Shares (“ADSs”), each representing the right to receive one ordinary share, are listed on the New York Stock Exchange and on the Lima Stock Exchange. ADSs are evidenced by American Depositary Receipts (“ADRs”) issued under a Deposit Agreement with Citibank, N.A., as Depositary.
As used herein, “Telefónica,” “Telefónica Group,” “Group”, the “Company” and terms such as “we,” “us” and “our” mean Telefónica, S.A. and its consolidated subsidiaries, unless the context requires otherwise.
As used herein, “Atento” means Atento Holding, Inversiones y Teleservicios, S.A. and its consolidated subsidiaries, unless the context requires otherwise.
Below are definitions of certain technical terms used in this Annual Report:
“Access” refers to a connection to any of the telecommunications services offered by Telefónica. A single fixed customer may contract for multiple services, and Telefónica believes that it is more useful to count the number of accesses a customer has contracted for, than to merely count the number of Telefónica’s customers. For example, a customer that has fixed line telephony service and broadband service is counted as two accesses rather than as one customer.
“ARPU” is the average revenues per user per month. ARPU is calculated by dividing total gross service revenues (excluding inbound roaming revenues) from sales to customers for the preceding 12 months by the weighted average number of accesses for the same period, and then dividing by 12.
“Bundles” refer to combination products that combine fixed services (wirelines, broad band and television) and mobile services.
“Churn” is the percentage of disconnections over the average customer base in a given period.
“Cloud computing” is the delivery of computing as a service rather than a product, whereby shared resources, software and information are provided to computers and other devices as a utility over a network (typically the Internet).
“Commercial activity” includes the addition of new lines, replacement of handsets and migrations.
“Data ARPU” is the average data revenues per user per month. Data ARPU is calculated by dividing total data revenues from sources such as Short Message Service (SMS), Multimedia Messaging Services (MMS), other mobile data services such as mobile connectivity and mobile Internet, premium messaging, downloading ringtones and logos, mobile mail and wireless application protocol (WAP) connectivity from sales to customers for the relevant period by the weighted average number of accesses for the same period, and then dividing by the relevant period.
“Data revenues” include revenues from SMS, MMS, other mobile data services such as mobile connectivity and mobile Internet, premium messaging, downloading ringtones and logos, mobile mail and WAP connectivity from sales to customers.
“Data traffic” includes all traffic from Internet access, messaging (SMS, MMS) and connectivity services that is transported by the networks owned by Telefónica.
“FaasT” is a cybersecurity technology that scans an organization’s system 24 hours a day, seven days a week, in order to prevent cybernetic attacks.
“Fixed telephony accesses” includes public switched telephone network, or PSTN, lines (including public use telephony), and integrated services digital network, or ISDN, lines and circuits. For purposes of calculating Telefónica’s number of fixed line accesses, Telefónica multiplies its lines in service as follows: PSTN (x1); basic ISDN (x1); primary ISDN (x30, x20 or x10); 2/6 digital accesses (x30).
“Fixed termination rates” is an established fixed network tariff that applies when a customer makes a call to someone in a network operated by another operator.
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“FTTx” is a generic term for any broadband network architecture that uses optical fiber to replace all or part of the metal local loop.
“Gross adds” means the gross increase in the customer base measured in terms of accesses in a period.
“HDTV” or “high definition TV” has at least twice the resolution of standard definition television (SDTV), allowing it to show much more detail than an analog television or digital versatile disc (DVD).
“Interconnection revenues” means revenues received from other operators which use Telefónica’s networks to connect or to finish their calls and SMS or connect to their customers.
“Internet and data accesses” include broadband accesses (including retail asymmetrical digital subscriber line “ADSL,” very high bit-rate digital subscriber line “VDSL”, satellite, fiber optic and circuits over 2 Mbps), narrowband accesses (Internet service through the PSTN lines) and the remaining non-broadband final customer circuits. Internet and data accesses also include “Naked ADSL”, which allows customers to subscribe for a broadband connection without a monthly fixed line fee.
“IPTV” (Internet Protocol Television) refers to distribution systems for television subscription signals or video using broadband connections over the IP protocol.
“ISP” means Internet service provider.
“IT”, or information technology, is the acquisition, processing, storage and dissemination of vocal, pictorial, textual and numerical information by a microelectronics-based combination of computing and telecommunications.
“Latch” is a cybernetic application, protecting accounts and on-line services.
“Local loop” means the physical circuit connecting the network termination point at the subscriber’s premises to the main distribution frame or equivalent facility in the fixed public telephone network.
“LTE” means Long Term Evolution, a 4G mobile access technology.
“M2M”, or machine to machine, refers to technologies that allow both mobile and wired systems to communicate with other devices of the same ability.
“Market share” is the percentage ratio of the number of final accesses or operator revenues over the existing total market in an operating area.
“Metashield” is a cybernetic product for protecting metadata (information on data) in digital documents and archives.
“Mobile accesses” includes accesses to the mobile network for voice and/or data services (including connectivity). Mobile accesses are categorized into contract and prepay accesses.
“Mobile broadband” includes Mobile Internet (Internet access from devices also used to make voice calls such as smartphones), and Mobile Connectivity (Internet access from devices that complement fixed broadband, such as PC Cards/dongles, which enable large amounts of data to be downloaded on the move).
“MTR” means mobile termination rate, which is the charge per minute or SMS paid by a telecommunications network operator when a customer makes a call to another network operator.
“MVNO” means mobile virtual network operator, which is a mobile operator that is not entitled to use spectrum for the provision of mobile services. Consequently, an MVNO must subscribe to an access agreement with a mobile network operator in order to provide mobile access to their customers. An MVNO pays a determined tariff to such a mobile network operator for using the infrastructure to facilitate coverage to their customers.
“Net adds” means the number of new accesses in a certain period.
“Non SMS data revenues” means data revenues excluding SMS revenues.
“OTT services” or “over the top services” means services provided through the Internet (such as television).
“P2P SMS” means person to person short messaging service (usually sent by mobile customers).
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“Pay TV” includes cable TV, direct to home satellite TV, or DTH, and Internet Protocol TV, or IPTV.
“Revenues” means net sales and revenues from rendering of services.
“Service revenues” means revenues less revenues from handset sales. Service revenues are mainly related to telecommunications services, especially voice revenues and data revenues (SMS and data traffic download and upload revenues) consumed by Telefónica’s customers.
“SIM” means subscriber identity module, a removable intelligent card used in mobile handsets, USB modems, etc. to identify the user in the network.
“Tacyt” is a cybersecurity tool that supervises, stores, analyzes, correlates and classifies mobile applications.
“Unbundled local loop” or “ULL” includes accesses to both ends of the copper local loop leased to other operators to provide voice and DSL services (fully unbundled loop, fully ULL) or only DSL service (shared unbundled loop, “shared ULL”).
“VoiceTraffic” means voice minutes used by Telefónica’s customers over a given period, both outbound and inbound.
“VoIP” means voice over Internet protocol.
“Wholesale accesses” means accesses Telefónica provides to its competitors, who then sell services over such accesses to their residential and corporate clients.
“Wholesale ADSL” means accesses of broadband or fiber that we provide to our competitors, who then sell services over such accesses to their residential and corporate clients.
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PRESENTATION OF CERTAIN FINANCIAL INFORMATION
In this Annual Report, references to “U.S. dollars,” “dollars” or “$,” are to United States dollars, references to “pounds sterling,” “sterling” or “£” are to British pounds sterling, references to “reais” refer to Brazilian reais and references to “euro”, “euros” or “€” are to the single currency of the participating member states in the Third Stage of the European Economic and Monetary Union pursuant to the treaty establishing the European Community, as amended from time to time.
Our consolidated financial statements as of December 31, 2015 and 2016, and for the years ended December 31, 2014, 2015 and 2016 included elsewhere in this Annual Report including the notes thereto (the “Consolidated Financial Statements”), are prepared in conformity with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
Retrospective revisions
The consolidated income statement and cash flow data for the years ended December 2014 and 2015 (and also for the years ended December 2012 and 2013 in “Item 3. Key Information―Selected Financial Data”) included in this Annual Report has been retrospectively amended to show the reclassification of the results attributable to our operations in the United Kingdom as continuing operations.
On March 24, 2015, Telefónica, S.A. reached an agreement with Hutchison Whampoa Group for the acquisition of Telefónica’s operations in the United Kingdom “O2 UK”. In accordance with IFRS 5, companies under the sale agreement were classified as a disposal group held for sale at that date, and their operations qualified as discontinued operations in the consolidated financial statements for the year ended December 31, 2015.
Following the European Commission’s (the “EC”) decision to prohibit such sale to Hutchison Whampoa Group, the Board of Directors of Telefónica, S.A. at its meeting on June 29, 2016 agreed that Telefónica will continue to explore different strategic alternatives for O2 UK to be implemented when market conditions are deemed appropriate. Given that the execution of a sale transaction is less certain, Telefónica’s operations in the United Kingdom are no longer presented as discontinued operations and the respective assets and liabilities cease to be classified as held for sale. Thus, these items are presented line by line in the Consolidated Financial Statements. Comparative financial information has been amended accordingly.
In addition, our 2015 and 2014 financial information by operating segment has been amended to reflect our current reporting structure: Telefónica Spain, Telefónica United Kingdom, Telefónica Germany, Telefónica Brazil and Telefónica Hispanoamérica (formed by the Group’s operators in Argentina, Chile, Peru, Colombia, Mexico, Venezuela, Central America, Ecuador and Uruguay), which is the same as our organizational structure prior to the elimination of our Telefónica United Kingdom operating segment, which was approved by the Board of Directors of Telefónica, S.A. on February 26, 2014.
Moreover, our consolidated statement of financial position as of December 31, 2014 has been adjusted to reflect the finalization of the purchase price allocation for the acquisition of E-Plus Mobilfunk GmbHCo KG (“E-Plus”). The impact of such finalization on our 2014 net income was immaterial and adjusted against retained profits as of December 31, 2014. As a result, we have not restated the consolidated income statement for the year ended December 31, 2014 in connection with this finalization.
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Item 1. Identity of Directors, Senior Management and Advisors
A. Directors and Senior Management
Not applicable.
Not applicable.
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
The following table presents certain selected consolidated financial data. It is to be read in conjunction with “Item 5. Operating and Financial Review and Prospects”, “Item 4. Information on the Company—Business Overview” and the Consolidated Financial Statements. The consolidated income statement and cash flow data for the years ended December 31, 2014, 2015 and 2016 and the consolidated statement of financial position data as of December 31, 2015 and 2016 set forth below are derived from, and are qualified in their entirety by reference to the Consolidated Financial Statements.
The consolidated income statement and cash flow data for the year ended December 31, 2015 set forth below has been retrospectively amended in 2016 to show the reclassification of the results attributable to our operations in the United Kingdom as continuing operations and is not derived from Telefónica, S.A.’s consolidated financial statements for such year, which are not included herein. See “Presentation of Certain Financial Information―Retrospective revisions”.
The consolidated income statement and cash flow data for the year ended December 31, 2014 set forth below is derived from Telefónica, S.A.’s consolidated financial statements for that year. The consolidated statement of financial position data as of December 31, 2014 set forth below have been retrospectively amended to show the finalization of the purchase price allocation for the acquisition of E-Plus and is not derived from Telefónica, S.A.’s consolidated financial statements for such year, which are not included herein. See “Presentation of Certain Financial Information―Retrospective revisions”.
The consolidated statement of financial position as of December 31, 2012 and 2013 and the consolidated income statement and cash flow data for the years ended December 31, 2012 and 2013 set forth below are derived from Telefónica, S.A.’s consolidated financial statements for such years, which are not included herein.
Our Consolidated Financial Statements have been prepared in accordance with IFRS as issued by the IASB.
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The basis of presentation is described in detail in Note 2 to our Consolidated Financial Statements.
| Millions of euros | 2012 | 2013 | 2014 | 2015 | 2016 |
| Revenues | 62,356 | 57,061 | 50,377 | 54,916 | 52,036 |
| Other income | 2,323 | 1,693 | 1,707 | 2,011 | 1,763 |
| Supplies | (18,074) | (17,041) | (15,182) | (16,547) | (15,242) |
| Personnel expenses | (8,569) | (7,208) | (7,098) | (10,349) | (8,098) |
| Other expenses | (16,805) | (15,428) | (14,289) | (16,802) | (15,341) |
| Depreciation and amortization | (10,433) | (9,627) | (8,548) | (9,704) | (9,649) |
| OPERATING INCOME | 10,798 | 9,450 | 6,967 | 3,525 | 5,469 |
| Share of profit (loss) of investments accounted for by the equity method | (1,275) | (304) | (510) | (10) | (5) |
| Net finance expense | (3,062) | (2,696) | (2,519) | (2,341) | (2,706) |
| Net exchange differences | (597) | (170) | (303) | (268) | 487 |
| Net financial expense | (3,659) | (2,866) | (2,822) | (2,609) | (2,219) |
| PROFIT BEFORE TAX | 5,864 | 6,280 | 3,635 | 906 | 3,245 |
| Corporate income tax | (1,461) | (1,311) | (383) | (155) | (846) |
| PROFIT AFTER TAX FROM CONTINUING OPERATIONS | 4,403 | 4,969 | 3,252 | 751 | 2,399 |
| PROFIT FOR THE YEAR | 4,403 | 4,969 | 3,252 | 751 | 2,399 |
| Attributable to equity holders of the Parent | 3,928 | 4,593 | 3,001 | 616 | 2,369 |
| Attributable to non-controlling interests | (475) | (376) | 251 | 135 | 30 |
| Weighted average number of shares-Basic (thousands)(1) | 4,847,311 | 4,872,974 | 4,850,311 | 5,070,588 | 5,060,519 |
| Basic and diluted earnings per share attributable to equity holders of the parent (euro)(1) | 0.81 | 0.94 | 0.58 | 0.07 | 0.42 |
| Basic and diluted earnings per ADS (euro)(1) | 0.81 | 0.94 | 0.58 | 0.07 | 0.42 |
| Weighted average number of ADS-Basic (thousands)(1) | 4,847,311 | 4,872,974 | 4,850,311 | 5,070,588 | 5,060,519 |
| Dividends per ordinary share (cash and scrip) (euro) | 0.83 | 0.35 | 0.75 | 0.75 | 0.75 |
| Dividends per ordinary share (cash and scrip) ($) (2) | 1.06 | 0.47 | 0.98 | 0.83 | 0.82 |
| Consolidated Statement of Financial Position Data | |||||
| Cash and cash equivalents | 9,847 | 9,977 | 6,529 | 2,615 | 3,736 |
| Property, plant and equipment | 35,021 | 31,040 | 33,156 | 33,910 | 36,393 |
| Total assets | 129,773 | 118,862 | 122,348 | 120,329 | 123,641 |
| Non-current liabilities | 70,601 | 62,236 | 62,318 | 60,509 | 59,805 |
| Equity net | 27,661 | 27,482 | 30,321 | 25,436 | 28,385 |
| Capital stock | 4,551 | 4,551 | 4,657 | 4,975 | 5,038 |
| Consolidated Cash Flow Data | |||||
| Net cash provided by operating activities | 15,213 | 14,344 | 12,193 | 13,615 | 13,338 |
| Net cash used in investing activities | (7,877) | (9,900) | (9,968) | (12,917) | (8,208) |
| Net cash used in financing activities | (1,243) | (2,685) | (4,041) | (3,612) | (4,220) |
| (1) | The per share and per ADS computations for all periods presented have been reported using the weighted average number of shares and ADSs, respectively, outstanding for each period, and have been adjusted to reflect the stock dividends which occurred during the periods presented, as if these had occurred at the beginning of the earliest period presented and have also been adjusted for mandatorily convertible notes issued in 2014. In accordance with IAS 33 (“Earnings per share”), the weighted average number of ordinary shares and ADSs outstanding for each of the periods covered has been restated to reflect the issuance of shares pursuant to Telefónica’s scrip dividend in June 2012, December 2014, December 2015 and December 2016. As a consequence, basic and diluted earnings per share have also been restated from 2012 to 2015. |
| (2) | Quantities in U.S. dollars are calculated in accordance with the conversion rate published by the Depositary (Citibank, N.A.) in connection with each dividend payment. |
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Exchange Rate Information
As used in this Annual Report, the term “Noon Buying Rate” refers to the rate of exchange for euro, expressed in U.S. dollars per euro, in the City of New York for cable transfers payable in foreign currencies as certified by the Federal Reserve Bank of New York for customs purposes. The Noon Buying Rate certified by the New York Federal Reserve Bank for the euro on February 10, 2017 was $1.065= 1.00 euro. The following tables describe, for the periods and dates indicated, information concerning the Noon Buying Rate for the euro. Amounts are expressed in U.S. dollars per 1.00 euro.
Noon Buying Rate
| Year ended December 31, | Period end | Average (1) | High | Low |
| 2012 | 1.3186 | 1.2909 | 1.3463 | 1.2062 |
| 2013 | 1.3779 | 1.3303 | 1.3816 | 1.2774 |
| 2014 | 1.2101 | 1.3155 | 1.3816 | 1.2447 |
| 2015 | 1.0859 | 1.1032 | 1.2015 | 1.0524 |
| 2016 | 1.0552 | 1.1075 | 1.1516 | 1.0375 |
| 2017 (through February 10, 2017) | 1.0650 | 1.0661 | 1.0802 | 1.0416 |
Source: Federal Reserve Bank of New York.
| (1) | The average of the Noon Buying Rates for the euro on the last day reported of each month during the relevant period. |
Noon Buying Rate
| Month ended | High | Low |
| August 31, 2016 | 1.1334 | 1.1078 |
| September 30, 2016 | 1.1271 | 1.1146 |
| October 31, 2016 | 1.1212 | 1.0866 |
| November 30, 2016 | 1.1121 | 1.0560 |
| December 31, 2016 | 1.0758 | 1.0375 |
| January 31, 2017 | 1.0794 | 1.0416 |
| February 10, 2017 (through February 10, 2017) | 1.0802 | 1.0650 |
Source: Federal Reserve Bank of New York.
Monetary policy within the member states of the euro zone is set by the European Central Bank.
Our ordinary shares are quoted on the Spanish Stock Exchanges in euro. Currency fluctuations may affect the dollar equivalent of the euro price of our shares listed on the Spanish Stock Exchanges and, as a result, the market price of our ADSs, which are listed on the New York Stock Exchange. Currency fluctuations may also affect the dollar amounts received by holders of ADSs on conversion by the depositary of any cash dividends paid in euro on the underlying shares.
Our consolidated results are affected by fluctuations between the euro and the currencies in which the revenues and expenses of some of our consolidated subsidiaries are denominated and recorded (principally the Brazilian real, the pound sterling, the Argentine peso, the Peruvian nuevo sol, the Chilean peso, the Colombian peso, the Mexican peso and the Venezuelan bolívar fuerte). See Note 3 (b) to our Consolidated Financial Statements for information on the exchange rate translation methodology we used in preparing our consolidated financial information.
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
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The Telefónica Group’s business is affected by a series of intrinsic risk factors that affect exclusively the Group, as well as a series of external factors that are common to businesses of the same sector. The main risks and uncertainties facing the Company which could affect its business, financial position, reputation, corporate image and brand and its results of operations, must be considered jointly with the information in the Consolidated Financial Statements, and are as follows:
Group-Related Risks
Worsening of the economic and political environment could negatively affect Telefónica’s business.
Telefónica's international presence enables the diversification of its activities across countries and regions, but it exposes Telefónica to various legislation, as well as to the political and economic environments of the countries in which it operates. Any adverse developments or even uncertainties in this regard, including exchange-rate or sovereign-risk fluctuations, may adversely affect the Company’s business, financial position, cash flows and results of operations and/or the performance of some or all of the Group's financial indicators.
Economic conditions may adversely affect the level of demand of existing and prospective customers, as they may no longer deem critical the services offered by the Group.
Growth in Europe and financial stability may be affected by political uncertainty in some European countries due to upcoming general elections, a possible revival of the crisis in Greece, restructuring of the banking sector and due to the impact of steps taken towards an EU banking union and a capital markets union. In particular, the British exit process from the European Union following the vote to leave in the recent referendum, will require an adjustment of the economy to whatever new trade and investment relationships are put in place in the future, with the consequences in the meantime being uncertainty regarding investment, activity and financial market volatility. In 2016, the Telefónica Group obtained 24.5% of its revenues in Spain (22.6% in 2015), 14.4% in Germany (the same percentage as in 2015) and 13.2% in United Kingdom (14.3% in 2015).
In Latin America, there is an increasing exchange rate risk brought on by external factors such as increasing interest rates in the United States amid still low commodity prices and doubts about growth and imbalances in China; as well as internal factors as a consequence of the still high fiscal and external deficits in the most important Latin American countries or the low liquidity in exchange markets as it is the case in Argentina.
Some of the most significant macroeconomic risk factors in the region affect Mexico, as it is the country with the highest commercial and financial exposure to the United States. In this sense, increasing interest rates and the possible overhaul of trade agreements between both countries could imply higher restrictions on imports into the United States that would affect negatively the economic activity in Mexico.
Brazil is undertaking several measures principally focused on adjusting its public finances. A constitutional amendment limiting public spending has been approved and the government has submitted a new social security reform bill to Congress. However, the possibility of a new bout of political turmoil, which could weaken the support of the reforms, is not negligible. While signs of stabilization have emerged, economic growth continues to be negative and the unemployment rate has hit double digits, having a sizable effect on consumption spending. Moreover, despite financing external needs have decreased, internal needs are still high. All these elements have led to new downgrades to the country’s credit rating during 2016, which now is below investment grade.
In countries such as Chile, Colombia and Peru, the recent uptick in commodity prices is having a positive impact on its fiscal and external accounts, but growth continues to be below its potential level due to the lower external inflows, which have affected investment and, to a lower extent, consumption.
In Argentina, the new government is focused on resolving Argentina’s macroeconomic and financial imbalances and on recovering international confidence. Although reforms taking place may have positive effects in the medium term, short term risks persist, including exchange rate risk, especially due to the high inflation rate amid an economic contraction.
During 2016, Telefónica Hispanoamérica represented 24.2% of the Telefónica Group's revenues (26.2% in 2015), of which 23.8% proceeded from revenues in Argentina, 19.9% in Peru and 17.2% in Chile. During 2016, Telefónica Brazil represented 21.3% of the Telefónica’s Group revenues (20.1% in 2015). In this respect, approximately 30.4% of the Group's revenues were generated in countries that do not have investment grade status (in order of importance, Brazil, Argentina, Ecuador, Nicaragua, Venezuela, Guatemala, Costa Rica and El Salvador), and other countries are only one notch away from losing this threshold.
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“Country risk” factors include the following, among others:
| · | unexpected adverse changes in regulation or administrative policies, including changes that modify the terms and conditions of licenses and concessions and their renewal (or delay their approval); |
| · | abrupt exchange rate movements; |
| · | high inflation rates; |
| · | expropriation or nationalization of assets, adverse tax decisions, or other forms of state intervention; |
| · | economic-financial downturns, political instability and civil disturbances; and |
| · | maximum limits on profit margins imposed in order to limit the prices of goods and services through the analysis of cost structures (for example, in Venezuela, a maximum profit margin has been introduced that is set annually by the Superintendence for Defense of Socioeconomic Rights). |
Any of the foregoing may adversely affect the business, financial position, results of operations and cash flows of the Group.
The Group's financial condition and results of operations may be adversely affected if it does not effectively manage its exposure to foreign currency exchange rates or interest rates.
At December 31, 2016, 50.8% of the Group's net debt (in nominal terms) was pegged to fixed interest rates for over a year, while 20% was denominated in a currency other than the euro. At December 31, 2016, the net financial debt ratio in Latin American currencies was 13%.
To illustrate the sensitivity of financial expenses to a change in short-term interest rates at December 31, 2016: (i) a 100 basis points increase in interest rates in all currencies in which Telefónica has a financial position at that date would lead to an increase in financial expenses of 232 million euros for the year ended December 31, 2016, (ii) whereas a 100 basis points decrease in interest rates in all currencies (even if negative interest rates are reached), would lead to a reduction in financial expenses of 201 million euros for the year ended December 31, 2016. These calculations were made assuming a constant currency and balance position equivalent to the position at year end taking into account the derivative financial instruments arranged.
According to the Group's calculations, the impact on results arising from a 10% depreciation of Latin American currencies against the US dollar and a 10% depreciation of other global currencies against the euro, excluding the pound sterling, would result in exchange losses of 43 million euros for the year ended December 31, 2016, primarily due to the depreciation of the Venezuelan bolívar and, to a lesser extent, the Argentinean peso. These calculations were made assuming a constant currency financial position with an impact on profit or loss for the year ended December 31, 2016, including derivative instruments in place.
During 2016, Telefónica Brazil represented 24.6% (27.0% in 2015), Telefónica Hispanoamérica represented 23.0% (32.9% in 2015) and Telefónica United Kingdom represented 11.3% (14.6% in 2015) of the operating income before depreciation and amortization (OIBDA) of the Telefónica Group.
The Telefónica Group uses a variety of strategies to manage this risk, among others the use of financial derivatives, which themselves are also exposed to risk, including counterparty risk. However, the Group's risk management strategies may not achieve the desired effect, which could adversely affect the Group's business, financial condition, results of operations and cash flows.
Existing or worsening conditions in the financial markets may limit the Group’s ability to finance, and consequently, the ability to carry out its business plan.
The performance, expansion and improvement of the Telefónica Group's networks, the development and distribution of the Telefónica Group's services and products, the implementation of Telefónica's strategic plan and new technologies, the renewal of licenses or the expansion of the Telefónica Group's business in countries where it operates, may require a substantial amount of financing.
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A decrease in the liquidity of Telefónica, a difficulty in refinancing maturing debt or raising new funds as debt or equity could force Telefónica to use resources allocated to investments or other commitments to pay its financial debt, which could have a negative effect on the Group's business, financial condition, results of operations and/or cash flows.
Funding could be more difficult and costly in the event of a significant deterioration of conditions in the international or local financial markets due to the uncertainties regarding the hikes in interest rates on the part of the US Federal Reserve and the oil prices instabilities, or if there is an eventual deterioration in the solvency or operating performance of Telefónica.
At December 31, 2016, gross financial debt scheduled to mature in 2017 amounted to 13,326 million euros (which includes the net position of derivative financial instruments and certain current payables), and gross financial debt scheduled to mature in 2018 amounted to 7,195 million euros.
In accordance with its liquidity policy, Telefónica has covered its gross debt maturities over the next twelve months with cash and credit lines available at December 31, 2016. Telefónica’s liquidity could be affected if market conditions make it difficult to renew existing undrawn credit lines, 8% of which, at December 31, 2016, were scheduled to mature prior to December 31, 2017.
In addition, given the interrelation between economic growth and financial stability, the materialization of any of the economic, political and exchange rate risks referred to above could lead to a negative impact on the availability and cost of Telefónica’s financing and its liquidity strategy, which could have a negative effect on the Group’s business, financial condition, results of operations and/or cash flows.
Adoption of new accounting standards could affect reported results and financial position.
Accounting Standardization Bodies and other authorities may periodically change accounting regulations that govern the preparation of the Group’s consolidated financial statements. Those changes could have a significant impact on the way the Group accounts and presents its financial position and its operating income. In some instances, a modified standard or a new requirement with retroactive nature must be implemented, which requires the Group to restate previous financial statements.
See details of the implementation of new standards and interpretations issued in Note 3 of the Consolidated Financial Statements. In particular, Telefónica is required to adopt the new accounting standards IFRS15 Revenue from Contracts with Customers, effective from January 1, 2018, and IFRS 16 Leases, effective for the financial years from January 1, 2019. These standards present significant changes that could affect both the amount and moment of recognition of revenues and expenses related with certain sales transactions, as well as the accounting treatment for all lease contracts (other than short-term leases and leases of low-value assets). These changes could have a material impact on the Group’s financial statements. Such impact is under analysis as of the date of this Annual Report.
Risks Relating to the Group’s Industry
The Group operates in a highly regulated industry which requires government concessions for the provision of a large part of its services and the use of spectrum, which is a scarce and costly resource.
The telecommunications sector is subject to laws and sector-specific regulations in the majority of the countries where the Group provides its services. Additionally, many of the services the Group provides require the granting of a license, concession or official approval, which usually requires certain obligations and investments to be made, such as those relating to the acquisition of spectrum. Among the main risks of this nature are those related to spectrum regulation and licenses/concessions, rates, universal service regulation, regulated wholesale services over fiber networks, privacy, functional separation of businesses and network neutrality. The fact that the Group’s business is highly regulated both affects its revenues and imposes costs on its operations.
Thus, as the Group provides most of its services under licenses, authorizations or concessions, it is vulnerable to administrative bodies' decisions, such as economic fines for serious breaches in the provision of services and, potentially, revocation or failure to renew these licenses, authorizations or concessions, or the granting of new licenses to competitors for the provisions of services in a specific market.
In this regard, the Telefónica Group pursues its license renewals on the terms referred in their respective contractual conditions, though it cannot guarantee that it will always complete this process successfully or under the most beneficial terms for the Group. In many cases complying with certain obligations is required, including, among others, minimum specified quality, service and coverage standards and capital investment. Failure to comply with these obligations could result in the imposition of fines, revision of the contractual terms, or even the revocation of the license, authorization or concession.
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Additionally, the Telefónica Group could be affected by regulatory actions carried out by the antitrust authorities. These authorities could prohibit certain actions, such as new acquisitions or specific practices, create obligations or lead to heavy fines. Any such measures implemented by the competition authorities could result in economic and/or reputational loss for the Group, in addition to a loss of market share and/or harm to the future growth of certain businesses. Regarding the merger of Telefónica Deutschland Holding AG and E-Plus, other providers such as United Internet and the regional cable operator Airdata lodged an appeal before the General Court against the decision of the EU which authorized such merger. Telefónica Deutschland has been accepted as an interested party of the process and it has presented its statements in both cases. United Internet has lodged a second appeal against the EC in relation to the content of the letter of commitment assumed by Telefónica Deutschland regarding the implementation of remedies for non-network operators. In December 2016, each of Mass Response Service GmbH and Multiconnect GmbH filed an appeal before the General Court against the decision of the EU that Telefónica Deutschland is not obliged to grant access to Full-Mobile Virtual Network Operators (“MVNO”) under the non-MNO remedy of the commitments. Telefónica Deutschland will apply for leave to intervene as an interested party.
Regulation of spectrum and access to new government licenses/concessions of spectrum
On September 14, 2016, the EC adopted, among other texts, a proposed Directive for the establishment of a European Electronic Communication Code, which could have significant implications, inter alia, for access to networks, spectrum use, auction conditions, duration and renewal of licenses, universal service, consumer protection, audiovisual services and platforms. It is estimated that the approval of such regulatory framework will take place in a year and a half.
On December 14, 2016, the European Parliament and Council agreed on a decision regarding the use and availability of the 700 MHz band. This could require new cash outflows from Telefónica between 2017 and 2022 in both the United Kingdom and Spain, where it is expected that the 700 MHz band will be available between 2020-2022. In connection with spectrum auctions for 2.3 and 3.4 GHz band, in the United Kingdom, Ofcom issued a consultation document on November 21, 2016. Responses were due by January 30, 2017, and a decision is expected in the second quarter of 2017. In Germany, the regulatory agency for electricity, gas, telecommunications, post and railway (“BNetzA”) initiated a proceeding for the demand-oriented allocation of new frequencies for the further rollout of digital 5G infrastructures, which include the timely allocation of the 2 GHz spectrum expiring at the end of 2020 and 2025 (so called UMTS spectrum) and further spectrum (inter alia 3.5 GHz). A decision about the allocation procedure is expected towards the end of 2017 and an auction may take place in 2018 or 2019.
In Latin America, spectrum auctions are expected to take place requiring potential cash outflows to obtain additional spectrum or to meet the coverage requirements associated with these licenses. Specifically, the procedures expected to take place in 2017-2018, in the relevant jurisdiction for the Group, are:
| · | Mexico: An auction spectrum in the 2500 MHz band is expected to take place between the third quarter of 2017 and the second quarter of 2018. A wholesale network tender, which will offer services in the 700 MHz band was concluded on November 17, 2016. Altán was the tender winner and the commercial operations must begin no later than March 31, 2018. |
| · | Colombia: During 2017 the Ministry of Information Technologies and Communications published for commentaries until March 7, 2017, the project of resolution with the conditions for an auction of 70 MHz of spectrum band in 700 MHz and 5 MHz in 1900 MHz. In addition, the Ministry published a project of decree increasing the spectrum cap for lower bands to 45 MHz and 90 MHz for upper bands. The schedule for the auction has not been set yet. |
| · | Argentina: The Government instructed the regulatory authority to issue new regulations during 2017 to ensure the reassignment of frequencies of the radio spectrum for the provision of wireless or fixed wireless services and enables the reassignment of frequencies previously granted to other provider. |
However, it is likely that some of these spectrum tender procedures will not be completed, or even initiated in the mentioned dates. In addition to the above, it may be the case that certain administrations may not yet have announced their intention to release new spectrum but may do so during 2017. The above does not include processes announced via general statements by administrations, which involve bands not key to Telefónica's needs. Furthermore, Telefónica may also seek to acquire spectrum on the secondary market where opportunities might arise.
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Risks relating to concessions and licenses previously granted
The terms of concessions and licenses granted to the Group and necessary for the provision of its services may be challenged or amended by the regulators at any time, which may materially adversely affect its business, financial condition, results of operations and cash flows.
The German regulator initiated consultations in March and July 2016 on the frequency distribution after the merger between Telefónica Deutschland and E-Plus, particularly in the 2 GHz band and on the future spectrum allocation for 5G band. The result of such consultations could lead, among others, to proposals by the regulator reorganizing the spectrum that Telefónica Deutschland holds on the 2 GHz band.
In the United Kingdom, Telefónica has an obligation in its 800 MHz spectrum license to provide indoor coverage to 98% of the United Kingdom population (and 95% of the population of each of England, Wales, Scotland and Northern Ireland) and an obligation in its 900/1800 MHz spectrum license to provide voice and text services to 90% of the United Kingdom landmass, both by the end of 2017, and to be maintained, thereafter. Inherent with these obligations is a risk of Telefónica United Kingdom not meeting the required targets. Telefónica United Kingdom is actively working towards mitigating the risk through the continuous investment in an infrastructure improvement program, upgrading its 2G and 3G Networks and continued roll-out of its 4G Network.
In the state of São Paulo, Telefônica Brazil provides local and national long-distance Fixed Switched Telephony Service ("STFC") under the so-called public regime, through a concession agreement, which is expected to remain in force until 2025. In accordance with current regulations, Telefônica Brasil informed the Brazilian regulatory authority (Agencia Nacional de Telecomunicações or "ANATEL") that the net value, as of December 31, 2015, of assets assigned to the provision of STFC (which include, among others, switching and transmission equipment and public use terminals, external network equipment, energy equipment and system and operation support equipment) were estimated to total 7.8 billion Brazilian reais. At December 31, 2016, this value is estimated to total 8,813,916 Brazilian reais (this value will be updated in the second half of 2017). In principle, the assets assigned to the provision of STFC were considered reversible assets. During the last months, a bill amending the regulatory framework in Brazil has been processed, establishing, among others, that such assets will no longer be reversible under the new licenses regime in exchange for significant broadband investment commitments. Recently, the processing at the Senate of such bill has been challenged before the Federal Supreme Court. Such Court and, consequently, the Senate’s governing board has decided to send the bill for voting in plenary. With the bill being sent to the plenary, it could be understood that there is no more dispute for the Supreme Court to decide upon. In case that the bill is finally approved, ANATEL will be entitled to adopt the pertinent administrative decisions for the transformation of the respective licenses with the consequent modification of the future binding obligations to STFC providers.
In Colombia, the Ministry of Information Technologies and Communications (“ITC”) issued Resolution 597 on March 27, 2014, to renew 850 MHz/1900 MHz licenses for 10 additional years. However, the reversion of assets (other than radio frequencies, which it is clear that must be returned) and its scope was widely discussed between the relevant mobile operators (including Telefónica Colombia) and the ITC in the context of the liquidation of the previous concession contract, taking into consideration the terms of the contract, and the Constitutional Court’s interpretation of Law 422 of 1998 and Law 1341 of 2009. Discussions on the matter concluded on February 16, 2016, when the ITC convened an arbitration proceeding, in accordance with in the terms of the relevant concession contract. The relevant concession holders (including Telefónica Colombia) filed a response to the claim prompted by the ITC. The arbitration process is still ongoing.
In Peru, Telefónica has concessions for the provision of the fixed-line service until November 2027. In December 2013, Telefónica filed a partial renewal request for these concessions for five more years. In December 2014 and June 2016, Telefónica also filed a renewal request for twenty more years in relation to a concession for the provision of local carrier service and one of the concessions to provide mobile-line services in provinces, respectively. As of the date of this Annual Report, the decision of the Ministry of Transport and Communications (Ministerio de Transportes y Comunicaciones) in all such proceedings is still pending and according to the legislation, the concessions subject of these procedures remain in force as long as the procedures are in progress.
Telefónica Móviles Chile, S.A. was awarded 2x10 MHz spectrum on the 700 MHz band in March 2014. A claim was brought by a consumer organization against the 700 MHz assignments. The decision by the Supreme Court on the appeal presented by such consumer organization is still pending.
During the year ended December 31, 2016, the Group’s consolidated investment in spectrum acquisitions and renewals amounted to 345 million euros.
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The Group’s failure to obtain sufficient or appropriate spectrum capacity in the jurisdictions discussed above or any others in which it operates, or its inability to assume the related costs, could have an adverse impact on its ability to launch and provide new services and on Telefónica’s ability to maintain the quality of existing services, which may adversely affect the Group’s business, financial condition, results of operations and cash flows.
Regulation of wholesale and retail charges
The European Regulation 2015/2120 on Net Neutrality and Roaming was adopted on November 25, 2015. From June 15, 2017, operators may not charge roaming users within the EU an additional fee on their domestic prices for roaming calls, SMS and data services. However, in some circumstances, operators may apply consumption limits and additional surcharge under a "fair use policy". In January 2017, wholesale roaming caps have been agreed between the Council and the Parliament and the maximum wholesale caps have been set at the following limits: 0.01€/sms; 0.032€/minute; data services glide path: 7.7€/GB (June – December 2017); 6€/GB (2018); 4.5€/GB (2019); 3.5€/GB (2020); 3€/GB (2021) and 2.5€/GB (2022).
On September 14, 2016, the EC presented its proposal of the regulatory framework which, among other measures, intends to incorporate a European methodology and a European upper limit for the call-termination prices for landline phone/ mobile phone applicable in EU.
The decreases in wholesale mobile termination rates (“MTR”) in Europe are also noteworthy. In the United Kingdom, the current rate is 0.503 ppm. A further cut to 0.495 ppm will come into effect from April 1, 2017.
In Germany, on August 30, 2016, BNetzA adopted a regulatory decision, which considers with pure long run incremental cost (“LRIC”) a new cost model for the calculation of MTR. Telefónica Deutschland has appealed the decision in court, but the appeal has not yet been decided. BNetzA approved new MTR on November 30, 2016, in a provisional decision, which sets the rates to 0.011 euro/minute as of December 1, 2016, to 0.0107 euro/minute as of December 1, 2017, and to 0.0095 euro/minute as of December 1, 2018, until the end of November 2019. Before taking a final decision, the new MTR are nationally consulted and notified to the EC. There is consequently a risk that when the new MTR are approved (which will be retroactively enforceable from December 1, 2016), and with the new termination rates applicable from January 1, 2017, the rates will significantly decrease. Regarding fixed networks termination rates, BNetzA adopted at the end of January 2017 a provisional decision which establish a tariff of 0.0010 euro/minute.
In Spain, on July 1, 2016, the Spanish National Regulatory and Competition Authority (Comisión Nacional de los Mercados y la Competencia or "CNMC") initiated the process of reviewing the prices of mobile termination, with a final decision expected to be adopted during 2017.
Additionally, on January 17, 2017, the CNMC issued the analysis of the market for access and call origination on fixed networks. The CNMC maintains the obligation of Telefónica, as an operator with significant market power, to provide a wholesale interconnection offer and a wholesale line rental ("WLR"), both with cost-oriented prices regarding manufacturing costs and the adoption of a management accounting system. Telefónica is equally obliged to non-discrimination, transparency and separation of accounts. In Latin America, it is likely that MTRs will also be reduced in the short to medium term.
In Brazil, ANATEL has issued ex-ante regulations to ensure competition in the wholesale market, which includes reductions of the MTR. In this regard, the Plano Geral de Metas de Competição (“PGMC”), amended by Resolution 649/2015, established that mobile termination fees are subject to successive yearly reductions from 2016 until 2019, when the definitive cost-oriented-model fees are expected to be in force (such Resolution has been challenged in courts without a definitive outcome). On December 5, 2016, ANATEL issued a public consultation for the revision of the PGMC, which addresses changes in the relevant wholesale markets regulated by the PGMC and also in the cost-oriented model. The mentioned public consultation is available for comments until March 22, 2017.
In Mexico, on September 23, 2016, the Instituto Federal de Telecomunicaciones (“IFT”) announced that the MTRs applicable to operators different from the so-called Prevailing Economic Agent for 2017 will be 0.1906 pesos per minute, as long as the regulatory asymmetry of the Prevailing Economic Agent introduced by Mexico with the constitutional reform on 2014 and the new Federal Telecommunication Law on 2014 remains in effect.
In Colombia, the Comisión de Regulación de Comunicaciones (“CRC”) published a regulatory project for public comments in November 2016. In the project the CRC proposes a symmetric termination rate of 11.17 COP per minute and 4.3 million COP per monthly capacity from 2017 for established operators and an asymmetric termination rate of 19.01 COP per minute and 7.6 million COP per monthly capacity for challenger operators in a five-year period. The CRC also proposes regulatory measures to promote the entry of mobile virtual network operators (“MVNOs”), including the regulation of prices for the access to the mobile networks. The project is still in debate.
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In Peru, the Organismo Supervisor de las Telecomunicaciones (“OSIPTEL”) started the process for the revision of the values on charges of interconnection for mobile termination of calls in telecommunication services networks in November 2016 .The new values established by OSIPTEL will apply as of the fourth quarter of 2017.
As a result of the foregoing regulatory actions, Telefónica may receive lower prices for certain of its services, which may materially adversely affect its business, financial condition, results of operations and cash flows.
Regulation of Universal Services
The Universal Service (“US”) is an economic and legal term which refers to the obligation imposed to telecommunication operators to provide a basic service to all inhabitants of a country. In general, the goal is to promote quality services availability at affordable, reasonable and fair prices, to increase the access to advances telecommunication services (such as broadband) and to move forward with the availability of such services to all customers. On its reform proposal for the regulatory framework issued on September 14, 2016, the EC seeks to modernize the Universal Services area in Europe, removing the mandatory inclusion of the traditional services (telephone boxes, directories and information services) and focusing on the provision of affordable broadband services. The EC also proposed that the US must be funded from general budgets and not from sectorial budgets. However, if this funding method does not thrive, the affordable broadband inclusion could result more expensive for the sector. In any case, it is estimated that the new regulation will not be applicable before 2020.
In Spain, the licenses of Telefónica de España and Telefónica Telecomunicaciones Públicas for the provision of USs expired on December 31, 2016. Both companies have been designated for the provision of these services from January 1, 2017.
In Brazil, on December 15, 2016, a proposal of the General Plan for Universalisation of Fixed Switched Telephony Services (“PGMU”) was approved by ANATEL.
The imposition on the Telefónica Group of additional or more onerous obligations to provide US services in the jurisdictions where it operates could have a material adverse effect on its business, financial condition, results of operations and cash flows.
Regulation of fiber networks
On February 24, 2016, the Spanish CNMC adopted a final resolution on the wholesale broadband market regulation, which raises a geographical segmentation in competitive (66 cities, 34% of total population) and non-competitive areas. It is anticipated that this resolution will last for at least four years. Its implementation is expected to result in a moderate increase of the current regulatory obligations of Telefónica in Spain, in terms of its granting of access to other operators to its fiber network and with respect to certain aspects relating specifically to the business segment (high quality bitstream service for business customers with national coverage). This Resolution has been appealed by Telefónica España. Additionally, on January 18, 2016, the CNMC adopted a resolution which approves the reference offer of the new wholesale unbundled virtual access service to Telefónica's new broadband Ethernet service (local NEBA). The NEBA service should be operative in 12 months from the date of the resolution's adoption.
Any of such obligations and restrictions could raise costs and limit Telefónica’s freedom to provide the mentioned services, which could materially adversely affect Telefónica’s business, financial condition, results of operations and cash flows.
Regulations on privacy
An intense data protection and privacy regulation may result in limitations to offer innovative digital services such as Big Data services. In Europe the new General Data Protection Regulation ("GDPR") of April 27, 2016, will be directly applicable in all member States from May 25, 2018. The GDPR introduces administrative fines of up to 4% of an undertaking’s annual global turnover for breaching the new data protection rules.
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On January 10, 2017, the EC presented its proposal for a regulation on ePrivacy, which will replace the current Directive 2002/58/EC on privacy in the electronic communications sector and will complement the recently approved GDPR. The proposal also introduces administrative fines of up to 4% of an undertaking’s annual global turnover for breaching new regulations.
In October 2015, the Court of Justice of the European Union declared invalid the decision of the EC as regards the "Safe Harbor Agreement" relating to the transfer of personal data from the EU to the United States. Subsequently, the EC adopted a new decision on Privacy Shield on July 12, 2016, which considers that there is an adequate level of protection of personal data transferred from the EU to US self-certified companies complying with the Privacy Shield principles. Telefónica USA, Inc. has self-certified itself as Privacy Shield compliant. The Privacy Shield has been challenged before the EU’s General Court by civil-society groups, but the admission of their appeals is still pending.
In Brazil, the adoption of a Personal Data Protection Act is still pending, this could lead to further obligations and restrictions for operators in relation to the collection of personal data and its treatment.
Any of such obligations and restrictions could raise costs and limit Telefónica’s ability to provide certain services, which could materially adversely affect Telefónica’s business, financial condition, results of operations and cash flows.
Regulation of network neutrality
Under the principle of network neutrality applicable to Internet access services area, network operators could not establish technical or commercial restrictions regarding the terminals that can be connected or the services, or applications and contents that can be accessed or distributed through the Internet by the end user. It also refers to the non-discriminatory behaviour (e.g. non-anticompetitive) to be adopted by operators regarding the different types of Internet traffic circulating through their networks.
In Europe, the application of the so-called “net neutrality Regulation” (Regulation (EU) 2015/2120 of November 25, 2015) will be monitored by national regulatory authorities following guidance to be delivered by the European Regulatory Authority (“BEREC”) on August 30, 2016. This guidance could directly impact internet access service commercial practices (for example, some zero rating offers) and it may limit network management practices or increase transparency requirements on the Internet Access Service.
Telefónica operates in Latin American countries where net neutrality is being implemented, such as Chile, Colombia, Mexico and Peru, where OSIPTEL adopted regulations aimed at providing clear guidelines on the implementation of the net neutrality regime adopted in 2012 and in force since January 1, 2017. In Brazil, the President approved a net neutrality decree (regulating Marco Civil) on May 11, 2016. In Mexico, the IFT scheduled a public consultation to be carried out in August 2016 in respect of the guidelines that will be issued regarding net neutrality, which was postponed to the first quarter 2017. In Chile, on November 22, 2016, the Commission of Telecommunications submitted a bill for amending the Network Neutrality Act. The main changes are the establishment of rules more restricted to apply measures for traffic management and restrictive rules for “Zero Rating”. If changes to regulation such as those described above, or otherwise, occur in the various jurisdictions where the Telefónica Group operates, it could have a material adverse effect on its business, financial condition, results of operations and cash flows.
The Telefónica Group is exposed to risks in relation to compliance with anti-corruption laws and regulations and economic sanctions programs.
The Telefónica Group is required to comply with the laws and regulations of various jurisdictions where it conducts operations. In particular, the Group's international operations are subject to various anti-corruption laws, including the US Foreign Corrupt Practices Act of 1977 and the United Kingdom Bribery Act of 2010, and economic sanctions programs, including those administered by the United Nations, the European Union and the United States, including the US Treasury Department's Office of Foreign Assets Control. The anti-corruption laws generally prohibit providing anything of value to government officials for the purposes of obtaining or retaining business or securing any improper business advantage. As part of the Telefónica Group's business, it may deal with entities, the employees of which are considered government officials. In addition, economic sanctions programs restrict the Group's business dealings with certain sanctioned countries, individuals and entities.
Although the Group has internal policies and procedures designed to ensure compliance with applicable anti-corruption laws and sanctions regulations, there can be no assurance that such policies and procedures will be sufficient or that the Group's employees, directors, officers, partners, agents and service providers will not take actions in violation of the Group's policies and procedures (or otherwise in violation of the relevant anti-corruption laws and sanctions regulations) for which the Group or they may be ultimately held responsible. Violations of anti-corruption laws and sanctions regulations could lead to financial penalties, exclusion from government contracts, damage to the Group's reputation and other consequences that could have a material adverse effect on the Group's business, results of operations and financial condition.
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Telefónica is currently conducting internal investigations covering various countries regarding possible violations of applicable anti-corruption laws. Telefónica has been in contact with governmental authorities about these matters and intends to cooperate with those authorities as the investigations continue. It is not possible at this time to predict the scope or duration of these matters or their likely outcome.
Customers' perceptions of services offered by the Company may put it at a disadvantage compared to competitors' offerings.
Customers' perceptions of the assistance and services offered are critical to operating in highly-competitive markets. The ability to predict and respond to the changing needs and demands of customers affects the Company's competitive position relative to other technology sector companies, and its ability to extract the value generated during this process of transformation. Failure to do so adequately could have an adverse impact on the Group’s business, financial condition, results of operations and cash flows.
Telefónica may not be able to adequately foresee and respond to technological changes and sector trends.
In a sector characterized by rapid technological change, it is essential to be able to offer the products and services demanded by the market and consider the impacts of changes in the life cycle of technical assets, secure margins and select the right investments to make.
The Telefónica Group operates in markets that are highly competitive and subject to constant technological development. Therefore, as a consequence of both of these characteristics, it is subject to the effects of actions by competitors in these markets and to its ability to anticipate and adapt, in a timely manner, to constant technological changes, changes in customer preferences that are taking place in the industry, as well as economic, political and social circumstances.
Failure to do so adequately could have an adverse effect on the Group's business, financial condition, results of operations and cash flows.
New products and technologies arise constantly, and their development can render obsolete the products and services the Telefónica Group offers and the technology it uses. This means that Telefónica must invest in the development of new products, technology and services so it can continue to compete effectively with current or future competitors, which may result in the decrease of the Group's profits and revenue margins. In this respect, margins from traditional voice and data business are shrinking, while new sources of revenues are deriving from mobile Internet and connectivity services that are being launched. Research and development costs amounted to 906 million euros in 2016, representing a decrease of 14.1% from 1,055 million euros in 2015 (1,111 million euros in 2014). These expenses represented 1.7%, 1.9% and 2.2% of the Group's consolidated revenues in 2016, 2015 and 2014, respectively. These figures have been calculated using the guidelines established in the Organization for Economic Cooperation and Development ("OECD") manual. One technology that telecommunications operators, including Telefónica (in Spain and Latin America), are focused on is the new FTTx-type network, which offers broadband access using optical fiber with superior services, such as Internet speed of up to 300MB or HD television services. However, substantial investment is required to deploy these networks, which entails fully or partially substituting copper loop access with optic fiber. While an increasing demand for the capabilities offered by these new networks to end users exists, the high level of the investments requires a continuous analysis of the return on investment.
The explosion of the digital market and entry of new players in the communications market, such as MVNOs, Internet companies or device manufacturers, may cause the loss of value of certain assets, and affect the Group's ability to generate income. Therefore, it is necessary to update the business model, encouraging the pursuit of incomes and additional efficiencies to those followed traditionally. Failure to do so adequately could have an adverse effect on the Group's business, financial condition, results of operations and cash flows.
In addition, the ability of the Telefónica Group's IT systems (operational and backup) to respond to Telefónica's operating requirements is a key factor to be taken into account with respect to the commercial development, customer satisfaction and business efficiency. Any failure by the Telefónica Group’s IT systems to adequately respond to the Group’s evolving operating requirements could have an adverse effect on the Group’s business, financial condition and results of operations.
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Telefónica depends on its suppliers.
The existence of critical suppliers in the supply chain, especially in areas such as network infrastructure, information systems or handsets, with a high concentration in a small number of suppliers, poses risks that may affect Telefónica's operations, and may cause legal contingencies or damages to its image in the event that inappropriate practices are produced by a participant in the supply chain.
As of December 31, 2016, the Telefónica Group depended on three handset suppliers and 12 network infrastructure suppliers, which together accounted for 80% of the awarded contracts for the year then ended. These suppliers may, among other things, extend delivery times, raise prices and limit supply due to their own stock shortfalls and business requirements.
If these suppliers fail to deliver products and services to the Telefónica Group on a timely basis, it could jeopardize network deployment and expansion plans, which in some cases could adversely affect the Telefónica Group's ability to satisfy its license terms and requirements, or otherwise have an adverse effect on the Group's business, financial condition, results of operations and cash flows.
Unanticipated network interruptions can lead to quality loss or the interruption of the service.
Unanticipated network interruptions as a result of system failures, including those due to network, hardware or software, stealing of infrastructure elements or cyber-attacks, which affect the quality of or cause an interruption in the Telefónica Group's service, could lead to customer dissatisfaction, reduced revenues and traffic, costly repairs, penalties or other measures imposed by regulatory authorities and could harm the Telefónica Group's image and reputation.
Telecommunications companies worldwide face increasing cybersecurity threats as businesses become increasingly dependent on telecommunications and computer networks and adopt cloud computing technologies. Cybersecurity threats include gaining unauthorized access to Telefónica's systems or inserting computer viruses or malicious software in its systems to misappropriate consumer data and other sensitive information, corrupt Telefónica's data or disrupt its operations. Unauthorized access may also be gained through traditional means such as the theft of laptop computers, portable data devices and mobile phones and intelligence gathering on employees with access.
Telefónica attempts to mitigate these risks through a number of measures, including backup systems and protective systems such as firewalls, virus scanners and other physical and logical security. However, these measures are not always effective. Although the Telefónica Group has insurance policies to cover these types of incidents, and the claims and loss in revenue caused by service interruptions to date have been covered by these policies, these policies may not be sufficient to cover all possible monetary losses.
The telecommunications industry may be affected by the possible effects that electromagnetic fields, emitted by mobile devices and base stations, may have on human health.
In some countries, there is a concern regarding potential effects of electromagnetic fields, emitted by mobile devices and base stations, on human health. This public concern has caused certain governments and administrations to take measures that have hindered the deployment of the infrastructures necessary to ensure quality of service, and affected the deployment criteria of new networks and digital services such as smart meters development.
There is a consensus between certain expert groups and public health agencies, including the World Health Organization that states that currently there are no established risks associated with exposure to low frequency signals in mobile communications. However, the scientific community is still investigating this issue especially with respect to mobile devices. Exposure limits for radio frequency suggested in the guidelines of the Protection of Non-Ionizing Radiation Protection Committee have been internationally recognized. The mobile industry has adopted these exposure limits and works to request authorities worldwide to adopt these standards.
Worries about radio frequency emissions may discourage the use of mobile devices and new digital services, which could cause the public authorities to implement measures restricting where transmitters and cell sites can be located, how they operate, the use of mobile telephones and the massive deployment of smart meters and other products using mobile technology. This could lead to Telefónica being unable to expand or improve its mobile network.
The adoption of new measures by governments or administrations or other regulatory interventions in this respect, and any future assessment on the adverse impact of electromagnetic fields on health, may adversely affect the business, financial conditions, results of operations and cash flows of the Telefónica Group.
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Possible regulatory, business, economic or political changes could lead to asset impairment.
The Telefónica Group reviews on an annual basis, or more frequently when the circumstances require it, the value of assets and cash-generating units, to assess whether their carrying values can be supported by the future expected cash flows, including, in some cases synergies allowed for in acquisition costs. Potential changes in the regulatory, business, economic or political environment may result in the need to introduce changes to estimates made and to recognize impairments in goodwill, intangible assets or fixed assets. Although the recognition of impairments of property, plant and equipment, intangible assets and financial assets results in a non-cash charge on the income statement, it could adversely affect the results of the Telefónica Group's operations. In this respect, the Telefónica Group has experienced impairments on certain of its investments, affecting its results of operations in the year in which they were experienced. In 2016, impairment losses in goodwill were recognized amounting to 215 million euros for Telefónica operations in Venezuela (124 million euros) and Mexico (91 million euros).
The Telefónica Group’s networks carry and store large volumes of confidential, personal and corporate data, and its Internet access and hosting services may lead to claims for illegal or illicit use of the Internet.
The Telefónica Group's networks carry and store large volumes of confidential, personal and business data, through both voice and data traffic. The Telefónica Group stores increasing quantities and types of customer data in both business and consumer segments. Despite its best efforts to prevent it, the Telefónica Group may be found liable for any loss, transfer, or inappropriate modification of the customer data or general public data stored on its servers or transmitted through its networks, any of which could involve many people and have an impact on the Group's reputation, or lead to legal claims and liabilities that are difficult to measure in advance.
In addition, the Telefónica Group's Internet access and hosting servers could lead to claims for illegal or unlawful use of the Internet. Telefónica, like other telecommunications providers, may be held liable for any loss, transfer or inappropriate modification of the customer data stored on its servers or carried by its networks.
In most countries in which the Telefónica Group operates, the provision of its Internet access and hosting services (including the operation of websites with shelf-generated content) are regulated under a limited liability regime applicable to the content that it makes available to the public as a technical service provider, particularly content protected by copyright or similar laws. However, regulatory changes have been introduced imposing additional obligations on access providers (such as blocking access to a website) as part of the struggle against some illegal or illicit uses of the Internet, notably in Europe.
Any of the foregoing could have an adverse effect on the business, financial position, results of operations and cash flows of the Group.
Telefónica and Telefónica Group companies are party to lawsuits, tax claims, antitrust and other legal proceedings.
Telefónica and Telefónica Group companies are party to lawsuits, tax claims, antitrust and other legal proceedings in the ordinary course of their businesses, the financial outcome of which is unpredictable. An adverse outcome or settlement in these or other proceedings could result in significant costs and may have a material adverse effect on the Group's business, financial condition, results of operations, reputation and cash flows. In particular, the Telefónica Group is party to certain judicial tax proceedings in Peru concerning the clearance of certain previous years' income tax, in respect of which a contentious-administrative appeal is currently pending and to certain tax proceedings in Brazil, primarily relating to the ICMS (a Brazilian tax on telecommunication services) and to the Corporate Tax. Further details on these matters are provided in Notes 17 and 21 of the Consolidated Financial Statements.
Item 4. Information on the Company
A. History and Development of the Company
Overview
Telefónica, S.A., is a corporation duly organized and existing under the laws of the Kingdom of Spain, incorporated on April 19, 1924. We:
| · | Are a diversified telecommunications group which provides a comprehensive range of services through one of the world’s largest and most modern telecommunications networks; |
| · | Are focused on providing telecommunications services; and |
| · | operate principally in Europe and Latin America. |
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The following significant events occurred in 2016:
| · | On January 12, 2016, DTS and Mediaproducción, S.L.U. reached an agreement for the broadcasting of the thematic pay TV channel called "BeIN Sports LaLiga" with contents of the Spanish national league championship first and second division and the Copa del S.M. el Rey, corresponding to the three seasons 2016/17, 2017/18 and 2018/19. The total value of the agreements relating to those channels amounted to 2,400 million euros. |
| · | On January 28, 2016, Telefónica announced that its subsidiary Telefónica de España signed the first Collective Agreement of Related Companies, which was supported by the largest trade unions. Telefónica Móviles España and Telefónica Soluciones were also parties to this agreement. The agreement contemplates, among other elements, an "Individual Employment Suspension Plan" for their respective employees, the implementation of which is entirely voluntary in the period from 2016-2017. All employees who fulfil the following criteria are eligible to participate in the plan: (i) employees must have been employed as of January 1, 2015, (ii) as of the date of the agreement, such employees must have worked for the Group 15 years or more, and (iii) as of December 31, 2017, such employees must be at least 53 years old. In relation to the aforementioned plan. Telefónica has opened the registration period for employees to sign up to the plan and the value of the recognized expenses resulting from the plan was approximately 2,896 million euros (see “Item 6. – Directors, Senior Management and Employees”). |
| · | On February 11, 2016, Telefónica announced the creation of Telxius Telecom, S.A., a company which brings together certain infrastructure assets of the Group, which is intended to enable the management of the Telefónica Group’s infrastructure on a global scale with a more specialized and focused approach, with the aim of increasing the services provided to other operators, improving the return on capital invested and allowing Telxius Telecom, S.A. to participate more actively in the growth opportunities that exist in the industry, including the possibility of incorporating third party assets. |
| · | On April 8, 2016, the Board of Directors of Telefónica, S.A. resolved to adopt the following resolutions: |
| - | To propose to the next General Shareholders’ Meeting the appointment of PricewaterhouseCoopers Auditores S.L. as statutory auditor for the annual accounts of Telefónica, S.A. and its consolidated group of companies for the years 2017, 2018 and 2019 (see “Item 16F – Change in Registrant’s Certifying Accountant”). |
| - | To appoint Mr. José María Álvarez-Pallete López as Chairman of the Board of Directors and of the Executive Commission, replacing Mr. César Alierta Izuel. |
| - | To take formal note of and record the voluntary resignation presented as members of the Board of Directors of Telefónica, S.A. by Mr. Carlos Colomer Casellas, Mr. Alfonso Ferrari Herrero, Mr. José Fernando de Almansa Moreno-Barreda and Mr. Santiago Fernández Valbuena. |
| - | Based on the proposal of the Nominating, Compensation and Corporate Governance Committee, to appoint Ms. Sabina Fluxà Thienemann, Mr. José Javier Echenique Landiríbar, Mr. Peter Löscher and Mr. Juan Ignacio Cirac Sasturain as Independent Directors of Telefónica, S.A. The ratification of such resolutions was approved by the General Shareholders Meeting held on May 12, 2016. |
| - | To appoint as Coordinating Independent Director, Mr. Francisco Javier de Paz Mancho. |
| - | To appoint: (i) the Independent Director Mr. José Javier Echenique Landiribar as a member of the Executive Commission; (ii) the Independent Director Mr. José Javier Echenique Landiríbar as Chairman of the Audit and Control Committee; and (iii) the Independent Director Mr. Francisco Javier de Paz Mancho as a member and Chairman of the Nominating, Compensation and Corporate Governance Committee. |
| · | In addition, the Board of Directors agreed to call the Annual General Shareholders’ Meeting which was held in Madrid, at the Recinto Ferial de la Casa de Campo, Pabellón de Cristal, Avenida de Portugal, sin número, at 1:00 p.m. on the second call on May 12, 2016. |
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| · | On April 27, 2016, the Board of Directors of Telefónica, S.A. resolved to adopt the following resolutions: |
| - | To appoint Ms. Sabina Fluxà Thienemann (Independent Director) as a member of the Nomination, Compensation and Corporate Governance Committee, and Mr. Francisco Javier de Paz Mancho (Independent Director) as a member of the Audit and Control Committee. |
| - | To cease Mr. Francisco Javier de Paz Mancho as member of Service Quality and Customer Service Committee. |
| - | To reorganize the current Regulation and Institutional Affairs Committees so as to become a single Committee, under the name "Regulation of Institutional Affairs Committee". |
| - | To reorganize the current Strategy and Innovation Committees so as to become a single Committee under the name "Strategy and Innovation Committee", and to appoint Mr. Juan Ignacio Cirac Sasturain (Independent Director) and Mr. Peter Löscher (Independent Director) as members of such committee. |
| · | On May 11, 2016, Telefónica, S.A. announced the decision of the EC to prohibit the potential acquisition by Hutchison Whampoa Group of the Telefónica subsidiary in the United Kingdom (O2 UK) under EU the Council Regulation (EC) No. 139/2004 of January 20, 2004 on the control of concentrations between undertakings (the “EU Merger Regulation”). |
| · | On May 12, 2016, Telefónica, S.A. announced the holding of the Annual General Shareholders’ Meeting of Telefónica S.A. at second call with the attendance, present or represented, of shareholders holding shares representing 56.13% of the share capital of the Company, which approved by a majority of votes all the resolutions submitted by the Board of Directors for deliberation and vote by the General Shareholders’ Meeting. |
Furthermore, the Company announced that, according to the shareholder remuneration policy, a dividend distribution was agreed, charged to unrestricted reserves, of a fixed gross amount of 0.40 euro for each Company share issued, in circulation and carrying entitlement to such distribution. The payment of this dividend was executed on May 19, 2016.
| · | On June 29, 2016, following the EC’s decision to prohibit the sale of O2 UK to the Hutchison Whampoa Group, the Board of Directors of Telefónica, S.A. agreed that Telefónica will continue to explore different strategic alternatives for O2 United Kingdom, to be implemented when market conditions are deemed appropriate. Given that the execution of a transaction for sale is now less certain, Telefónica’s operations in the United Kingdom have ceased to be presented as discontinued operations and the respective assets and liabilities are no longer classified as held for sale. Further details are provided in Note 2 of the Consolidated Financial Statements. |
| · | On July 10, 2016, Telefónica Internacional, S.A.U. (a 100% subsidiary of Telefónica, S.A.) sold 361,794,559 shares of China Unicom (Hong Kong) Limited ("China Unicom HK"), representing 1.51% of the share capital of the company, through a block trade process, at a price of 7.80 Hong Kong dollars per share, for a total amount of 2,822 million Hong Kong dollars, approximately 322 million euros. As of December 31, 2016, Telefónica maintained a stake of close to 1% in China Unicom HK. |
| · | On September 5, 2016, Telefónica, S.A. announced that it is considering various strategic options with respect to Telefónica’s United Kingdom subsidiary (O2 UK) (all of which would involve Telefónica maintaining a majority shareholding), including, among others, a potential initial public offering. |
| · | On September 28, 2016, the Company announced its decision to proceed with the share capital reduction by means of a cancellation of 74,627,988 shares of the Company’s own stock, representing 1.5% of the Company’s current share capital. As a result, 74,627,988 shares of Telefónica were cancelled, reducing the company’s share capital by the same amount. Telefónica's share capital after the reduction, at such date, stood at 4,900,571,209 euros made up of an equal number of ordinary shares, all of a single series and with a nominal value of one (1) euro per share. On October 11, 2016, the public deed of this share capital reduction was registered in the Madrid mercantile registry (Registro Mercantil). |
| · | On October 27, 2016, the Executive Commission of Telefónica’s Board of Directors agreed that the corporate resolution required to carry out the free-of-charge capital increase related to the scrip dividend shareholder compensation scheme (“Telefónica Flexible Dividend“) approved by the Annual General Shareholders’ Meeting held on May 12, 2016, should be adopted at the Executive Commission meeting scheduled for November 11, 2016. On November 11, 2016, the Executive Commission agreed the implementation of the aforementioned capital increase. |
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| · | Furthermore, the Company announced the amendment of the dividend policy for the years 2016 and 2017. Telefónica would pay in 2016, 0.55 euros per share, of which 0.35 euros would be paid in November 2016 via a voluntary scrip dividend and 0.20 euros in cash in the second quarter of 2017. Relating to the 2017 dividend, it would amount to 0.40 euros per share in cash, of which 0.20 euros would be paid in the fourth quarter of 2017 and 0.20 euros in the second quarter of 2018. As a result, in the calendar year 2016 payments amounted to 0.75 euros per share while in the calendar year 2017 payments will amount 0.40 euros. |
| · | On November 7, 2016, Moody’s Investors Service published its resolution to lower the long-term credit rating of Telefónica, S.A., from Baa2 to Baa3. At the same time, Moody’s lowered the short-term rating to Prime-3 from Prime-2. |
| · | On November 15, 2016, Telefónica, S.A. announced that the entire share capital of Televisión Federal, S.A. (“Telefé”) was sold to Viacom International Inc. in exchange for 345 million dollars (322 million euros). |
| · | On December 1, 2016, Telefónica announced that, on November 29, 2016, the free-of-charge allotment rights trading period for the free-of-charge capital increase related to Telefónica’s Flexible Dividend had ended. The holders of 29.99% of the free-of-charge allotment rights accepted the purchase commitment assumed by Telefónica. The gross amount paid by Telefónica for these rights amounted to 499,707,062.36 euros. The Company waived the rights thus acquired, which were amortized. |
The holders of 70.01% of the free-of-charge allotment rights were entitled, therefore, to receive new shares of Telefónica. Nevertheless, Telefónica waived the free-of-charge allotment rights that corresponded to its treasury shares at the record date (November 16, 2016). Therefore, the final number of ordinary shares with a nominal value of one (1) euro issued in the capital increase was 137,233,781 (2.8% of Telefónica’s share capital as of that date), totaling 137,233,781 euros. As a result, the share capital of Telefónica after the capital increase, as registered on December 7, 2016, with the commercial registry of Madrid was 5,037,804,990 euros (5,037,804,990 shares).
The new shares were admitted to listing on the Madrid, Barcelona, Bilbao and Valencia stock exchanges (the “Spanish Stock Exchanges”) on December 13, 2016, and the ordinary trading of the new shares in Spain begun on December 14, 2016.
Business areas
The organizational structure approved by the Board of Directors of Telefónica, S.A. on February 26, 2014 was made up of the following segments: Telefónica Spain, Telefónica United Kingdom, Telefónica Germany, Telefónica Brazil and Telefónica Hispanoamérica (formed by the Group’s operators in Argentina, Chile, Peru, Colombia, Mexico, Venezuela, Central America, Ecuador and Uruguay).
Following our signing of an agreement on March 24, 2015 with Hutchison for the sale and purchase of the entire issued share capital of Telefónica Europe plc, and the reclassification of the results attributable to our operations in the United Kingdom as discontinued operations, our segments were revised in 2015 as follows: Telefónica Spain, Telefónica Germany, Telefónica Brazil and Telefónica Hispanoamérica.
Following the EC’s decision to prohibit the sale of O2 UK to Hutchison Whampoa Group, the Board of Directors of Telefónica, S.A. at its meeting on June 29, 2016 agreed that Telefónica will continue to explore different strategic alternatives for O2 UK, to be implemented when market conditions are deemed appropriate. Given that the execution of a sale transaction is less certain, Telefónica’s operations in United Kingdom are no longer presented as discontinued operations and the respective assets and liabilities cease to be classified as held for sale. Thus, our segments were revised as follows: Telefónica Spain, Telefónica United Kingdom, Telefónica Germany, Telefónica Brazil and Telefónica Hispanoamérica (comprised of our consolidated subsidiaries in Argentina, Chile, Peru, Colombia, Mexico, Venezuela, Central America, Ecuador and Uruguay). As a result, the 2015 and 2014 financial information by operating segment presented in this report has been amended to reflect the inclusion of the Telefónica United Kingdom segment.
Our segments include the information relating to wireline, wireless, cable, data, internet and television businesses and other digital services in accordance with each location. The results, assets and liabilities of the segments include the new companies that operate the towers business. Consequently the impacts of the intercompany sales of towers have been eliminated. “Other companies and eliminations” includes the companies belonging to cross-segment areas as well as other Group companies and eliminations in the consolidation process.
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Segment reporting takes into account the impact of the purchase price allocation to assets acquired and the liabilities assumed from the companies included in each segment. The assets and liabilities presented in each segment are those managed by the heads of each segment, irrespective of their legal structure.
The Group manages borrowing activities and taxes centrally. Therefore, it does not disclose the related assets, liabilities, revenue and expenses by reportable segments. In addition, revenue and expenses arising from intra-group invoicing for the use of the trademark and management services have been eliminated from the operating results of each Group segment. These adjustments have no impact on the Group’s consolidated results.
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The following chart shows the organizational structure of the principal subsidiaries of the Telefónica Group at December 31, 2016, including their jurisdictions of incorporation and our ownership interest. For further detail, see Exhibit 8.1 to this Annual Report.
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Telefónica, S.A., the parent company of the Telefónica Group, also operates as a holding company with the following objectives:
| · | coordinate the Group’s activities; |
| · | allocate resources efficiently among the Group; |
| · | provide managerial guidelines for the Group; |
| · | manage the Group’s portfolio of businesses; |
| · | foster cohesion within the Group; and |
| · | foster synergies among the Group’s subsidiaries. |
Our principal executive offices are located at Distrito Telefónica, Ronda de la Comunicación, s/n, 28050 Madrid, Spain, and our registered offices are located at Gran Vía, 28, 28013 Madrid, Spain. Our telephone number is +34 900 111 004.
Capital Expenditures and Divestitures
Our principal capital expenditures during the three years ended December 31, 2016, consisted of additions to property, plant and equipment and additions to intangible assets, including spectrum. In 2016, 2015 and 2014, we made capital expenditures of 8,928 million euros, 10,461 million euros and 9,448 million euros, respectively.
Year ended December 31, 2016
Capital expenditures in 2016 decreased 14.7% compared to 2015. Capital expenditures in 2016 included the cost of spectrum mainly in Peru and Brazil, amounting to 345 million euros.
Investment by Telefónica Spain amounted to 1,847 million euros and was primarily focused on rapid fiber optic roll out, together with investments in the LTE network, reaching a 96% population coverage, and transport network modernization. Investment by Telefónica United Kingdom in 2016 amounted to 931 million euros and was mainly focused on increasing LTE coverage, achieving 95% population coverage by year-end 2016 and also, pursuing the improvement of network capacity. Investment by Telefónica Germany in 2016 amounted to 1,108 million euros, with LTE roll out the company´s main focus, achieving a coverage of 79% by year-end 2016, and network consolidation activities, which are allowing to enhance customer experience and to capture integration synergies. Investment by Telefónica Brazil in 2016 amounted to 2,138 million euros and was mainly dedicated to extend the coverage and capacity of 4G and 3G mobile networks, as well as improving network quality, and the deployment and connection of fiber network in the fixed business. Investment by Telefónica Hispanoamérica in 2016 amounted to 2,613 million euros and was mainly focused on improving the coverage and capacity of 3G and 4G networks, the roll out of ultra-broadband fixed capabilities (fiber / HFC) and the quality enhancement in broadband and TV services.
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Year ended December 31, 2015
Capital expenditures in 2015 increased 10.7% compared to 2014. Capital expenditures in 2015 included the cost of spectrum mainly in Germany, Argentina, Ecuador and Spain, amounting to 1,585 million euros.
Investment by Telefónica Spain in 2015 amounted to 1,827 million euros and was primarily focused on fiber networks, 3G, 4G and fiber as well as improvement of the quality of broad-band services and Pay TV. Investments by Telefónica United Kingdom in 2015 amounted to 883 million euros and was mainly focused on increasing LTE coverage, achieving 79.6% population coverage by year-end 2015, seeking to achieve improvements of network capacity and quality in line with the operator’s objectives. Investment by Telefónica Germany in 2015 amounted to 2,230 million euros, focusing on its LTE roll-out strategy. Investment by Telefónica Brazil in 2015 amounted to 2,105 million euros, and related mainly to the continuation of the 3G and LTE roll-outs and the expansion of the roll-out of fiber optic. Investment by Telefónica Hispanoamérica in 2015 amounted to 3,060 million euros and was mainly focused on LTE roll-outs, densification of the 3G network, the continuation of ultra-broad band (UBB) roll-out for fixed broadband by speed upgrades and network digitalization as well as improving the Pay TV network.
Year ended December 31, 2014
Capital expenditures in 2014 increased 0.6% compared to 2013. Capital expenditures in 2014 included the cost of spectrum mainly in Brazil, Argentina, Venezuela, Colombia and Panama, amounting to 1,294 million euros.
Investment by Telefónica Spain in 2014 amounted to 1,732 million euros. Fiber optic was rolled out rapidly, and by year-end 2014 Telefónica Spain had created more than 10 million “fiber-to-the-house” (“FTTH”) facilities in Spain, increasing its investments in LTE networks. Investments by Telefónica United Kingdom in 2014 amounted to 755 million euros, mainly due to the greater LTE coverage, which extends outdoor to the areas where an estimated 58% of the population is concentrated, and a network capacity ramped up to cope with denser 3G and 4G traffic.
Investment by Telefónica Germany in 2014 amounted to 849 million euros, focusing on its LTE roll-out strategy, securing 61% coverage in 2014. Investment by Telefónica Brazil in 2014 amounted to 2,933 million euros, mainly due to the fact that the mobile segment featured a continuation of LTE roll-outs in 2014, improving network capacity, systems and applications. Investment in the fixed-line network was used to expand roll-out of fiber optic, larger volumes of IPTV customers and corporate projects. Investment by Telefónica Hispanoamérica in 2014 amounted to 2,842 million euros mainly focused on LTE roll-outs in practically all operations in the region. Investment was also allocated to the densification of the 3G network, optimization of fixed-mobile convergence systems, the continuation of ultra-broad band (UBB) roll-out for fixed broadband by speed upgrades and network digitalization, television and digital initiatives.
Financial Investments and Divestitures
There were no significant financial investments in 2016. Our principal financial divesture in 2016 was the sale of Telefé, which was completed on November 11, 2016, for 345 million U.S. dollars (approximately 322 million euros) and the sale on July 10, 2016 of 361,794,559 shares of China Unicom (Hong Kong) Limited (“China Unicom”), representing 1.51% of the share capital of the company, at a price of 7.80 Hong Kong dollars per share for a total amount of 2,822 million Hong Kong dollars, approximately 322 million euros.
Our principal financial investment in 2015 was the acquisition of GVT, which was completed on May 28, 2015, through our subsidiary Telefônica Brasil for a total purchase price of 4,663 million euros (through payment in cash and debt assumption) as well as the delivery of shares representing 12% of the share capital of Telefônica Brasil (following its integration with GVT) and the acquisition on April 30, 2015 of 56% of DTS for an initial consideration of 707 million euros, subject to the finalization of the working capital and net debt adjustments. Our principal divesture in 2015 was the sale of our stake in Telefónica Italia (we disposed of 872 million ordinary shares in Telecom Italia in exchange for approximately 1,025 million euros and 1,110 million ordinary shares in Telecom Italia in exchange for 4.5% of the share capital in Telefônica Brasil). In addition, we also exchanged 46 million treasury shares of Telefónica for approximately 3.5% of the Share Capital of Telefónica Brasil.
Our principal financial investment in 2014 was the acquisition of E-Plus, which was completed on October 1, 2014, through our subsidiary Telefónica Deutschland for a total purchase price of 7,463 million euros. Our principal divestures in 2014 were the completion of the sales of Telefónica Czech Republic, a.s. on January 28, 2014, Telefónica Ireland, Ltd on July 2, 2014, and the sale of shares representing approximately 2.5% of the share capital of China Unicom (Hong Kong) Limited (“China Unicom”) for approximately 687 million euros.
Active portfolio management is part of Telefónica's strategy and therefore it may undertake transactions involving its or its subsidiaries' shares, including transactions similar to those undertaken in the 2014-2016 period or otherwise, at any time.
Public Takeover Offers
Not applicable
Recent Developments
The principal events that have occurred since December 31, 2016, are set forth below:
On February 10, 2017, Telefónica announced that it has received several offers for the acquisition of an equity stake in Telxius Telecom, S.A.U. Telefónica is in the process of negotiating and analyzing the diverse alternatives presented.
On February 20, 2017 Telefónica has reached an agreement for the sale of up to 40% of the total share capital of Telxius Telecom, S.A.U. to Taurus Bidco S.à.r.l. (hereafter, ”KKR”, entity managed by Kohlberg Kravis Roberts & Co. L.P.), for a total amount of 1,275 million euros (12.75 euros per share).
The aforementioned agreement includes a purchase agreement for the sale of 62 million shares (representing 24.8% of the share capital) of Telxius Telecom, S.A.U. for a price of 790.5 million euros, as well as stock options over 38 million shares (representing 15.2% of the share capital) for a price of at least 484.5 million euros.
These options correspond to a call option exercisable by KKR and to a put option exercisable by Telefónica upon maturity of the call option.
The closing is subject to obtaining the corresponding regulatory approvals. The exercise window of the options would take place during the fourth quarter of 2017, provided that regulatory approvals have been obtained on that date.
After the transaction Telefónica will maintain the control over Telxius.
For information related to our significant financing transactions completed in 2016 and through the date of this Annual Report, see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Anticipated Sources of Liquidity”.
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Telefónica is one of the world’s leading communications services providers. Our objective is to create, protect and promote fixed and mobile connections for our customers helping them to take control of their digital lifestyle. Therefore, we offer our customers connectivity, simple products and services and also the security that we protect their data, managing it in a responsible way.
In order to develop its business model, Telefónica has an organizational structure completely focused on customers and incorporates the digital offering as the main focus for commercial policies. The structure gives greater visibility to local operations, bringing them closer to the corporate decision-making center, simplifying the global structure and strengthening the transverse areas to improve flexibility and agility in decision making. On top of the transverse areas, which are led by the Chief Commercial Digital Officer, who is responsible for fostering revenue growth, and the Chief Global Resources Officer who is in charge of the efficiency of the cost side, the organizational structure is composed of the following segments: Telefónica Spain, Telefónica United Kingdom, Telefónica Germany, Telefónica Brazil and Telefónica Hispanoamérica (comprised of our consolidated subsidiaries in Argentina, Chile, Peru, Colombia, Mexico, Venezuela, Central America, Ecuador and Uruguay). These segments include the information related to wireline, wireless, DSL, TV, and other digital services provided in each country or countries.
The Telefónica Group’s strategy aims to:
| · | Enhance value through: |
| o | Offering excellent connectivity, for which, our infrastructure management and our continuous investment in network are key. We aim to return the control over the data to our customers. |
| o | Providing a bundled offer with video and digital services. We offer our customers additional data in order to amplify their services, such as video or digital services, through unique, simple and clear offers. |
| o | Providing increased customer value and customer experience with digital access, aiming to offer the best products, solutions and contents. |
| · | With the following enablers: |
| o | End-to-end Digitalization. We reduce our legacy investments to improve virtualization, reduce physical servers, data centers and applications, digitalization of IT systems and processes, digitalization of front- and back office, offering a true digital experience to our customers. |
| o | Big Data and Innovation to add value to our customers and return the control over data to our customers. |
| o | Continued focus on capital allocation in our legacy investments and simplification processes in order to continue investing. |
Moreover, Telefónica has increased its presence in key markets. In 2014 Telefónica acquired E-Plus (through Telefónica Germany) and in 2015 Telefónica acquired DTS (through Telefónica Spain) and GVT (through Telefónica Brazil).
On February 10, 2016, Telefónica announced the creation of “Telxius” a company which brings together certain infrastructure assets of the Group in several countries, which will enable the management of the Telefónica Group’s infrastructure on a global scale with a more specialized and focused approach, with the aim of increasing the services provided to other operators, improving the return on capital invested and allowing Telefónica to participate more actively in the growth opportunities that exist in the industry, including the possibility of incorporating third party assets.
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2016 highlights
In 2016 Telefónica has taken further steps aimed at achieving profitable and sustainable long-term growth, and improving in efficiencies and synergies, which resulted in a higher OIBDA (+14.3% year-on-year in reported terms). Additionally, the investment levels over total revenues continued above 17% with a total amount of 8,928 million euros, with more than 2,000 million euros dedicated to LTE and ultra-broad band (“UBB”). The Company closed the year with a total of 350 million accesses, representing a stable growth level (0.7% versus 2015), where the downward growth trend in prepay and fixed voice was more than compensated by the growth in value customers. Post-pay customers, which grew by 6.3% year-on-year, reaching 111 million customers, while fiber customers amounted to 7.3 million customers at December 2016, representing a 18.9% increase year-on-year.
In 2016, revenues totaled 52,036 million euros, down 5.2% compared to 2015 in reported terms. OIBDA totaled 15,118 million euros in 2016, up 14.3% in reported terms. In organic terms (which term and calculation is explained further below), OIBDA was up 4.7%, due mainly to the positive evolution of all the regions mainly as a consequence of the integration synergies in Telefónica Brazil and Telefónica Germany, the positive evolution of service revenues and the continuous effort in efficiency and simplification.
Telefónica’s total accesses totaled 350.0 million as of December 31, 2016. Group accesses increased by 0.7% year-on-year, mainly as a result of the solid growth in accesses in Telefónica Germany, Telefónica United Kingdom and Telefónica Hispanoamérica. By service, it is worth highlighting the higher commercial activity based on high value customers, resulting in a sustained growth of the contract mobile segment (smartphones and LTE) and fiber. It is worth mentioning, the growth in accesses in Telefónica Hispanoamérica (representing 39% of the Group’s total accesses as of December 31, 2016) up by 0.9% year-on-year, the growth in accesses in Telefónica Germany (representing 14% of the Group’s total) up by 2.0% year-on-year and the growth in accesses in Telefónica United Kingdom (representing 7% of the Group’s total) up by 1.9% year-on-year.
The below table shows the evolution of accesses over the past two years as of December 31 of such years:
| ACCESSES | |||
| Thousands of accesses | 2015(*) | 2016 | %Reported YoY |
| Fixed telephony accesses (1) | 39,734.9 | 38,280.1 | (3.7%) |
| Internet and data accesses | 21,365.3 | 21,652.1 | 1.3% |
| Broadband (2) | 20,971.3 | 21,194.9 | 1.1% |
| Fiber | 7,393.1 | 9,162.9 | 23.9% |
| Mobile accesses | 272,103.9 | 276,450.0 | 1.6% |
| Prepay | 167,845.1 | 165,663.2 | (1.3%) |
| Contract | 104,258.8 | 110,786.8 | 6.3% |
| M2M | 11,526.3 | 14,002.0 | 21.5% |
| Pay TV | 8,271.6 | 8,289.0 | 0.2% |
| Final Clients Accesses | 341,475.6 | 344,671.1 | 0.9% |
| Wholesale Accesses | 6,062.8 | 5,300.9 | (12.6%) |
| Total Accesses | 347,538.4 | 349,972.1 | 0.7% |
Notes:
(*) Accesses include GVT and DTS customers since May 1, 2015. There were no variations in organic terms during the period.
(1) Includes "fixed wireless" and Voice over IP accesses.
(2) Includes DSL, satellite, optic fiber, cable modem and broadband circuits.
The below table shows the evolution of accesses by segment:
| YoY variation | % Over Total Accesses | |||
| Accesses 2016 | 2015 | 2016 | ||
| Spain | (1.8%) | 12.1% | 11.8% | |
| United Kingdom | 1.9% | 7.3% | 7.4% | |
| Germany | 2.0% | 13.9% | 14.1% | |
| Brazil | 0.3% | 27.9% | 27.8% | |
| Hispanoamérica | 0.9% | 38.7% | 38.8% | |
| Others | 40.7% | 0.1% | 0.1% | |
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The Group’s strategy is based on capturing growth in its markets, especially on attracting high-value customers.
Mobile accesses totaled 276.5 million at December 31, 2016, up 1.6% compared to December 31, 2015, affected mainly by the increase in the number of contract accesses , up 6.3% year-on-year, continuing to increase their weight over total mobile accesses reaching 40.1% (+1.8 p.p. year-on-year).
Smartphone accesses maintained a strong growth rate (up 16.6% year-on-year), totaling 147 million accesses and reaching a penetration rate over total accesses of 57.1% (+7.6 p.p. year-on-year), reflecting the Company’s strategic focus on the growth of its data services.
Fixed broadband accesses stood at 21.2 million at December 31, 2016, up 1.1% year-on-year. UBB accesses stood at 9.2 million at December 31, 2016.
TV accesses totaled 8.3 million at December 31, 2016, remaining stable year-on-year (+0.2%) due to the effort in capturing high value customers in Telefónica Brazil and Telefónica Hispanoamérica.
The table below shows the evolution of our estimated access market share for mobile and DSL for the past two years.
| Competitive Position Evolution | ||||
| Mobile Market Share (1) | ||||
| Telefónica | 2015 | 2016 | ||
| Spain | 30.8% | 30.5% | ||
| United Kingdom | 27.2% | 26.8% | ||
| Germany | 38.1% | 37.9% | ||
| Brazil | 28.4% | 30.2% | ||
| Argentina | 32.3% | 33.3% | ||
| Chile | 36.7% | 33.4% | ||
| Peru | 49.7% | 44.0% | ||
| Colombia | 22.4% | 23.2% | ||
| Venezuela | 34.2% | 37.8% | ||
| Mexico | 22.7% | 24.2% | ||
| Central America | 33.2% | 34.1% | ||
| Ecuador | 29.7% | 31.0% | ||
| Uruguay | 34.9% | 33.1% | ||
(1) Internal estimation in both years
| DSL Market Share (1) | ||||
| Telefónica | 2015 | 2016 | ||
| Spain | 43.5% | 42.5% | ||
| Brazil | 28.1% | 28.0% | ||
| Argentina | 29.4% | 28.6% | ||
| Chile | 39.4% | 36.4% | ||
| Peru | 80.5% | 78.7% | ||
| Colombia | 18.1% | 16.6% | ||
(1) Internal estimation in both years
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2016/2015 Consolidated results
In this section, we discuss changes in the Group’s consolidated income statements for 2016 and 2015. Changes in the Group’s consolidated income statements for 2015 and 2014 are discussed in a separate section further below.
| Year ended December 31 | Variation | |||||
| Consolidated Results | 2015(*) | 2016 | 2016 vs 2015 | |||
| Millions of euros | Total | % of revenues | Total | % of revenues |
Total | % |
| Revenues | 54,916 | 100.0% | 52,036 | 100.0% | (2,880) | (5.2%) |
| Other income | 2,011 | 3.7% | 1,763 | 3.4% | (248) | (12.3%) |
| Supplies | (16,547) | (30.1%) | (15,242) | (29.3%) | 1,305 | (7.9%) |
| Personnel expenses | (10,349) | (18.8%) | (8,098) | (15.6%) | 2,251 | (21.8%) |
| Other expenses | (16,802) | (30.6%) | (15,341) | (29.5%) | 1,461 | (8.7%) |
| OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION (OIBDA) | 13,229 | 24.1% | 15,118 | 29.1% | 1,889 | 14.3% |
| Depreciation and amortization | (9,704) | (17.7%) | (9,649) | (18.5%) | 55 | (0.6%) |
| OPERATING INCOME | 3,525 | 6.4% | 5,469 | 10.5% | 1,944 | 55.2% |
| Share of loss of investments accounted for by the equity method | (10) | (0.0%) | (5) | (0.0%) | 5 | (54.3%) |
| Net financial expense | (2,609) | (4.8%) | (2,219) | (4.3%) | 390 | (14.9%) |
| PROFIT BEFORE TAX | 906 | 1.6% | 3,245 | 6.2% | 2,339 | n.m. |
| Corporate income tax | (155) | (0.3%) | (846) | (1.6%) | (691) | n.m. |
| PROFIT FOR THE YEAR | 751 | 1.4% | 2,399 | 4.6% | 1,648 | n.m. |
| Attributable to equity holders of the Parent | 616 | 1.1% | 2,369 | 4.6% | 1,753 | n.m. |
| Attributable to non-controlling interests | 135 | 0.2% | 30 | 0.1% | (105) | (77.9%) |
(*)Amended data: comparative information was amended to cease to present the results of Telefónica United Kingdom as discontinued operations.
Adjustments made to calculate organic variations
Year-on-year changes referred to in this document as “organic” or presented in “organic terms” intend to present year-on-year variations on a comparable basis, by considering a constant perimeter of consolidation and constant exchange rates and by making certain other adjustments which are described herein. “Organic variations” should not be viewed in isolation or as an alternative to reported variations.
For purposes of this report, 2016/2015 “organic” variation is defined as the reported variation as adjusted to exclude the impacts detailed below:
| · | Foreign exchange effects and hyperinflationary adjustments in Venezuela: we have excluded the impact of changes in exchange rates by assuming constant average foreign exchange rates year on year. In particular, we have used the average foreign exchange rates of 2015 for both years. |
Foreign exchange rates had a negative impact on our reported 2016 results, mainly due to the depreciation versus the euro of various Latin American currencies (in particular the Argentine peso, the Brazilian real and, to a lesser extent, the Venezuelan bolivar), and the pound sterling.
We have also excluded the impact of hyperinflationary adjustments in Venezuela by reversing such adjustments.
| · | Changes in the scope of consolidation: we have excluded the impact of changes in our consolidation perimeter in 2016 and 2015. The main changes in our consolidation perimeter in such years related to the consolidation of GVT in Telefónica Brazil since May 2015 and the consolidation of DTS in Telefónica Spain since May 2015. In addition, Telefé was sold in November 2016. |
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In order to exclude the impact of these changes in our perimeter for the calculation of organic variations, the 2015 comparative figures:
| o | include GVT’s results from January 1 to April 30, 2015; |
| o | include DTS’s results from January 1 to April 30, 2015; |
| o | exclude Telefé’s results from November 1 to December 31, 2015. |
| · | Restructuring costs: we have excluded the impact in 2016 and 2015 of certain restructuring costs, mainly those related to the first Collective Agreement of Related Companies in Spain, restructuring processes relating to Germany and Brazil and the Group’s simplification program in global areas. |
The distribution by segment of the restructuring costs is as follows (impacts on OIBDA):
| Million euros | 2015 | 2016 |
| Telefónica Spain (Individual Suspension Plan) | 2,896 | 789 |
| Telefónica Spain (other restructuring plans) | - | 48 |
| Telefónica Brazil | 7 | 40 |
| Telefónica Germany | 74 | 89 |
| Telefónica United Kingdom | 4 | 37 |
| Telefónica Hispanoamérica | 38 | 84 |
| Other companies | 198 | 293 |
| Total restructuring costs | 3,217 | 1,380 |
| · | Results of tower sales: the results attributable to the sale of towers in 2016 and 2015 have been excluded. |
In 2016, the results from the sale of towers totaled 1 million euros, mainly in Telefónica Hispanoamérica. In 2015, the results from the sale of towers totaled 65 million euros, distributed as follows: Telefónica Spain (38 million euros), Telefónica Brazil (10 million euros) and Telefónica Hispanoamérica (18 million euros, mainly in Chile).
| · | Irrevocable commitment with Fundación Telefónica: in 2015 we have excluded the expense (325 million euros) resulting from Telefónica, S.A.’s irrevocable commitment to make a donation to Fundación Telefónica in order to provide this entity with the financing required so that it can carry out its existing or new social programs and non-profit activities in the short and medium term. |
| · | Adjustment to the final purchase price of E-Plus: in 2015 we have excluded the result from the difference between the preliminary purchase price of E-Plus (as estimated at the end of the valuation period) and the final purchase price agreed with KPN, totaling 104 million euros (which had a 102 million euros positive impact on OIBDA, net of costs related to the acquisition). |
| · | Spectrum acquisition: we have excluded the impact of spectrum acquisitions in 2016 and 2015. |
In 2016, these acquisitions totaled 345 million euros, 284 million euros corresponding to Telefónica Perú, 48 million euros corresponding to Telefónica Brasil, 7 million euros corresponding to Telefónica Spain and 6 million euros corresponding to Telefónica Germany.
In 2015 these acquisitions totaled 1,585 million euros, 1,198 million euros corresponding to Telefónica Germany, 49 million euros corresponding to Telefónica Spain and 338 million euros corresponding to Telefónica Hispanoamérica (mainly Argentina and Ecuador).
| · | Gains or losses on the sale of companies: the gains obtained or losses incurred from the sale of companies have not been included in organic variations. |
In 2016 the 199 million euros in profit obtained from the sale of Telefé and the 29 million euros obtained from the sale of Telecomunicaciones Personalizadas were not included. Similarly, the loss of 16 million euros incurred in the sale of Vocem was also not included.
| · | Impairment of goodwill: the impairment losses on goodwill have not been included in organic variations. |
37
In 2016, the impairment loss on the goodwill assigned to Telefónica Venezolana and Telefónica Móviles Mexico amounting to 124 and 91 million euros, respectively, has been excluded.
In 2015, the impairment loss on the goodwill generated by the acquisition of Telefónica Digital Inc. amounting to 104 million euros was excluded.
| · | Other adjustments: we have excluded the impact of the impairment resulting from the deterioration in certain minority participations, totaling 23 million euros in 2015. We have also excluded the impact of the provisions recorded in Telefónica Spain to optimize the distribution network (18 and 30 million euros in 2016 and 2015, respectively). |
The table below shows 2016/2015 variations in reported and organic terms (the latter, calculated in accordance with the adjustments referred to above) of certain income statement and other measures:
YoY variation | ||
| TELEFÓNICA 2016 | % Reported YoY |
% Organic YoY |
| Revenues | (5.2%) | 1.3% |
| Other income | (12.3%) | (13.9%) |
| Supplies | (7.9%) | (3.1%) |
| Personnel expenses | (21.8%) | 1.9% |
| Other expenses | (8.7%) | 0.2% |
| OIBDA | 14.3% | 4.7% |
| Operating income | 55.2% | 8.3% |
| CapEx | (14.7%) | 3.9% |
| OpCF (OIBDA-CapEx) | n.m. | 5.6% |
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The table below shows the contribution to reported growth of each item considered to calculate the organic variations, as explained above. For each line item, the contribution to reported growth, expressed in p.p., is the result of dividing the amount of each impact (on a net basis when the impact affects both years) by the consolidated reported figure for the previous year.
Contribution to reported growth (percentage points) | ||||||||||
| TELEFÓNICA 2016 | Exchange rate effect and hyperinflation |
Perimeter change |
Restructuring costs |
Towers sales |
Commitment with Fundación | Adjustments to the final purchase price of E-Plus |
Spectrum acquisition | Capital gains/losses on sale of companies |
Impairments |
Other adjustments |
| Revenues | (8.0) | 1.4 | -- | -- | -- | -- | -- | -- | -- | -- |
| Other income | (3.9) | 1.7 | -- | (3.2) | -- | (5.2) | -- | 11.3 | -- | -- |
| Supplies | (6.7) | 1.9 | -- | -- | -- | -- | -- | -- | -- | -- |
| Personnel expenses | (7.0) | 1.1 | (17.2) | -- | -- | -- | -- | -- | -- | -- |
| Other expenses | (8.7) | 1.3 | (0.1) | 0.0 | (1.9) | 0.0 | -- | 0.1 | 0.7 | (0.2) |
| OIBDA | (8.8) | 1.3 | 13.6 | (0.5) | 2.5 | (0.8) | -- | 1.6 | (0.8) | 0.3 |
| Operating income | (20.2) | (0.9) | 51.1 | (1.8) | 9.2 | (2.9) | -- | 6.0 | (3.1) | 1.0 |
| Capex | (7.9) | 1.5 | -- | -- | -- | -- | (11.7) | -- | -- | -- |
| OpCF (OIBDA-CapEx) | (12.4) | 0.2 | 65.1 | (2.3) | 11.7 | (3.7) | 44.1 | 7.6 | (4.0) | 1.3 |
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Results discussion
Revenues totaled 52,036 million euros in 2016, decreasing 5.2% compared to 2015 in reported terms. This decrease was mainly attributable to the impact of changes in foreign exchange rates and hyperinflation in Venezuela (-8.0 p.p.), which was partially offset by the changes in the consolidation perimeter, which contributed with 1.4 p.p. to the year-on-year growth. In organic terms, revenues increased 1.3% due to the increase in service revenues offset by the decrease in handset revenues affected by the extension of handset lifecycles.
The structure of revenues reflects Telefónica’s business diversification, the segment with the largest contribution to our revenues in 2016 was Telefónica Spain, representing 24.4% (+1.8 p.p. compared to 2015), followed by Telefónica Hispanoamérica, representing 24.2% despite the adverse impact of exchange rates and hyperinflation in Venezuela, (-2.0 p.p. compared to 2015), and Telefónica Brazil, representing 21.3% (+1.2 p.p. compared to 2015).
Mobile business revenues totaled 32,401 million euros in 2016 (of which 28,030 million euros corresponded to service revenues and 4,032 million euros corresponded to handset revenues) down 8.8% year-on-year in reported terms. This decrease was mainly attributable to the impact of changes in foreign exchange rates and hyperinflation in Venezuela (-8.7 p.p.). Excluding this impact, the year-on-year decrease was 0.1%, mainly due to the decrease of mobile revenues in Europe due to less handsets revenues that offset the increase of mobile revenues in Telefónica Hispanoamérica and in Telefónica Brazil as a result mainly of the increase in the customer base and data adoption.
Mobile service revenues, which is included in mobile business revenues, totaled 28,030 million euros in 2016, down 7.5% year-on-year in reported terms explained by the impact of changes in foreign exchange rates and hyperinflation in Venezuela (-8.9 p.p.). Excluding this impact, mobile service revenues increased year-on-year by 1.5% due mainly to the higher customer base and higher data consumption.
Mobile data revenues, which is included in mobile service revenues, totaled 14,663 million euros in 2016, up 2.1% in reported terms. This increase was mainly attributable to higher consumption of data by our customers, which was partially offset by the impact of changes in foreign exchange rates and hyperinflation in Venezuela (-10.2 p.p.). Excluding this impact, mobile data revenues increased by 12.3% due mainly to the increase of non-SMS data revenues (up 19.7%) and higher use of data per customer. Mobile data revenues accounted for 52% of mobile service revenues in 2016, up 4.9 p.p. compared to 2015 in reported terms.
Fixed revenues totaled 18,187 million euros in 2016, up 1.9% year-on-year in reported terms. This increase was mainly attributable to the full year of consolidation of GVT and DTS in 2015 (which accounted for +4.7 p.p. of the year-on-year increase), which was partially offset by the impact of changes in foreign exchange rates and hyperinflation in Venezuela (-6.9 p.p.). Excluding these impacts, fixed revenues increased 3.9%. This increase was mainly due to higher broad band connection revenues and Pay-TV revenues as a result of the commercial actions carried out by the Company in order to increase our value proposition and the higher customer base in Pay-TV.
Other income totaled 1,763 million euros in 2016, including the profit obtained from the sale of Telefé (199 million euros) and Telecomunicaciones Personalizadas (29 million euros). It also included income derived from the sale of towers totaling 1 million euros.
In 2015, other income included the positive result from the E-Plus price adjustment (104 million euros), the positive impact from the expired payment obligation (98 million euros) in Telefónica Brazil and the spectrum swap with AT&T in Telefónica Mexico carried out in December 2015 (79 million euros). Other income also included in 2015, income derived from the sale of real estate (78 million euros) and the sale of towers totaling 65 million euros in Telefónica Spain.
Total expenses, which include supply costs, personnel costs and other expenses (principally external services and taxes) but do not include amortization and depreciation expenses, were 38,681 million euros in 2016, down year-on-year 11.5% in reported terms. This decrease was mainly attributable to the impact of changes in foreign exchange rates and hyperinflation in Venezuela (-7.5 p.p.). The costs are explained in detail below:
| · | Supplies amounted to 15,242 million euros in 2016, down 7.9% year-on-year in reported terms mainly as a result of the impact of foreign exchange rates and hyperinflation in Venezuela (-6.7 p.p.). In organic terms, supplies expenses decreased by 3.1% year-on-year, mainly due to lower handset consumption associated with a longer handset lifecycle, and lower interconnection costs. |
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| · | Personnel expenses amounted to 8,098 million euros in 2016, down 21.8% in reported terms year-on-year compared to 2015. This decrease was mainly attributable to the restructuring provision of 1,336 million euros, principally in Telefónica Spain, accounting for 17.2 p.p. of the year-on-year decrease. In organic terms, personnel costs increased 1.9% year-on-year due to inflationary pressure in some Latin American countries and the internalization of services in Telefónica Brazil, which was partially offset by the savings generated from restructuring plans in recent years. |
The average headcount was 132,120 employees in 2016, down 1.1% compared to 2015.
| · | Other expenses amounted to 15,341 million euros in 2016, down 8.7% in reported terms. This decrease was mainly attributable to the impact of foreign exchange rates and hyperinflation in Venezuela (-8.7 p.p.) In organic terms, other expenses remained flat year-on-year (+0.2%), principally due to savings in commercial costs, benefitting from higher synergies in Telefónica Spain, Telefónica Brazil and Telefónica Germany, which offset in part the negative impact of the inflation rates in some Latin American countries resulting in higher network costs. |
OIBDA was 15,118 million euros in 2016, up 14.3% in reported terms as a result of various factors that affect comparability, mainly the lower restructuring costs in 2016 (1,380 million euros) compared to 2015 (3,217 million euros), which accounted for 13.6 p.p. of the year-on-year increase, the provision related to the agreement between Telefónica, S.A. and Fundación Telefónica registered in 2015 (+2.5 p.p.), the impact of the consolidation of GVT, DTS and Telefé (+1.3 p.p.) and the capital gain from the sale of Telefé, Telecomunicaciones Personalizadas and Vocem (+1.6 p.p.). These factors more than offset the impact of changes in foreign exchange rates and hyperinflation in Venezuela (-8.8 p.p.), the adjustments made to the final acquisition price of E-Plus in 2015 (-0.8 p.p.), the impairment loss on goodwill (-0,8 p.p.) and finally the lower sale of towers (-0.5 p.p.). In organic terms, OIBDA grew 4.7% due mainly to the positive evolution of all the regions as consequence of the positive evolution of service revenues, integration synergies captured in Telefónica Brazil and Telefónica Germany and the continuous effort to contain costs.
OIBDA margin stood at 29.1% in 2016, up 5 p.p. compared to 2015 in reported terms. In organic terms OIBDA margin was 31.5% and increased 1 p.p. compared to 2015 thanks to the increase in service revenues and higher content costs.
By segments, the main contributors to Group OIBDA were Telefónica Spain with 29.6% (+11.9 p.p. compared to 2015 due to lower restructuring cost provision in 2016), Telefónica Brazil with 24.6% (-2.4 p.p. compared to 2015) and Telefónica Hispanoamérica with 23% (reducing its contribution by 9.9 p.p. compared to 2015 due to the lower contribution of Argentina, Peru and Mexico).
Depreciation and amortization amounted to 9,649 million euros in 2016, down 0.6% year-on-year in reported terms, mainly due to the impact of foreign exchange rates and hyperinflation in Venezuela partially offset by the consolidation of GVT and DTS. The total depreciation and amortization charges arising from purchase price allocation processes amounted to 801 million euros in 2016, down 10% year-on-year.
Operating income (OI) in 2016 totaled 5,469 million euros, up 55.2% in reported terms compared to 2015 for the reasons set forth above. In organic terms, operating income grew 8.3% year-on-year mostly as a result of cost savings.
The share of loss of investments accounted for by the equity method for 2016 was a loss of 5 million euros (compared to a loss of 10 million euros in 2015).
Net financial expense amounted to 2,219 million euros in 2016, 14.9% lower than the previous year, due to savings from the management of debt (pound sterling hedges linked to Telefónica United Kingdom and the lower cost of debt in European currencies). On the other hand, the higher finance income resulting from the inflation in Venezuela was mainly offset by the income from the sale of equity investments, with the capital loss from the sale of the 1.5% stake in China Unicom (155 million euros) in 2016, and the positive impact from the divestment of the holding in Telecom Italia, S.p.A. (380 million euros) in 2015.
Corporate income tax amounted to 846 million euros in 2016. Considering a pre-tax profit of 3,245 million euros, the effective tax rate stood at 26.1%, 9.0 p.p. higher than the 2015 effective tax rate, due to lower tax credits recognition in 2016.
As a result of the foregoing, profit for the year attributable to equity holders of the parent for 2016 was 2,369 million euros (616 million euros in 2015).
41
Profit attributable to non-controlling interest reached 30 million euros, 105 million euros less than in 2015, mainly due to the increase in losses attributable to minority interests at Telefónica Germany, offset by the lower profit attributable to minority interests in Telefónica Brazil.
42
2016/2015 Segment results
TELEFÓNICA SPAIN
The below table shows the evolution of accesses in Telefónica Spain over the past two years as of December 31 of such years:
| ACCESSES | |||
| Thousand of accesses | 2015 | 2016 | %Reported YoY |
| Fixed telephony accesses (1) | 10,005.6 | 9,720.2 | (2.9%) |
| Internet and data accesses | 6,000.0 | 6,094.5 | 1.6% |
| Broadband (2) | 5,962.0 | 6,067.3 | 1.8% |
| Fiber | 2,223.0 | 2,998.3 | 34.9% |
| Mobile accesses | 17,258.5 | 17,237.7 | (0.1%) |
| Prepay | 2,777.1 | 2,329.3 | (16.1%) |
| Contract | 14,481.4 | 14,908.4 | 2.9% |
| M2M | 1,778.8 | 2,006.3 | 12.8% |
| Pay TV | 3,671.5 | 3,657.0 | (0.4%) |
| Final Clients Accesses | 36,935.6 | 36,709.4 | (0.6%) |
| Wholesale Accesses | 5,037.7 | 4,525.5 | (10.2%) |
| Total Accesses | 41,973.3 | 41,234.9 | (1.8%) |
Notes:
| (*) | There were no variations in organic terms during the period. |
| (1) | PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access; 2/6 Digital Access x30. Company’s accesses for internal use included. Includes VoIP and Naked ADSL. |
| (2) | Include ADSL, satellite, fiber optic and retail broadband circuit. |
In 2016 the commercial activity was leveraged on the differentiated assets of the Company and, in the second half of 2015 was strengthened by the convergent offer “Movistar Fusión+” launched in July 2015. During the first semester of 2016 the tariffs of the consumer segment, fundamentally broadband, postpaid mobile and “Fusion” were revised and, on July 3, 2016 a new "Movistar Fusión+" portfolio was launched, increasing the value offered to customers and tailoring it to their preferences. Basic bundles now include content from the Spanish "La Liga", to which "UEFA Champions and Europe League" are added in ultrafast packages; and the new "Movistar Fusión+" bundles include additional mobile lines and Premium TV content. It is important to highlight the good evolution of the second mobile line included in “Fusion+ Contigo” since its launching on June 1, 2016.
Churn evolution was positive in 2016, especially taking into account the elimination of “Fusión” long-term contracts on August 1, 2015, reflecting the higher loyalty of the customers with bundles services. This fact has resulted in a positive performance of commercial activity in 2016, broadband net adds grew by 39% year-on-year, there were more than 775 thousand new fiber accesses, and mobile contract net adds continued growth (+0.4 million customers). In fixed telephony the net loss of accesses decreased by 35.5% year-on-year.
Telefónica Spain had 41.2 million accesses at the end of December 2016, down 1.8% year-on-year, explained by the decrease in prepay mobile accesses and fixed telephony accesses. Retail accesses also declined by 0.6% year-on-year.
“Movistar Fusión”, with a customer base of 4.3 million with 2.5 million additional wireless lines to the base offer as of December 31, 2016, maintained a solid year-on-year growth (+5% and +26% respectively compared to December 2015) and contributed 83% of the fixed retail broadband customer base (3.0% year-on-year) and 73% of the wireless contract customer base (6 p.p. year-on-year). There was significant growth in the penetration of the high value services of “Movistar Fusión”, with 37% of the customer base already using 100 Mb or 300 Mb ultra-fast broadband (+8 p.p. year-on-year) and 68% of the customer base with Pay-TV as of December 31, 2016 (+5 p.p. year-on-year).
Fixed accesses decreased 2.9% year-on-year, with a net loss of 285 thousand accesses in the year 2016. This decrease was mainly due to a slower fixed access market evolution.
43
Retail broadband accesses presented 105 thousand new accesses in 2016, totaling 6.1 million acesses (+1.8% year-on-year) due to a low churn (1.4% in 2016, +0.02 p.p. year-on-year).
Fiber accesses showed a good evolution in terms of net adds (0.8 million new accesses in 2016), reaching 3.0 million customers in 2016 (up 34.9% compared to 2015), 49% of which corresponded to broad band accesses (+12 p.p. year-on-year), and with more than 775 thousand new accesses in 2016. Ultra-speed fiber accesses, with 100 or 300 Mb (with additional ARPU of 10 euros, including VAT) reached 2.0 million accesses (68% of total fiber accesses). At December 31, 2016 the fiber deployment reached 17.1 million premises, 2.7million more than at December 31, 2015, and continues to be the largest in Europe.
Total mobile accesses stood at 17.2 million, down 0.1% compared with year-end 2015 as a result of the decrease in prepay accesses. The contract access base accelerated its growth during 2016, growing by 2.9% year-on-year. Smartphone penetration stood at 70.9% of the mobile voice base (+4.6 p.p. compared to year-end 2015) and significantly boosted data traffic growth to 62% year-on-year in 2016 due to the higher number of customers with the renewed portfolio containing superior data packages.
LTE network rollout continued to progress well and coverage reached (based on our estimates) approximately 91% of the population at the end of 2016, up 16 p.p. compared to 2015, due to the deployment of the 800 MHz. As a result, the LTE customer base reached 6.0 million customers in 2016, almost doubling the customer base in 2015, while penetration reached 40% (+19 p.p. year-on-year).
Pay-TV accesses reached 3.7 million, in line with the previous year, including 613 thousand satellite TV accesses from DTS.
Given the high penetration level of the convergent offer “Fusión”, the revenue breakdown by service is considered to be increasingly less relevant in 2016. For this reason, Telefónica Spain has disclosed a new revenue breakdown that management believes is more meaningful.
The table below shows the evolution of Telefónica Spain’s results over the past two years:
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| Millions of euros | |||||
| TELEFÓNICA SPAIN | 2015 | 2016 | % Reported YoY | % Organic YoY (3) | |
| Revenues | 12,402 | 12,713 | 2.5% | (0.1%) | |
| Consumer (1) | 6,129 | 6,536 | 6.6% | 1.8% | |
| Fusion | 3,368 | 4,095 | 21.6% | 21.6% | |
| Out of Fusion | 2,761 | 2,441 | (11.6%) | (20.0%) | |
| Corporate | 3,473 | 3,423 | (1.4%) | (1.4%) | |
| Comunications | 2,799 | 2,708 | (3.3%) | (3.3%) | |
| IT | 674 | 716 | 6.2% | 6.2% | |
| Others (2) | 2,152 | 2,257 | 4.8% | 3.2% | |
| Other income | 516 | 476 | (7.6%) | (6.4%) | |
| Supplies | (2,996) | (3,375) | 12.7% | 4.4% | |
| Personnel expenses | (5,173) | (2,997) | (42.1%) | (6.2%) | |
| Other expenses | (2,413) | (2,350) | (2.6%) | (4.8%) | |
| OIBDA | 2,336 | 4,467 | 91.2% | 1.4% | |
| OIBDA margin | 18.8% | 35.1% | 16.3 p.p. | 0.6 p.p. | |
| Depreciation and amortization | (1,898) | (1,830) | (3.6%) | (4.8%) | |
| Operating income (OI) | 438 | 2,637 | n.m. | 5.1% | |
| CapEx | 1,827 | 1,847 | 1.1% | 3.0% | |
| OpCF (OIBDA-CapEx) | 509 | 2,621 | n.m. | 0.6% |
Notes:
(1) Consumer revenues also include freelance revenues.
(2) Other revenues include wholesale, subsidiaries and other revenues.
(3) See adjustments made to calculate organic variation below.
Adjustments made to calculate organic variations
As explained above, year-on-year changes referred to in this document as “organic” or presented in “organic terms” intend to present year-on-year variations on a comparable basis.
With respect to Telefónica Spain, we have made the following adjustments in order to calculate 2016/2015 variations in organic terms:
| · | Changes in the scope of consolidation: DTS was included in Telefónica’s consolidation perimeter on May 1, 2015. In order to exclude the impact of this change in the perimeter for the calculation or organic variations, the 2015 comparative figures include DTS’s results from January 1 to April 30, 2015. |
| · | Restructuring costs: the impact of certain restructuring costs related to the Voluntary Suspension Plan in Spain and amounting to 837 million and 2,896 million euros in 2016 and 2015, respectively, has been excluded. |
| · | Results of tower sales: the result obtained by Telefónica Spain from the sale of towers in 2015 totaling 38 million euros, has been excluded. Telefónica Spain recognized no result from the sale of towers in 2016. |
| · | Spectrum acquisition: we have excluded the impact of spectrum acquisitions in 2016 and 2015, which totaled 7 and 49 million euros, respectively. |
| · | Gains or losses on the sale of companies: in 2016, the gain obtained from the sale of Telecomunicaciones Personalizadas for 29 million euros was excluded. |
| · | Optimization of the distribution network: the impact of the provisions recorded for 18 million and 30 million euros in 2016 and 2015, respectively, have been excluded. |
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The table below shows 2016/2015 variations in reported and organic terms (the latter, calculated in accordance with the adjustments referred to above) of certain income statement and other measures, and the contribution of each item for which we have adjusted to our reported growth:
| YoY variation | Contribution to reported growth (percentage points) | |||||||
| TELEFÓNICA SPAIN 2016 | % Reported YoY | % Organic YoY | Perimeter change | Restructuring costs | Towers sales | Spectrum acquisition | Capital Gains/losses on sale of companies | Spain distribution channel |
| Revenues | 2.5% | (0.1%) | 2.6 | -- | -- | -- | -- | -- |
| Other income | (7.6%) | (6.4%) | 0.1 | -- | (7.4) | -- | 5.6 | -- |
| Supplies | 12.7% | 4.4% | 7.9 | -- | -- | -- | -- | -- |
| Personnel expenses | (42.1%) | (6.2%) | 0.5 | (39.8) | -- | -- | -- | -- |
| Other expenses | (2.6%) | (4.8%) | 2.8 | -- | -- | -- | -- | (0.5) |
| OIBDA | 91.2% | 1.4% | (0.2) | 88.1 | (1.6) | -- | 1.2 | 0.5 |
| CapEx | 1.1% | 3.0% | 0.4 | -- | -- | (2.3) | -- | -- |
| OpCF (OIBDA-CapEx) | n.m. | 0.6% | (2.2) | n.m. | (7.5) | 8.2 | 5.6 | 2.3 |
Results discussion
Revenues in Telefónica Spain in 2016 were 12,713 million euros, up 2.5% year-on-year in reported terms mainly as a result of the consolidation of DTS since May 1, 2015 (which accounted for +2.6 p.p. of the year-on-year increase). In organic terms, revenues were flat year-on-year, as lower handset revenues were offset by higher service revenues.
Given the high penetration level of the convergent offer (which means the offer of more than a single service for a single price), the revenue breakdown by service is considered to be increasingly less relevant. For this reason, Telefónica Spain has established a new revenue breakdown that management believes is more meaningful.
| • | Consumer revenues (6,536 million euros in 2016) grew by 6.6% year-on-year in reported terms, as a result of the consolidation of DTS since May 1, 2015 (+4.8 p.p. of the year-on-year increase). In organic terms, these revenues increased 1.8% year-on-year, mainly driven by the growth in ARPU and in the number of customers. It is worth highlighting the strong growth in "Fusión" revenues during 2016 (4,095 million euros, +21.6% year-on-year) which more than offset the drop in "non-Fusión" revenues. |
| • | Business revenues (3,423 million euros in 2016) decreased by 1.4% year-on-year in reported terms, improving the year-on-year trend, mainly due to a better evolution in communications revenues evolution and higher IT revenues. During 2016, business revenues showed a path of stabilization, supported by the commercial offer renovation, with integrated connectivity solutions, IT and digital services, all of them key for the digitalization of the businesses. |
| • | Other revenues, which include wholesale, subsidiaries and other revenues (2,257 million euros in 2016) grew by 4.8% year-on-year in reported terms, due to the growth in wholesale TV revenues and fixed ingoing voice revenues. |
Fusión ARPU was 80.4 euros in 2016, up 12.0% year-on-year in reported terms, boosted by the demand of higher value packages and the tariff revisions, as well as the improvement in the customers' mix stimulated by the renovation of the portfolio that took place in August, 2016 including mobile additional lines and additional contents in the convergent offers.
OIBDA amounted to 4,467 million euros in 2016, up 91.2% year-on-year in reported terms, as a consequence of the provisions recorded in 2015 totaling 2,896 million euros relating to restructuring cost by the “Employment Suspension Plan” and 30 million euros relating to restructuring of the distribution channel. The OIBDA reported in 2016 also included 837 million euros of provisions due to the Individual Suspension Plan and other restructuring plans, and 18 million euros of provision due to the restructuring of the distribution channel.
In organic terms OIBDA increased 1.4% year-on-year, mainly due to the higher service revenues, lower personnel costs (down by 6.2% year-on-year in organic terms which is mainly explained by the savings generated by the “employment suspension plan” (207 million euros) since April 2016) and lower other expenses, which dropped 2.6% in reported terms and down 4.8% in organic terms excluding changes in the perimeter of consolidation, principally due to lower commercial costs, which in total offset the increase of supplies (+12.7% in reported terms, +4.4% in organic terms) impacted by higher content costs and IT equipment purchases.
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OIBDA margin was 35.1% in 2016 in reported terms and 41.6% in organic terms, up 16.3 p.p. year-on-year in reported terms.
TELEFÓNICA UNITED KINGDOM
As explained above, the consolidated income statement for 2015 appearing in the Consolidated Financial Statements has been amended to retroactively show the reclassification of Telefónica United Kingdom´s results as continuous operations. Therefore, these results do not match the results published for such period. Consequently, segmented information has been modified for 2015.
The table below shows the evolution of accesses in Telefónica United Kingdom over the past two years as of December 31 of such years:
| ACCESSES | |||
| Thousands of accesses | 2015 | 2016 | %Reported YoY |
| Fixed telephony accesses (1) | 247.1 | 272.6 | 10.3% |
| Internet and data accesses | 21.0 | 23.7 | 12.8% |
| Broadband | 21.0 | 23.7 | 12.8% |
| Mobile accesses | 25,018.8 | 25,462.7 | 1.8% |
| Prepay | 10,561.4 | 9,701.4 | (8.1%) |
| Contract | 14,457.4 | 15,761.3 | 9.0% |
| M2M (2) | 2,383.9 | 3,266.9 | 37.0% |
| Final Clients Accesses | 25,286.9 | 25,759.0 | 1.9% |
| Total Accesses | 25,286.9 | 25,759.0 | 1.9% |
Notes:
(1) Includes "fixed wireless" and Voice over IP accesses.
(2) Includes 720 thousand M2M accesses on the global platform since the first quarter 2016.
In 2016, Telefónica United Kingdom maintained market momentum, as a result of the O2 brand recognition, the commercial proposal success and the customer loyalty. These factors have allowed the company to keep growing in a competitive market.
The total access base grew 1.9% year-on-year and stood at 25.8 million at December 31, 2016, mainly driven by a 1.8% increase in the mobile customer base.
The contract mobile customer base grew 9.0% year-on-year and reached 15.8 million accesses, with a broadly stable 61.9% share over the total mobile base driven by the incorporation of 720 thousand M2M accesses on the global platform, not accounted before. Net adds reached 444 thousand accesses due to the solid contribution of postpay accesses. Smartphone penetration reached 68.4% of the total mobile accesses base, up 8.0 p.p. year-on-year, driven by the continued growth of LTE customers (+36.1% year-on-year reaching 10.4 million at December 31, 2016). LTE penetration reached 47% of the total mobile access base.
The prepay access base decreased 8.1% year-on-year to 9.7 million at December 31, 2016.
The table below shows the evolution of Telefónica United Kingdom´s results over the past two years:
| Millions of euros | |||||
| TELEFÓNICA UNITED KINGDOM | 2015 | 2016 | % Reported YoY | % Organic YoY (1) | |
| Revenues | 7,837 | 6,861 | (12.5%) | (1.5%) | |
| Mobile service revenues | 5,778 | 5,121 | (11.4%) | (0.3%) | |
| Other income | 170 | 148 | (12.7%) | (1.8%) | |
| Supplies | (3,769) | (3,226) | (14.4%) | (3.7%) | |
| Personnel expenses | (549) | (528) | (3.9%) | 1.2% | |
| Other expenses | (1,760) | (1,546) | (12.1%) | (1.1%) | |
| OIBDA | 1,929 | 1,709 | (11.4%) | 1.7% | |
| OIBDA margin | 24.6% | 24.9% | 0.3 p.p. | 0.8 p.p. | |
| Depreciation and amortization | (1,196) | (1,090) | (8.9%) | 2.6% | |
| Operating income (OI) | 733 | 619 | (15.5%) | 0.2% | |
| CapEx | 883 | 931 | 5.5% | 18.7% | |
| OpCF (OIBDA-CapEx) | 1,046 | 778 | (25.6%) | (12.7%) |
(1) See adjustments made to calculate organic variation below.
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Adjustments made to calculate organic variations
As explained above, year-on-year changes referred to in this document as “organic” or presented in “organic terms” intend to present year-on-year variations on a comparable basis.
With respect to Telefónica United Kingdom, we have made the following adjustments in order to calculate 2016/2015 variations in organic terms:
| · | Exchange rate effect: we have excluded the impact of changes in exchange rates by assuming constant average foreign exchange rates year on year. In particular, we have used the average foreign exchange rates of 2015 for both years. |
| · | Restructuring costs: we have excluded the impact in 2016 and 2015 of restructuring costs, amounting to 37 and 4 million euros, respectively. |
The table below shows 2016/2015 variations in reported and organic terms (the latter, calculated in accordance with the adjustments referred to above) of certain income statement and other measures, and the contribution of each item for which we have adjusted to our reported growth:
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| YoY variation | Contribution to reported growth (percentage points) | |||
| TELEFÓNICA UNITED KINGDOM 2016 | % Reported YoY | % Organic YoY | Exchange rate effect | Restructuring costs |
| Revenues | (12.5%) | (1.5%) | (11.0) | -- |
| Other income | (12.7%) | (1.8%) | (10.9) | -- |
| Supplies | (14.4%) | (3.7%) | (10.7) | -- |
| Personnel expenses | (3.9%) | 1.2% | (12.0) | 6.9 |
| Other expenses | (12.1%) | (1.1%) | (11.0) | -- |
| OIBDA | (11.4%) | 1.7% | (11.1) | (2.0) |
| CapEx | 5.5% | 18.7% | (13.2) | -- |
| OpCF (OIBDA-CapEx) | (25.6%) | (12.7%) | (9.3) | (3.6) |
Results discussion
Total revenues were 6,861 million euros in 2016, down by 12.5% year-on-year in reported terms mainly due to the depreciation of the pound sterling (which accounted for -11 p.p. of the year-on-year decrease). In organic terms, revenues decreased by 1.5% year-on-year due mainly to lower handset sales, which declined by 8.0% year-on-year.
Mobile service revenues totaled 5,121 million euros in 2016, down by 11.4% year-on-year in reported terms due mainly to the depreciation of the pound sterling (which accounted for -11.1 p.p. of the year-on-year decrease). Excluding this impact, mobile service revenues decreased by 0.3% due to the “Refresh” commercial model as well as the low interconnection fares. Under the Refresh commercial model, certain revenues related to handset are not considered as mobile service revenues, but as handset revenues.
Mobile ARPU decreased by 12.1% year-on-year in reported terms due mainly to the depreciation of the pound sterling. In organic terms, ARPU went down by 1.1% adversely affected by the “Refresh” model, while data ARPU increased by 2.3%. In the “Refresh” model handset revenues are not considered as mobile service revenues, but as handset revenues and ARPU does not reflect the handset revenues.
| TELEFÓNICA UNITED KINGDOM | 2015 | 2016 | %YoY | %Organic YoY |
| Voice Traffic (millions of minutes) | 90,527 | 93,306 | 3.1% | 3.1% |
| ARPU (EUR) | 19.4 | 17.0 | (12.1%) | (1.1%) |
| Prepay | 7.7 | 7.5 | (3.1%) | 9.7% |
| Contract (1) | 33.5 | 28.8 | (14.1%) | (3.5%) |
| Data ARPU (EUR) | 11.3 | 10.3 | (9.0%) | 2.3% |
| % non-SMS over data revenues | 59.4% | 61.4% | 2.0 p.p. | 2.0 p.p. |
Notes:
(1) Excludes M2M.
OIBDA totaled 1,709 million euros in 2016, down 11.4% year-on-year in reported terms, as a result mainly of the depreciation of the sterling pound. In organic terms, OIBDA increased by 1.7% year-on-year due to the reduction of costs offset by lower service revenues.
The OIBDA margin stood at 24.9% in 2016, with an increase of 0.3 p.p. in reported terms compared to 2015. In organic terms, OIBDA margin stood at 25.5%.
49
TELEFÓNICA GERMANY
The below table shows the evolution of accesses in Telefónica Germany over the past two years as of December 31 of such years:
| ACCESSES | |||
| Thousands of accesses | 2015 | 2016 | %Reported YoY |
| Fixed telephony accesses (1) | 1,997.8 | 2,010.3 | 0.6% |
| Internet and data accesses | 2,330.6 | 2,324.5 | (0.3%) |
| Broadband | 2,098.0 | 2,104.0 | 0.3% |
| VDSL | 516.8 | 805.5 | 55.9% |
| Mobile accesses | 43,062.8 | 44,320.7 | 2.9% |
| Prepay | 23,979.4 | 23,784.0 | (0.8%) |
| Contract | 19,083.4 | 20,536.6 | 7.6% |
| M2M | 632.0 | 787.8 | 24.6% |
| Final Clients Accesses | 47,391.2 | 48,655.5 | 2.7% |
| Wholesale Accesses | 972.0 | 691.0 | (28.9%) |
| Total Accesses | 48,363.2 | 49,346.4 | 2.0% |
Notes:
(1) Includes "fixed wireless" and Voice over IP accesses.
During 2016 Telefónica Germany maintained market momentum with the launch of a new Premium portfolio called “O2 Free” on October 5, 2016, which underpins the company´s data monetization strategy, offering more content at a higher price with a clear focus on retaining and developing the premium customer base. Competitive pressure in the non-premium segment is showing some signs of improvement. At the same time, Telefónica Germany delivered on its integration milestones, generating additional savings in line with its synergy targets.
The total access base grew 2.0% year-on-year and stood at 49.3 million at December 31, 2016, mainly driven by a 2.9% increase in the mobile base (which reached 44.3 million).
The contract mobile customer base grew 8% year-on-year and reached 20.5 million accesses, with a broadly stable 46.3% share over the total mobile base. Net adds reached 1.5 million accesses due to the solid contribution of partners (second brands). Smartphone penetration reached 59% of the total mobile access base, up 5.2 p.p. year-on-year driven by the continued growth of LTE customers (+53% year-on-year reaching 12.1 million at December 31, 2016) which reflects the continuous demand by customers for high speed mobile data access. LTE penetration reached 27% of the total mobile access base.
The prepay access base remained broadly stable year-on-year (-0.8%) at 23.8 million. The prepay segment lost 195 thousand accesses in 2016 due to the partner segment.
The retail broadband access loss trend continued to improve, with 6 thousand net additions in 2016. VDSL registered 289 thousand net additions (+60% year-on-year) in 2016 and continued to benefit from the continued strong demand, while the wholesale DSL customer base continued to fall due to the planned dismantling of the legacy infrastructure.
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The table below shows the evolution of Telefónica Germany’s results over the past two years:
| Millions of euros | |||||
| TELEFÓNICA GERMANY | 2015 | 2016 | % Reported YoY | % Organic YoY (1) | |
| Revenues | 7,888 | 7,503 | (4.9%) | (4.9%) | |
| Mobile Business | 6,832 | 6,498 | (4.9%) | (4.9%) | |
| Mobile service revenues | 5,532 | 5,437 | (1.7%) | (1.7%) | |
| Fixed Business | 1,043 | 981 | (5.9%) | (5.9%) | |
| Other income | 265 | 146 | (45.0%) | (9.3%) | |
| Supplies | (2,712) | (2,452) | (9.6%) | (9.6%) | |
| Personnel expenses | (655) | (646) | (1.4%) | (7.9%) | |
| Other expenses | (2,928) | (2,757) | (5.8%) | (5.0%) | |
| OIBDA | 1,858 | 1,794 | (3.4%) | 2.9% | |
| OIBDA margin | 23.6% | 23.9% | 0.4 p.p. | 1.9 p.p. | |
| Depreciation and amortization | (2,128) | (2,211) | 3.9% | 3.9% | |
| Operating income (OI) | (270) | (417) | 54.2% | 9.8% | |
| CapEx | 2,230 | 1,108 | (50.3%) | 6.8% | |
| OpCF (OIBDA-CapEx) | (372) | 686 | c.s. | (2.1%) |
(1) See adjustments made to calculate organic variation below.
Adjustments made to calculate organic variations
As explained above, year-on-year changes referred to in this document as “organic” or presented in “organic terms” intend to present year-on-year variations on a comparable basis.
With respect to Telefónica Germany, we have made the following adjustments in order to calculate 2016/2015 variations in organic terms:
| · | Restructuring costs: we have excluded the impact of restructuring costs associated with simplification processes implemented in Germany. In 2016, restructuring costs had an 89 million euros impact on OIBDA. In 2015, restructuring costs had a 74 million euros impact on OIBDA. |
| · | Adjustments to the final purchase price of E-Plus: in 2015 we have excluded the result from the difference between the preliminary purchase price of E-Plus (as estimated at the end of the valuation period) and the final purchase price agreed with KPN, totaling 104 million euros (which had 102 million euros positive impact on OIBDA, net of costs related to the acquisition). |
| · | Spectrum acquisition: the CapEx organic variation exclude spectrum acquisition, which in 2015 amounted to 1.198 million euros (6 million euros in 2016). |
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The table below shows 2016/2015 variations in reported and organic terms (the latter, calculated in accordance with the adjustments referred to above) of certain income statement measures and CapEX and the contribution of each item for which we have adjusted to our reported growth:
| YoY variation | Contribution to reported growth (percentage points) | ||||
| TELEFÓNICA GERMANY 2016 | % Reported YoY | % Organic YoY | Restructuring costs | Adjustments to the final purchase price of E-Plus | Spectrum acquisition |
| Revenues | (4.9%) | (4.9%) | -- | -- | -- |
| Other income | (45.0%) | (9.3%) | -- | (39.4) | |
| Supplies | (9.6%) | (9.6%) | -- | -- | -- |
| Personnel expenses | (1.4%) | (7.9%) | 6.4 | -- | -- |
| Other expenses | (5.8%) | (5.0%) | (0.9) | (0.1) | -- |
| OIBDA | (3.4%) | 2.9% | (0.8) | (5.5) | -- |
| CapEx | (50.3%) | 6.8% | -- | -- | (53.5) |
| OpCF (OIBDA-CapEx) | c.s. | (2.1%) | 4.1 | 27.4 | n.m. |
Results discussion
Total revenues were 7,503 million euros in 2016, down 4.9% year-on-year in reported terms due mainly to the lower service revenues and handset sales.
Mobile service revenues totaled 5,437 million euros in 2016, decreasing 1.7% year-on-year in reported terms due mainly to the impact of termination and roaming tariffs, the increasing share of partner segment (second brands) within the customer base and the competitive pressure. Telefónica Germany continued to focus on data revenues, which increased by 5.3% and accounted for 55% of mobile service revenues in 2016. Non-P2P SMS data revenues amounted to 2,300 million euros (increasing +13.1% year-on-year) and non-P2P SMS data revenues accounted for 76.9% of the total data revenues (+5.3 p.p. year-on-year).
Fixed revenues were 981million euros in 2016 (down 5.9% year-on-year), due to lower wholesale revenues driven by the planned decommissioning of the legacy ULL platform.
Mobile ARPU was 10.3 euros in 2015 (down 3.7% year-on-year), while contract ARPU stood at 16.5 euros (down 4.1% year-on-year), as a result of the high pricing pressure in a competitive market, higher share of wholesale customers in the customer base and the consequent change in the weight of retail to wholesale. Data ARPU was 5.7 euros (+3.4% year-on-year).
| TELEFÓNICA GERMANY | 2015 | 2016 | %YoY |
| Voice Traffic (millions of minutes) | 117,877 | 113,896 | (3.4%) |
| ARPU (EUR) | 10.7 | 10.3 | (3.7%) |
| Prepay | 5.8 | 5.7 | (1.6%) |
| Contract (1) | 17.2 | 16.5 | (4.1%) |
| Data ARPU (EUR) | 5.5 | 5.7 | 3.4% |
| % non-SMS over data revenues | 71.6% | 76.9% | 5.3 p.p. |
Notes:
(1) Excludes M2M.
OIBDA totaled 1,794 million euros in 2016, decreasing 3.4% year-on-year in reported terms as a result mainly of the previously mentioned positive impact of the final purchase price of E-Plus in 2015 (-5.5 p.p.) and the lower restructuring costs recorded in 2016 (-0.8 p.p.). In organic terms, OIBDA grew by 2.9% year-on-year, driven by the synergies captured in integration (approximately 150 million euros in 2016) mainly by employees restructuring and infrastructure dismantling.
The OIBDA margin stood at 23.9% in reported terms for 2016, up 0.4 p.p. compared to 2015 (+1.9 p.p. in organic terms).
52
TELEFÓNICA BRAZIL
The below table shows the evolution of accesses in Telefónica Brazil over the past two years as of December 31 of such years:
| ACCESSES | ||||
| Thousands of accesses | 2015 | 2016 | %Reported YoY |
|
| Fixed telephony accesses (1) | 14,654.5 | 14,338.4 | (2.2%) | |
| Internet and data accesses | 7,195.5 | 7,383.2 | 2.6% | |
| Broadband | 7,129.5 | 7,311.0 | 2.5% | |
| Fiber and VDSL | 3,779.9 | 4,171.0 | 10.3% | |
| Mobile accesses | 73,261.3 | 73,769.8 | 0.7% | |
| Prepay | 42,194.4 | 40,387.2 | (4.3%) | |
| Contract | 31,066.9 | 33,382.6 | 7.5% | |
| M2M | 4,234.7 | 5,005.1 | 18.2% | |
| Pay TV | 1,787.9 | 1,712.7 | (4.2%) | |
| Final Clients Accesses | 96,899.3 | 97,204.2 | 0.3% | |
| Wholesale Accesses | 22.3 | 17.9 | (19.5%) | |
| Total Accesses | 96,921.5 | 97,222.2 | 0.3% | |
Notes:
(*) There were no variations in organic terms during the period.
(1) Includes "fixed wireless" and Voice over IP accesses.
Telefónica Brazil closed the year 2016 improving its competitive position in the mobile as well as in the fixed market. In the mobile business, leadership has been maintained in the higher value segments, which permitted the operator to capture mobile market revenue growth in 2016. In the fixed business, the transformation towards fiber and Pay-TV was strengthened after the integration of GVT in May 2015.
Revenues and OIBDA evolution was positively supported by the acceleration of mobile data and the good evolution of fiber and Pay-TV. Additionally, Telefónica Brazil carried out costs control measures and generated benefits from the synergies with GVT that offset the adverse macroeconomic situation in Brazil.
However, results in 2016 were adversely affected by the interconnection tariff reduction in the mobile business (-33.8%) and in the retail fixed-mobile tariff (-20.6%), fixed-local (-65.9%) and fixed-interurban (-21.3%) since February 25, 2016.
Telefónica Brazil reached 97.2 million accesses at December 31, 2016, up 0.3% compared with December 2015.
In the mobile business, the strategic focus remained on gaining and retaining high value customers, reaching a market share of 42.1% in the contract segment as of December 31, 2016 (Source: Anatel), preserving the leadership. Telefónica Brazil maintained its market leadership in terms of total accesses with a market share of 30.2% as of December 2016 (source: Anatel), driven by the contract clients growth (7.5% year-on-year), and offset the fall in prepaid clients (-4.3% year-on-year). An improvement has been experienced on the “familiar plans”, giving the chance to proceed to data sharing among the same family, as well as progress in online client assistance through “meu vivo”, acclaiming one of Vivo’s strengths and continuing with constant upgrades.
In its fixed business, Telefónica Brazil maintained its strategic focus on fiber deployment, with 17 million premises passed with fiber at December 31, 2016 and 4.3 million homes connected. Traditional accesses decreased 2.2% due to the fixed-mobile substitution. Retail broadband accesses totaled 7.3 million accesses at the end of 2016, increasing 2.5% year-on-year. Among them, 59% accesses were connected with FTCC. Pay TV customers reached 1.7 million as of December 31, 2016, down 4.2% in reported terms due mainly to the macroeconomic situation and a commercial strategy based in value clients gaining. IPTV accesses increased in relevance representing 13% of total Pay TV accesses.
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The table below shows the evolution of Telefónica Brazil’s results over the past two years:
| Millions of Euros | |||||
| TELEFÓNICA BRAZIL | 2015 | 2016 | % Reported YoY | % Organic YoY (1) | |
| Revenues | 11,060 | 11,097 | 0.3% | 0.9% | |
| Mobile Business | 6,906 | 6,669 | (3.4%) | 1.7% | |
| Mobile service revenues | 6,495 | 6,357 | (2.1%) | 3.1% | |
| Fixed Business | 4,154 | 4,428 | 6.6% | (0.2%) | |
| Other income | 416 | 348 | (16.3%) | (16.6%) | |
| Supplies | (2,568) | (2,249) | (12.4%) | (10.9%) | |
| Personnel expenses | (1,042) | (1,167) | 11.9% | 3.1% | |
| Other expenses | (4,293) | (4,315) | 0.5% | 2.0% | |
| OIBDA | 3,573 | 3,714 | 3.9% | 5.3% | |
| OIBDA margin | 32.3% | 33.5% | 1.2 p.p. | 1.4 p.p. | |
| Depreciation and amortization | (1,916) | (2,038) | 6.4% | 2.5% | |
| Operating income (OI) | 1,657 | 1,676 | 1.1% | 8.8% | |
| CapEx | 2,105 | 2,138 | 1.6% | (2.9%) | |
| OpCF (OIBDA-CapEx) | 1,468 | 1,576 | 7.3% | 17.8% |
(1) See adjustments made to calculate organic variation below.
Adjustments made to calculate organic variations
As explained above, year-on-year changes referred to in this document as “organic” or presented in “organic terms” intend to present year-on-year variations on a comparable basis.
With respect to Telefónica Brazil, we have made the following adjustments in order to calculate 2016/2015 variations in organic terms:
| · | Exchange rate effect: we have excluded the impact of changes in exchange rates by assuming constant average foreign exchange rates year on year. In particular, we have used the average foreign exchange rates of 2015 for both years. |
| · | Changes in the scope of consolidation: GVT was included in Telefónica’s consolidation perimeter in May 2015. In order to exclude the impact of this change in the perimeter for the calculation of organic variations, the 2015 comparative figures include GVT’s results from January 1 to April 30, 2015. |
| · | Restructuring costs: we have excluded the impact of restructuring costs associated with the simplification processes implemented in Telefónica Brazil. In 2016, these restructuring costs totaled 40 million euros. In 2015, these restructuring costs totaled 7 million euros |
| · | Results of tower sales: the results attributable to the sale of towers have been excluded (10 million euros in 2015). |
| · | Spectrum acquisition: the impact of spectrum acquisitions has been excluded (48 million euros in 2016). |
The table below shows 2016/2015 variations in reported and organic terms (the latter, calculated in accordance with the adjustments referred to above) of certain income statement and other measures, and the contribution of each item for which we have adjusted to our reported growth:
| YoY variation | Contribution to reported growth (percentage points) | ||||||
| TELEFÓNICA BRAZIL 2016 | % Reported YoY | % Organic YoY | Exchange rate effect | Perimeter change | Restructuring costs | Towers sales | Spectrum acquisition |
| Revenues | 0.3% | 0.9% | (5.2) | 4.6 | -- | -- | -- |
| Other income | (16.3%) | (16.6%) | 4.4 | (7.9) | -- | 2.3 | -- |
| Supplies | (12.4%) | (10.9%) | (4.6) | 3.4 | -- | -- | -- |
| Personnel expenses | 11.9% | 3.1% | (5.8) | 11.0 | 3.3 | -- | -- |
| Other expenses | 0.5% | 2.0% | (5.2) | 3.7 | -- | -- | -- |
| OIBDA | 3.9% | 5.3% | (5.4) | 5.1 | (1.0) | (0.3) | -- |
| CapEx | 1.6% | (2.9%) | (5.3) | 7.6 | -- | -- | 2.4 |
| OpCF (OIBDA-CapEx) | 7.3% | 17.8% | (5.6) | 1.4 | (2.4) | (0.7) | (3.5) |
54
Results discussion
Revenues totaled 11,097 million euros in 2016, up 0.3% in reported terms and 0.9% year-on-year in organic terms, due mainly to the depreciation of the Brazilian real (which accounted for -5.2 p.p. of the evolution) and the consolidation of GVT (+4.6 p.p.). In organic terms, the year-on-year variation of 0.9% was principally due to the good evolution in the mobile business (+1.7% year-on-year), which was partially offset by the impact of the regulatory interconnection tariff reduction, impacting resulting in a reduction in fixed revenues, that decreased by 0.2%.
| · | Revenues from the mobile business totaled 6,669 million euros in 2016, down 3.4% in reported terms due mainly to the depreciation of the Brazilian real (which accounted for -5.0 p.p. of the evolution). In organic terms, revenues from the mobile business increased by 1.7% due to the positive evolution of service revenues (+3.1% year-on-year) as a result of the good performance of outbound revenues, which in turn increased as a result of an increase in the customer base and the increased proportion of data revenues. This offsets the decrease in inbound revenues because of the fall in interconnection, due to the decrease of tariffs, and prepaid revenues associated with the customer base fall. Additionally, handsets revenues slow down 23.9% in reported terms due to a lower commercial activity. |
| · | Fixed telephony revenues totaled 4,428 million euros, up by 6.6% in reported terms due mainly to the impact of the consolidation of GVT (+12.3 p.p.) and partially offset by depreciation of the Brazilian real (which accounted for -5.6 p.p. of the evolution). In organic terms, revenues were down by 0.2%, mainly due to the regulatory impact of the decrease of the fixed-mobile and fixed-fixed tariffs that compensate the increase in broadband and new services revenues, which were up by 6.5% year-on-year in organic terms supported by the increase in fiber and Pay TV revenues. |
The mobile ARPU increased 13.3% year-on-year in reported terms due mainly to the better quality of the customer base and the expansion of data revenues that compensate the depreciation of the Brazilian real. In organic terms, it increased 19.3% year-on-year as a consequence of the higher data ARPU which more than offset the negative impact of the reduction in the mobile termination rates. We believe the high quality of the client base is reflected in an increase in the outbound ARPU and the 25.3% growth in the data ARPU.
| TELEFÓNICA BRAZIL | 2015 | 2016 | %YoY | %Local
Currency YoY |
| Voice Traffic (millions of minutes) | 379,430 | 373,074 | (1.7%) | (1.7%) |
| ARPU (EUR) | 6.3 | 7.1 | 13.3% | 19.3% |
| Prepay | 3.2 | 3.4 | 5.4% | 11.2% |
| Contract (1) | 13.3 | 12.9 | (2.9%) | 2.4% |
| Data ARPU (EUR) | 2.9 | 3.5 | 19.1% | 25.3% |
| % non-SMS over data revenues | 82.9% | 88.4% | 5.5 p.p. | 5.5 p.p. |
Notes:
(1) Excludes M2M.
55
OIBDA stood at 3,714 million euros in 2016, up 3.9% in reported terms. This evolution was affected by the recognition of a 40 million euros related to a restructuring personnel plan in 2016 compared with the 7 million euros provision registered in 2015, the positive impact from the expired payment obligation (98 million euros) in 2015, the negative impact of the depreciation of the Brazilian real (-5.4 p.p.) and the consolidation of GVT (+5.1 p.p.). In organic terms, the year-on-year increase was 5.3% due to revenue improvement and cost efficiency compensating a worse macro scenario with higher inflation, more devaluation and greater insolvencies provision rates. Personnel expenses totaled 1,167 million euros in 2016, up 11.9% in reported terms as result mainly of the consolidation of GVT, which was partially offset by the depreciation of the Brazilian real. In organic terms, personnel expenses increased by 3.1% year-on-year due to higher social benefits and the internalization of network contractors that compensates benefits from restructuring plans and voluntary redundancy programs in 2016. In addition, supplies costs fell (-10.9% in organic terms) thanks to the positive impact of the interconnection tariff reduction and lesser devices consumption (commercial activity focused on profitable clients).
The OIBDA margin stood at 33.5% in reported terms for 2016, up 1.2 p.p. compared to 2015.
56
TELEFÓNICA HISPANOAMÉRICA
The below table shows the evolution of accesses in Telefónica Hispanoamérica over the past two years as of December 31 of such years:
| ACCESSES | |||
| Thousands of accesses | 2015 | 2016 | %Reported YoY |
| Fixed telephony accesses (1) | 12,829.8 | 11,938.6 | (6.9%) |
| Internet and data accesses | 5,667.8 | 5,707.9 | 0.7% |
| Broadband | 5,610.4 | 5,570.7 | (0.7%) |
| Mobile accesses | 113,302.7 | 115,284.5 | 1.7% |
| Prepay | 88,332.8 | 89,461.2 | 1.3% |
| Contract | 24,969.8 | 25,823.3 | 3.4% |
| M2M | 2,296.9 | 2,561.3 | 11.5% |
| Pay TV | 2,812.2 | 2,919.2 | 3.8% |
| Final Clients Accesses | 134,612.4 | 135,850.3 | 0.9% |
| Wholesale Accesses | 30.9 | 66.5 | 115.6% |
| Total Accesses T. Hispanoamérica | 134,643.3 | 135,916.8 | 0.9% |
Notes:
(1) Includes "fixed wireless" and Voice over IP accesses.
Total accesses reached 135.9 million at December 31, 2016 (+ 0.9% year-on-year).
Mobile accesses totaled 115.3 million customers and grew 1.7% year-on-year, highlighting the higher quality of the customer base.
| · | In the contract segment, accesses grew 3.4% year-on-year. Growth was particularly strong in Argentina (+3.3%), Chile (+7.5%) and Colombia (+6.0%). Annual net adds reached 854 thousand customers, mainly due to the contribution of Argentina (+231 thousand accesses), Chile (+218 thousand accesses) and Colombia (+203 thousand accesses), benefitting from a successful strategy of migrations (from prepay to contract), as well as a higher amount of gross adds. |
| · | In the prepay segment, accesses grew 1.3% year-on-year, with net adds of 1,1 million customers. Growth was driven mainly by Mexico (+1.5 million accesses), Colombia (+0.6 million accesses) and Central America (+0.8 million accesses), compensating the negative net adds in other markets like Peru (-1.2 million accesses) and Chile (-1.0 million accesses). Such increases were explained by strong price competition in the prepay segment, not followed by Movistar to avoid harming the quality levels of the network (avoiding reduced price offers), along with the focus on attracting high value customers that allowed the acceleration of migration processes from prepay to contract. |
| · | The smartphone customer base grew 14.7% year-on-year to 46.1 million accesses, with a penetration over mobile accesses of 41.3% (+4.7 p.p. year-on-year), mainly due to the growth in all countries of the region. At the same time, 4G accesses continued growing, reaching 15.5 million accesses at the end of the year. |
Traditional fixed business accesses stood at 11.9 million at December 31, 2016 (-6.9% year-on-year) with negative net adds of 0.9 million customers, affected by the erosion of traditional fixed business in the region, including Argentina (-4.0% year-on-year), Peru (-5.8% year-on-year), Chile (-5.4% year-on-year) and Colombia (-5.4% year-on-year).
Broadband accesses totaled 5.6 million at December 31, 2016 (-0.7% year-on-year), due to negative net adds in Colombia (-3.6%) and Argentina (-1.6%), which were not enough to offset the positive performance of Peru (+2.4%). The penetration of fixed broadband accesses over traditional fixed business accesses was 46.7% at December 31, 2016 (+2.9 p.p. year-on-year). There was progressive migration towards data plans with higher speeds, with 62.1% of broadband accesses having a speed over 4Mb at December 31, 2016 (+9 p.p. year-on-year).
TV accesses totaled 2.9 million (+3.8% year-on-year), with net adds of 107 thousand customers as a result of an improvement in all the countries in the region that offer the service. Growth was particularly positive in Peru (+6.2%), Colombia (+5.9%) and Chile (+2.5%).
57
The table below shows the evolution of Telefónica Hispanoamérica’s results over the past two years:
| Millions of euros | |||||
| TELEFÓNICA HISPANOAMÉRICA | 2015 | 2016 | % Reported YoY | % Organic YoY (1) | |
| Revenues | 14,387 | 12,579 | (12.6%) | 7.5% | |
| Mobile Business | 10,347 | 8,882 | (14.2%) | 6.3% | |
| Mobile service revenues | 9,160 | 7,918 | (13.6%) | 7.0% | |
| Fixed Business | 4,070 | 3,732 | (8.3%) | 12.2% | |
| Other income | 347 | 274 | (21.3%) | (10.4%) | |
| Supplies | (4,176) | (3,704) | (11.3%) | 4.4% | |
| Personnel expenses | (1,686) | (1,584) | (6.1%) | 22.8% | |
| Other expenses | (4,516) | (4,088) | (9.5%) | 7.0% | |
| OIBDA | 4,356 | 3,477 | (20.2%) | 3.9% | |
| OIBDA margin | 30.3% | 27.6% | (2.6 p.p.) | (1.0 p.p.) | |
| Depreciation and amortization | (2,241) | (2,190) | (2.3%) | 7.5% | |
| Operating income (OI) | 2,115 | 1,287 | (39.1%) | 0.5% | |
| CapEx | 3,060 | 2,613 | (14.6%) | 6.5% | |
| OpCF (OIBDA-CapEx) | 1,296 | 864 | (33.3%) | (0.3%) |
(1) See adjustments made to calculate organic variation below.
Adjustments made to calculate organic variations
As explained above, year-on-year changes referred to in this document as “organic” or presented in “organic terms” intend to present year-on-year variations on a comparable basis.
With respect to Telefónica Hispanoamérica, we have made the following adjustments in order to calculate 2016/2015 variations in organic terms:
| · | Exchange rate effects and hyperinflationary adjustments in Venezuela: we have excluded the impact of changes in exchange rates by assuming constant average foreign exchange rates year on year. In particular, we have used the average foreign exchange rates of 2015 for both years. We have also excluded the impact of hyperinflationary adjustments in Venezuela, by reversing such adjustments. |
| · | Restructuring costs: we have excluded the impact of restructuring costs in 2016 and 2015, amounting to 84 and 38 million euros, respectively. |
| · | Results of tower sales: the results attributable to the sale of towers have been excluded (1 million euros in 2016 and 18 million euros in 2015). |
| · | Spectrum acquisition: the impact of spectrum acquisitions has been excluded in 2016 (284 million euros, corresponding to Peru) and 2015 (338 million euros, mainly corresponding to Argentina and Ecuador). |
| · | Capital gains and losses on sales of companies: gains and losses obtained from the sale of companies are excluded to calculate organic variations. In 2016, the profit from the sale of Telefé for 15 million euros was excluded. |
| · | Goodwill impairments: Impairment losses from goodwill in consolidation are excluded to calculate organic variations. In 2016, the impairment loss on the goodwill assigned to Telefónica Venezolana and Telefónica Móviles Mexico amounting to 124 and 91 million euros, respectively. |
| The table below shows 2016/2015 variations in reported and organic terms (the latter, calculated in accordance with the adjustments referred to above) of certain income statement and other measures, and the contribution of each item for which we have adjusted to our reported growth: |
58
| YoY variation | Contribution to reported growth (percentage points) | |||||||
| TELEFÓNICA HISPANOAMÉRICA 2016 | % Reported YoY | % Organic YoY | Exchange rate effect and hyperinflation | Restructuring costs | Towers sales | Spectrum acquisition | Capital Gains/losses on sale of companies | Impairments |
| Revenues | (12.6%) | 7.5% | (20.0) | -- | -- | -- | -- | |
| Other income | (21.3%) | (10.4%) | (10.7) | -- | (5.0) | -- | 4.2 | -- |
| Supplies | (11.3%) | 4.4% | (15.6) | -- | -- | -- | -- | -- |
| Personnel expenses | (6.1%) | 22.8% | (32.4) | 4.2 | -- | -- | -- | -- |
| Other expenses | (9.5%) | 7.0% | (21.2) | -- | -- | -- | -- | 4.8 |
| OIBDA | (20.2%) | 3.9% | (17.5) | (1.6) | (0.4) | -- | 0.3 | (4.9) |
| CapEx | (14.6%) | 6.5% | (19.1) | -- | -- | (1.2) | -- | |
| OpCF (OIBDA-CapEx) | (33.3%) | (0.3%) | (13.6) | (5.5) | (1.3) | 2.9 | 1.1 | (16.6) |
Results discussion
Revenues amounted to 12,579 million euros in 2016, decreasing 12.6% year-on-year in reported terms due to the foreign exchange effects and the hyperinflation in Venezuela (-20.0 p.p.). Revenues increased 7.5 % year-on-year in organic terms mainly due to the growth in data revenues (mobile and fixed) and the growth of the customer base, higher data usage per customer and higher data penetration.
| · | Mobile service revenues reached 7,918 million euros in 2016 and decreased by 13.6% year-on-year in reported terms. This decrease was mainly driven by the foreign exchange effects and the hyperinflation in Venezuela (which decreased growth by 20.6 p.p. of the year-on-year variation). Excluding these effects, these revenues grew by 7.0% principally as a result of the increase of service revenues in Argentina (18.4%). Mobile service revenues performance by country was as follows: |
| o | In Argentina: mobile service revenues amounted to 1,628 million euros in 2016, decreasing 25.8% year-on-year in reported terms. This decrease was mainly due to the exchange rate effect, reducing growth by 44.2 p.p. Excluding this effect, revenues increased by 18.4% due to the data revenues growth leveraged on the higher 4G customer base, permitting data consumption acceleration and commercial offers adapted to the inflationary environment. |
| o | In Mexico: mobile service revenues reached 1,246 million euros in 2016, decreasing 19% year-on-year in reported terms. In local currency, these revenues decreased 4.9%, mainly due to lower prepaid revenues as a result of strong competition and due to the regulatory impact, which was partially offset by a satisfactory performance in wholesale service. |
| o | In Chile: service revenues reached 1,103 million euros in 2016, decreasing 6.3% year-on- year in reported terms mainly due to the foreign exchange effect (-3.1 p.p.). In local currency, these revenues decreased by 3.2% affected by lower prepaid revenues as well as lower interconnection rates. |
| o | In Peru: mobile service revenues reached 1,206 million euros in 2016, decreasing 13.2% year-on-year in reported terms mainly due to the foreign exchange effect (-5 p.p.). In local currency these revenues decreased by 8.2%, affected by the reduction of prepaid and contract revenues due to higher aggressiveness in the market, resulting in lower ARPUs. |
| · | Data revenues in the segment reached 3,511 million euros in 2016 and decreased 4.8% year-on-year in reported terms mainly due to foreign exchange effects and the hyperinflation in Venezuela (-24.4 p.p). Excluding these effects, these revenues grew 19.6 % year-on-year mainly due to the increase in data revenues in most of the countries of the region and by the higher data penetration which grew from 41.3% in 2015 to 46.1 % during 2016. |
| · | Fixed business revenues reached 3,732 million euros in 2016, and decreased 8.3% in reported terms. Excluding the foreign exchange effects and the hyperinflation in Venezuela (which decreased growth by 20.5p.p.) these revenues grew by 12.2% due to the increase in broadband and new services revenues (+21.6%). Revenues from broadband and new services, accounted for 53.7% of fixed revenues (+3.0 p.p. year-on-year). The growth was particularly notable in Argentina (44.7%), Colombia (17.4%) and Chile (11.7%) with a strong growth in broadband revenues due to the higher quality of the customer base as well as the tariff adjustment. |
59
OIBDA reached 3,477 million euros in 2016, decreasing 20.2% in reported terms, negatively affected by the goodwill impairment in Mexico and Venezuela and restructuring costs in 2016 and 2015, previously mentioned, and offset by the generated capital gain from the Telefé sale. Excluding these adjustments, exchange rate effects and hyperinflation in Venezuela, OIBDA increased 3.9% in organic terms. This growth is mainly due to the good evolution in revenues and higher commercial efficiencies that offset higher interconnection, content and network costs, up principally due to the devaluation in certain countries in the region. Energy, electricity and call center costs also increased during 2016.
Below additional information by country.
| o | Argentina: OIBDA reached 797 million euros in December 2016, decreasing 20.7% in reported terms. In local currency, OIBDA increased by 26.6%, mainly due to the revenue growth as well as to lower commercial costs recorded in 2016, as a result of lower commercial activity and greater commercial efficiency. |
| o | Chile: OIBDA reached 704 million euros in December 2016, decreasing 7.4% in reported terms mainly due to the exchange rate evolution (-3 p.p.). In local currency, OIBDA decreased by 4.4%, explained by the decrease in mobile service revenues. |
| o | Peru: OIBDA reached 782 million euros in December 2016, decreasing 17.1% in reported terms mainly due to the exchange rate evolution. In local currency, OIBDA decreased by 12.3%, as the efforts in costs savings were insufficient to compensate higher interconnection costs associated with higher traffic, and more than offset the revenue increase. |
| o | Colombia: OIBDA reached 464 million euros in December 2016, decreasing 15% in reported terms mainly due to the exchange rate evolution. In local currency, OIBDA decreases 5.1% year-on-year due to higher interconnection costs associated to the successful offer “Todo Destino”. |
The OIBDA margin was 27.6% in 2016, decreasing 2.6 p.p. in reported terms. This decrease is affected by the margin reduction in Chile (-1.7 p.p.), Peru (-2.8 p.p.), Colombia (-3.3 p.p.) and Mexico (-5.0 p.p.), reflecting a higher commercial effort focused on higher value segments.
2015/2014 Consolidated results
In this section, we discuss changes in the Group’s consolidated income statements for 2015 and 2014. The consolidated income statement data for the years ended December 31, 2015 and 2014 set forth below has been retrospectively amended, in order to cease to present our operations in the United Kingdom as a discontinued operation.
As explained above, the consolidated income statement for the year ended December 31, 2015 has been amended to retroactively show the reclassification of Telefónica United Kingdom´s results as continuing operations. Therefore, the results below differ from the results previously published for such period. The segmented financial information shown below has been amended for 2015 as discussed above.
Telefónica’s total accesses totaled 347.5 million as of December 31, 2015. Telefónica United Kingdom customers have been included in the 2014 and 2015 customer base, since we have classified Telefónica United Kingdom and its operations as continuing operations. Group accesses increased 1.9% year-on-year, as a result mainly of the additional accesses gained following the purchase of GVT by Telefónica Brazil and DTS in Telefónica Spain and the growth in accesses in Telefónica Hispanoamérica, Telefónica Germany and Telefónica United Kingdom. If we consider the accesses from GVT and DTS as of December 31, 2014 to make both years comparable, accesses would have decreased by 0.8% affected, in part, by prepaid disconnections in Telefónica Brazil (which resulted in the disconnection of 11.5 million accesses in 2015 and 1.6 million accesses in 2014). In 2015, commercial activity increased based on high value customers, resulting in growth of the contract mobile segment (smartphones and LTE), fiber and Pay TV. Accesses in Telefónica Hispanoamérica (38.7% of the Group’s total as of December 31, 2015) increased by 2.3% year-on-year, Telefónica United Kingdom (7.3% of the Group’s total as of December 31, 2015) increased by 2.3% year-on-year, while accesses in Telefónica Germany (13.9% of the Group’s total) increased by 1.5% year-on-year.
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The below table shows the evolution of accesses 2014 and 2015:
| ACCESSES | ||||
| Thousands of accesses | 2014 | 2015 | %Reported YoY |
%Organic
YoY (1) |
| Fixed telephony accesses (2) | 36,830.0 | 39,734.9 | 7.9% | (3.0%) |
| Internet and data accesses | 18,151.7 | 21,365.3 | 17.7% | 1.3% |
| Broadband (3) | 17,668.5 | 20,971.3 | 18.7% | 1.8% |
| Fiber (4) | 1,755.0 | 6,100.3 | 247.6% | 29.9% |
| Mobile accesses | 274,458.0 | 272,103.9 | (0.9%) | (0.9%) |
| Prepay | 175,720.4 | 167,845.1 | (4.5%) | (4.5%) |
| Contract | 98,737.6 | 104,258.8 | 5.6% | 5.6% |
| M2M | 9,787.4 | 11,526.3 | 17.8% | 17.8% |
| Pay TV (5) | 5,087.2 | 8,271.6 | 62.6% | 12.0% |
| Final Clients Accesses | 334,526.9 | 341,475.6 | 2.1% | (0.7%) |
| Wholesale Accesses | 6,521.6 | 6,062.8 | (7.0%) | (7.0%) |
| Total Accesses | 341,048.5 | 347,538.4 | 1.9% | (0.8%) |
Notes:
- T. Ireland customers are excluded since the third quarter 2014. Accesses include E-Plus customers since the fourth quarter 2014 and GVT and DTS customers since May 1 2015.
(1) In order to calculate organic changes, we have added the accesses of DTS and GVT as of December 31, 2014 to our accesses as of such date.
(2) Includes "fixed wireless" and Voice over IP accesses.
(3) Includes DSL, satellite, optic fiber, cable modem and broadband circuits.
(4) Includes 3.25 million GVT fiber (FTTx) customers since second quarter 2015.
(5) Includes 1.1 million DTS customers.
The below table shows the contribution of each item for which we have adjusted our reported growth. With respect to each line item, the contribution to reported growth of such line item, expressed in p.p., is the result of dividing the impact of each item for which we have adjusted by the amount of such line item, on a reported basis, for the prior year.
| TELEFÓNICA 2015 |
%Reported YoY |
%Organic YoY (1) |
DTS | GVT |
| Fixed telephony accesses | 7.9% | (3.0%) | 0.0 p.p. | 11.2 p.p. |
| Internet and data accesses | 17.7% | 1.3% | 0.0 p.p. | 16.2 p.p. |
| Broadband | 18.7% | 1.8% | 0.0 p.p. | 16.6 p.p. |
| Fiber | n.m. | 29.9% | 0.0 p.p. | n.m. |
| Pay TV | 62.6% | 12.0% | 28.3 p.p. | 16.9 p.p. |
| Final Clients Accesses | 2.1% | (0.7%) | 0.4 p.p. | 2.4 p.p. |
| Total Accesses | 1.9% | (0.8%) | 0.4 p.p. | 2.3 p.p. |
(1) In order to calculate organic changes, we have added the accesses of DTS and GVT as of December 31, 2014 to our accesses as of such date.
The table below shows the evolution of accesses by segment:
| YoY variation | % Over Total Accesses | ||||
| Accesses 2015 | %Reported YoY |
%Organic
YoY (1) |
2014 | 2015 | |
| Spain | 1.9% | (1.6%) | 12.1% | 12.1% | |
| United Kingdom | 2.3% | -- | 7.3% | 7.3% | |
| Germany | 1.5% | -- | 14.0% | 13.9% | |
| Brazil | 1.4% | (6.4%) | 28.0% | 27.9% | |
| Hispanoamérica | 2.3% | -- | 38.6% | 38.7% | |
| Others | 16.6% | -- | 0.1% | 0.1% | |
(1) In order to calculate organic changes, we have added the accesses of DTS and GVT as of December 31, 2014 to our accesses as of such date.
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The Group’s strategy is based on capturing growth in its markets, especially on attracting high-value customers.
Mobile accesses totaled 272.1 million at December 31, 2015, down 0.9% compared to December 31, 2014, affected mainly by the decrease in prepay accesses (due to the disconnection of prepay accesses in Brazil (11.5 million accesses in 2015 and 1.6 million accesses in 2014)). Contract accesses, however, were up 5.6% year-on-year, continuing to increase their weight over total mobile accesses up to 38.3% (+2.3 p.p. year-on-year).
Smartphone accesses maintained a strong growth rate (up 48.3% year-on-year), totaling 126.2 million accesses as of December 31, 2015 and reaching a penetration rate over total accesses of 49.5% (+14.3 p.p. year-on-year), reflecting the Company’s strategic focus on the growth of its data services.
Fixed broadband accesses stood at 21.0 million at December 31, 2015, up 18.7% year-on-year (of which 16.6 p.p. was due to the inclusion of accesses from GVT in the 2015). Fiber accesses stood at 6.1 million at December 31, 2015.
TV accesses totaled 8.3 million up 63% year-on-year (of which 28 p.p. was due to the inclusion of accesses from DTS and 17 p.p. was due to the inclusion of accesses from GVT in the 2015 access base).
Telefónica’s customer base includes the consumer and business segments, and therefore is not affected by customer concentration risk.
| Year ended December, 31 | Percent Change | |||||
Consolidated Results |
2014 (*) | 2015 (*) | 2015 vs 2014 | |||
| Millions of euros | Total |
% of revenues | Total |
% of revenues | Total | % |
| Revenues | 50,377 | 100.0% | 54,916 | 100.0% | 4,539 | 9.0% |
| Other income | 1,707 | 3.4% | 2,011 | 3.7% | 304 | 17.8% |
| Supplies | (15,182) | (30.1%) | (16,547) | (30.1%) | (1,365) | 9.0% |
| Personnel expenses | (7,098) | (14.1%) | (10,349) | (18.9%) | (3,251) | 45.8% |
| Other expenses | (14,289) | (28.4%) | (16,802) | (30.6%) | (2,513) | 17.6% |
| OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION (OIBDA) | 15,515 | 30.8% | 13,229 | 24.1% | (2,286) | (14.7%) |
| Depreciation and amortization | (8,548) | (17.0%) | (9,704) | (17.7%) | (1,156) | 13.5% |
| OPERATING INCOME | 6,967 | 13.8% | 3,525 | 6.4% | (3,442) | (49.4%) |
| Share of loss of investments accounted for by the equity method | (510) | (1.0%) | (10) | (0.0%) | 500 | (97.9%) |
| Net financial expense | (2,822) | (5.6%) | (2,609) | (4.8%) | 213 | (7.5%) |
| PROFIT BEFORE TAX | 3,635 | 7.2% | 906 | 1.7% | (2,729) | (75.1%) |
| Corporate income tax | (383) | (0.8%) | (155) | (0.3%) | 228 | (59.6%) |
| PROFIT FOR THE YEAR | 3,252 | 6.5% | 751 | 1.4% | (2,501) | (76.9%) |
| Attributable to equity holders of the Parent | 3,001 | 6.0% | 616 | 1.1% | (2,385) | (79.5%) |
| Attributable to non- controlling interests | 251 | 0.5% | 135 | 0.3% | (116) | 46.2% |
(*) Amended data
Adjustments made to calculate organic variations
As previously mentioned, year-on-year changes referred to in this document as “organic” or presented in “organic terms” intend to present year-on-year variations on a comparable basis (see Consolidated Results 2016/2015- Adjustments for the calculation of organic variations)
The adjustments made to calculate 2015/2014 organic variations are the following:
| · | Foreign exchange effects and the impact of hyperinflationary adjustments in Venezuela: We have excluded the impact of changes in exchange rates by assuming constant average foreign exchange rates in 2015 and 2014. In particular, we have used the average foreign exchange rates of 2014 for both years. |
Foreign exchange rates had a negative impact on our reported 2015 results, mainly due to the depreciation of various Latin American currencies versus the euro, in particular the Brazilian real and, to a lesser extent, the Venezuelan bolívar.
We have also excluded the impact of hyperinflationary adjustments in Venezuela by reversing such adjustments.
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| · | Changes in the scope of consolidation: We have excluded the impact of changes in our consolidation perimeter in 2015 and 2014. The main changes in our consolidation perimeter in such years related to the consolidation of GVT in Telefónica Brazil since May 2015, the consolidation of DTS in Telefónica Spain since May 2015, the consolidation of E-Plus in Telefónica Germany since October 2014 and the sale of Telefónica Ireland in July 2014. |
In order to exclude the impact of these changes in our perimeter, we have:
| o | consolidated GVT’s results from May 1 to December 31, 2014 in our 2014 results; |
| o | consolidated DTS’s results from May 1 to December 31, 2014 in our 2014 results; |
| o | consolidated E-Plus’s results from January 1 to September 30, 2014 in our 2014 results; and |
| o | excluded Telefónica Ireland’s results from January 1 to June 30, 2014 from our 2014 results. |
| · | Restructuring costs: We have excluded the impact of certain restructuring costs, mainly those related to the 1st Collective Agreement of Related Companies in Telefónica Spain, restructuring processes relating to Telefónica Germany, Telefónica United Kingdom and Telefónica Brazil and the Group’s simplification program. |
In 2015, these restructuring costs totaled 3,217 million euros and were aimed at increasing future efficiency, representing a further step towards the transformation and simplification initiatives carried out by Telefónica. These costs were distributed by segment as follows (impacts on OIBDA): Telefónica Spain (2,896 million euros), Telefónica Germany (74 million euros), Telefónica Hispanoamérica (38 million euros), Telefónica Brazil (7 million euros), Telefónica United Kingdom (4 million euros) and other companies (197 million euros).
In 2014, these restructuring costs totaled 658 million euros and were attributable to the simplification initiatives that the Group has implemented to meet its targets. These costs were mainly distributed by segment as follows (impacts on OIBDA): Telefónica Germany (414 million euros), Telefónica Brazil (68 million euros), Telefónica Hispanoamérica (99 million euros, mainly in Peru) and other companies (77 million euros).
| · | Results of tower sales: The results attributable to the sale of towers in 2015 and 2014 have been excluded in both years. |
In 2015 the results from the sale of towers totaled 65 million euros, distributed as follows: Telefónica Spain (38 million euros), Telefónica Brazil (10 million euros) and Telefónica Hispanoamérica (18 million euros, mainly in Chile). In 2014 the results from the sale of towers totaled 196 million euros in OIBDA, mainly in Telefónica Spain (191 million euros).
| · | Irrevocable commitment with Fundación Telefónica: In 2015 we have excluded the expense (325 million euros) resulting from Telefónica, S.A.’s irrevocable commitment to make a donation to Fundación Telefónica in order to provide this entity with the financing required so that it can carry out its existing or new social programs and non-profit activities in the short and medium term. |
| · | Adjustments to the final purchase price of E-Plus: In 2015 we have excluded the positive result from the difference between the preliminary purchase price of E-Plus (as estimated at the end of the valuation period) and the final purchase price agreed with KPN, totaling 104 million euros (which had a 102 million euros positive impact on OIBDA, net of costs related to the acquisition). |
| · | Spectrum acquisition: We have excluded the impact of spectrum acquisitions in 2015 and 2014. |
In 2015, these acquisitions totaled 1,585 million euros, 1,198 million euros corresponding to Telefónica Germany, 49 million euros corresponding to Telefónica Spain and 338 million euros corresponding to Telefónica Hispanoamérica (mainly Argentina and Ecuador).
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In 2014 these acquisitions totaled 1,294 million euros, 889 million euros corresponding to Telefónica Brazil and 405 million euros corresponding to Telefónica Hispanoamérica with the following distribution by country or region:
| o | Telefónica Argentina (168 million euros); |
| o | Telefónica Colombia (111 million euros); and |
| o | Telefónica Venezuela and Central America (126 million euros). |
| · | Real Estate Efficiency Plan: In 2014 we have excluded the impact of certain urban assets qualification changes in Telefónica Spain and also the investment in Telefónica’s Barcelona head office, which had an impact on capital expenditures (Capex) of 78 million euros. |
| · | Other adjustments: We have excluded the partial adjustment of the goodwill generated in the acquisition of Telefónica Digital Inc. amounting to 104 million euros y the impact of the impairment resulting from the deterioration in certain minority participations, totaling 23 million euros in 2015. We have also excluded the impact of the 30 million euros provision recorded in 2015 in Telefónica Spain to optimize the distribution channel. |
The table below shows 2015/2014 variations in reported and organic terms (the latter, calculated in accordance with the adjustments referred to above) of certain income statement and other measures:
| YoY variation | ||
| TELEFÓNICA 2015 |
% Reported YoY | % Organic YoY |
| Revenues | 9.0% | 3.5% |
| Other income | 17.8% | 15.3% |
| Supplies | 9.0% | 0.3% |
| Personnel expenses | 45.8% | 4.0% |
| Other expenses | 17.6% | 8.1% |
| OIBDA | (14.7%) | 3.2% |
| Operating income (OI) | (49.4%) | 4.0% |
| CapEx | 10.7% | 4.9% |
| OpCF (OIBDA-CapEx) | (54.4%) | 1.3% |
The below table shows the contribution of each item for which we have adjusted to our reported growth. With respect to each line item, the contribution to reported growth of such line item, expressed in p.p., is the result of dividing the impact of each item for which we have adjusted by the amount of such line item, on a reported basis, for the prior year.
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| Contribution to reported growth (percentage points) | |||||||||
| TELEFÓNICA 2015 |
Exchange rate effect and hyperinflation | Perimeter change | Restructuring costs | Towers sales | Commitment with Fundación | Adjustments to the final purchase price of E-Plus | Spectrum acquisition | Real Estate Efficiency Plan | Other adjustments |
| Revenues | (2.3) | 7.6 | - | - | - | - | - | - | - |
| Other income | (2.7) | 7.5 | - | (7.7) | - | 6.1 | - | - | - |
| Supplies | 0.3 | 8.4 | - | - | - | - | - | - | - |
| Personnel expenses | (1.5) | 7.1 | 36.3 | - | - | - | - | - | - |
| Other expenses | (4.4) | 9.9 | (0.1) | - | 2.3 | - | - | - | 1.1 |
| OIBDA | (3.2) | 4.8 | (16.5) | (0.8) | (2.1) | 0.7 | - | - | (1.0) |
| Operating Income (OI) | (5.3) | (4.2) | (36.7) | (1.9) | (4.7) | 1.5 | - | - | (2.3) |
| CapEx | (3.7) | 7.9 | - | - | - | - | 2.8 | (0.8) | - |
| OpCF (OIBDA-CapEx) | (2.4) | - | (42.2) | (2.1) | (5.4) | 1.7 | (4.4) | 1.3 | (2.6) |
Results Discussion
Revenues totaled 54,916 million euros in 2015, increasing 9.0% compared to 2014 in reported terms. This increase was mainly attributable to the consolidation of E-Plus, GVT and DTS (which accounted for 7.6 p.p. of the year-on-year increase), which was partially offset by the impact of changes in foreign exchange rates and hyperinflation in Venezuela (-2.3 p.p.). In organic terms, revenues increased 3.5% due to higher connectivity revenues, mainly in the mobile business as a consequence of the strong data revenue growth. The growing focus on our key markets was reflected in the revenue mix with Telefónica Spain, Telefónica Brazil and Telefónica Germany accounting for 57.1% of the revenues, increasing local scale and keeping at the same time the Group’s differential diversification and global scale.
The structure of revenues reflects Telefónica’s business diversification. Despite the adverse impact of exchange rates and hyperinflation in Venezuela, the segment with the largest contribution to our revenues in 2015 was Telefónica Hispanoamérica, representing 26.2% (+0.1 p.p. compared to 2014), followed by Telefónica Spain, representing 22.6% (-1.3 p.p. compared to 2014), Telefónica Brazil, representing 20.1% (-2.2 p.p. compared to 2014), Telefónica Germany, which increased its contribution with respect to 2014 to 14.4% (+3.4 p.p. year-on-year), and Telefónica United Kingdom representing 14.3% (+0.3 p.p. compared to 2014).
Mobile business revenues totaled 35,540 million euros in 2015 (of which 30,289 million euros corresponded to service revenues and 4,984 million euros corresponded to handset revenues) up 8.2% year-on-year in reported terms. This increase was mainly attributable to the consolidation of E-Plus (which accounted for 6.1 p.p. of the year-on-year increase), which was partially offset by the impact of changes in foreign exchange rates and hyperinflation in Venezuela (-1.6 p.p.). Excluding these impacts, year-on-year growth was 3.5% due to higher mobile revenues in Telefónica Hispanoamérica and Telefónica Brazil as a result mainly of the increase in the customer base and data adoption.
Mobile service revenues totaled 30,289 million euros in 2015, up 6.6% year-on-year in reported terms. This increase was mainly attributable to the consolidation of E-Plus (which accounted for 6.0 p.p. of the year-on-year increase), which was partially offset by the impact of changes in foreign exchange rates and hyperinflation in Venezuela (-2.2 p.p.). Excluding these impacts, year-on-year growth was 2.6% due mainly to the higher customer base and higher data consumption.
Mobile data revenues totaled 13,869 million euros in 2015, up 18.9% in reported terms. This increase was mainly attributable to the consolidation of E-Plus (which accounted for 7.9 p.p. of the year-on-year increase) and the higher consumption of data of our customers, which was partially offset by the impact of changes in foreign exchange rates and hyperinflation in Venezuela (-2.2 p.p.). Excluding these impacts, mobile data revenues increased by 12.2% due mainly to the increased revenues of non-SMS data (up 20.4%) and higher use of data per customer. Mobile data revenues accounted for 45.5% of mobile service revenues in 2015, up 4.8 p.p. compared to 2014 in reported terms.
Fixed revenues totaled 17,854 million euros in 2015, up 9.5% year-on-year in reported terms. This increase was mainly attributable to the consolidation of GVT and DTS (which accounted for +10.9 p.p. of the year-on-year increase), which was partially offset by the impact of changes in foreign exchange rates and hyperinflation in Venezuela (-3.9 p.p.). Excluding these impacts, fixed revenues increased 2.2%. This increase was mainly due to higher broad band connection revenues and Pay-TV revenues as a result of the commercial actions carried out by the Company in order to increase our value proposition and the higher customer base in Pay-TV.
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Other income in 2015 mainly included own work capitalized in our fixed assets, profit from the sale of other assets, and the sale of towers by Telefónica Spain, Telefónica Brazil and Telefónica Hispanoamérica.
In 2015, other income totaled 2,011 million euros, up 17.8% year-on-year in reported terms. In 2015, other income was positively affected by the consolidation of E-Plus, GVT and DTS, the positive result from the E-Plus price adjustment (104 million euros), the positive impact from the expired payment obligation (98 million euros) in Telefónica Brazil, the spectrum swap with AT&T in Telefónica Mexico carried out in December 2015 (79 million euros), the sale of real estate in Telefónica Spain (78 million euros) and the result from the sale of towers amounting to 65 million euros.
In 2014, the sale of towers had a positive impact of 196 million euros. Other income also included an extraordinary sale of real estate in Telefónica Spain (63 million euros).
Total expenses (which include supply costs, personnel costs and other expenses (principally external services and taxes) but do not include amortization and depreciation expenses), were 43,698 million euros in 2015, up year-on-year 19.5% in reported terms. This increase was mainly attributable to the consolidation of E-Plus, GVT and DTS (which accounted for 8.7 p.p. of the year-on-year increase) and higher restructuring costs amounting to 3,217 million euros (which accounted for 7.0 p.p. of the year-on-year increase), which was partially offset by the impact of changes in foreign exchange rates and hyperinflation in Venezuela (-1.9 p.p.). The costs are explained in detail below:
| · | Supplies amounted to 16,547 million euros in 2015, up 9.0% year-on-year in reported terms mainly as a result of the consolidation of E-Plus, GVT and DTS (which accounted for 8.4 p.p. of the year-on-year increase). In organic terms, supplies expenses grew by 0.3% year-on-year, due to increased commercial activity in high-end devices and higher TV content costs, which more than offset the decrease in mobile interconnection costs. |
| · | Personnel expenses amounted to 10,349 million euros in 2015, up 45.8% in reported terms year-on-year compared to 2014. This increase was mainly attributable to higher restructuring costs of 3,146 million euros (which accounted for +36.3 p.p. of the year-on-year increase), the consolidation of E-Plus, GVT and DTS (which accounted for 7.1 p.p. of the year-on-year increase), and was partially offset by the impact of changes in foreign exchange rates and hyperinflation in Venezuela (-1.5 p.p.). In organic terms, personnel costs increased 4.0% year-on-year mainly affected by inflationary pressures in some Latin American countries. |
The average headcount was 133,569 employees in 2015, up 10.8% compared to 2014 (-2.1% excluding the impact of changes in the scope of consolidation).
| · | Other expenses amounted to 16,802 million euros in 2015, up 17.6% in reported terms. This increase was mainly attributable to the consolidation of E-Plus, GVT and DTS (which accounted for 9.9 p.p. of the year-on-year increase), the provision of 325 million euros related to the irrevocable agreement between Telefónica, S.A. and Fundación Telefónica for its short-and mid-term financing (+2.3 p.p.) and to a lesser extent, the impairment resulting from the deterioration in certain minority participations, the goodwill value adjustment in Telefónica Digital Inc. (+1.1 p.p.) and the decrease in other expenses related to restructuring processes (-0.1 p.p.), which was partially offset by the impact of changes in foreign exchange rates and hyperinflation in Venezuela (-4.4 p.p.). In organic terms, other expenses increased by 8.1% compared to 2014, mainly as a result of increased network costs, higher IT costs and a higher commercial activity. Increased inflation in some Latin American countries offset in part the savings resulting from the simplification measures carried out by the Company. |
OIBDA was 13,229 million euros in 2015, down 14.7% in reported terms. This decrease was mainly attributable to the higher restructuring costs (which accounted for 16.5 p.p. of the year-on-year decrease and included a restructuring costs provision of 3,217 million euros), the impact of changes in foreign exchange rates and hyperinflation in Venezuela (-3.2 p.p.), the provision of 325 million euros related to the agreement between Telefónica S.A. and Fundación Telefónica for its short and mid-term financing (-2.1 p.p.) and, to a lesser extent, the decreased results from the sale of towers (-0.8 p.p.), the provision recorded in connection with the optimization of the distribution channel in Spain of 30 million euros (-0.2 p.p.) and the impairment resulting from the deterioration in certain minority participations (-0.8 p.p.), which was partially offset by the impact of the consolidation of E-Plus, GVT and DTS (+4.8 p.p.) and the adjustments made to the final acquisition price of E-Plus (+0.7 p.p.).
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In organic terms, OIBDA grew 3.2% due to the positive evolution of Telefónica Germany (+20.9% year-on-year), reflecting increased synergies, the better performance of Telefónica Brazil (+2.9% year-on-year) and the results from Telefónica Hispanoamérica (+7.2% year-on-year).
OIBDA margin stood at 24.1% in 2015, down 6.7 p.p. compared to 2014 in reported terms due mainly to the restructuring costs provision of 3,217 million euros in 2015.
By segments, Telefónica Hispanoamérica was the main contributor to Group OIBDA with 32.9% (+6.7 p.p. compared to 2014), Telefónica Brazil contributed 27.0% (+4.2 p.p. compared to 2014), Telefónica Germany contributed 14.0% (+9.3 p.p. compared to 2014) and Telefónica United kingdom contributed 14.6% (+3.3 p.p. compared to 2014). Telefónica Spain contributed 17.7% to Group OIBDA, down 18.9 p.p. compared to 2014, mainly as a result of the restructuring cost provision of 2,896 million euros in 2015.
Depreciation and amortization amounted to 9,704 million euros in 2015, up 13.5% year-on-year in reported terms, mainly due to the consolidation of E-Plus, GVT and DTS. The total depreciation and amortization charges arising from purchase price allocation processes amounted to 894 million euros in 2015, up 26.3% year-on-year.
Operating income (OI) in 2015 totaled 3,525 million euros, down 49.4% compared to 2014 for the reasons set forth above for OIBDA. In organic terms, operating income grew 4.0% year-on-year as a result of higher revenues and costs savings.
The share of loss of investments accounted for by the equity method for 2015 was a loss of 10 million euros (compared to a loss of 510 million euros in 2014). The loss recorded in 2014 was mainly due to the valuation adjustment of Telco, S.p.A. at Telecom Italia, S.p.A. amounting to 464 million euros.
Net financial expense amounted to 2,609 million euros in 2015, 7.5% lower than the previous year. Excluding exchange rate differences, costs improved by 21.2% (536 million euros) to 1,993 million euros. Negative foreign exchange differences amounted to 616 million euros (excluding monetary correction), primarily due to adoption of the SIMADI exchange rate for the Venezuelan bolivar. The lower cost of debt in euros explains 146 million euros of this improvement, due to lower fixed rate debt and capture of the reduction in short-term rates. The divestment of the entire holding in Telecom Italia, S.p.A. generated a positive variation of 404 million euros. Other effects resulted in losses of 13 million euros. These included the monetary correction for inflation in Venezuela, net of higher expenses in Latin America currencies, costs for updating contingencies, and other gains and losses on equities. The effective cost of debt over 2015, excluding exchange rate differences and the positive impact of the divestment of Telecom Italia, S.p.A., stood at 4.82%, down 52 basis points year-on-year.
Corporate income tax totaled 155 million euros in 2015, compared to 383 million euros in 2014, mainly due to the temporary difference recorded related to a restructuring provision the activation of tax credit in Spain. Considering a pre-tax income of 906 million euros, the effective tax rate was 17.1% in 2015, 6.5 p.p. higher than in 2014.
Profit attributable to non-controlling interest reduced the profit for the year attributable to equity holder of the parent by 135 million euros, 116 million euros less than in 2014, mainly due to the lower profit attributable to minority interests in Telefónica Brazil and Colombia Telecomunicaciones.
As a result of the foregoing, profit for the year attributable to equity holders of the parent for 2015 was 616 million euros, down by 79.5% year on year compared to 2014.
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2015/2014 Segment results
TELEFÓNICA SPAIN
The below table shows the evolution of accesses in Telefónica Spain over the past two years as of December 31 of such years:
| ACCESSES | ||||
| Thousands of accesses | 2014 | 2015 | %Reported YoY |
%Organic
YoY (1) |
| Fixed telephony accesses (2) | 10,447.8 | 10,005.6 | (4.2%) | (4.2%) |
| Internet and data accesses | 5,928.7 | 6,000.0 | 1.2% | 1.2% |
| Broadband (3) | 5,885.9 | 5,962.0 | 1.3% | 1.3% |
| Fiber | 1,316.8 | 2,223.0 | 68.8% | 68.8% |
| Mobile accesses | 17,575.4 | 17,258.5 | (1.8%) | (1.8%) |
| Prepay | 3,328.1 | 2,777.1 | (16.6%) | (16.6%) |
| Contract | 14,247.3 | 14,481.4 | 1.6% | 1.6% |
| M2M | 1,612.4 | 1,778.8 | 10.3% | 10.3% |
| Pay TV | 1,884.7 | 3,671.5 | 94.8% | 10.5% |
| Final Clients Accesses | 35,836.7 | 36,935.6 | 3.1% | (0.9%) |
| Wholesale Accesses | 5,366.0 | 5,037.7 | (6.1%) | (6.1%) |
| Total Accesses | 41,202.7 | 41,973.3 | 1.9% | (1.6%) |
Notes:
(1) In order to calculate organic changes, we have added the accesses of DTS as of December 31, 2014 to our accesses as of such date.
(2) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access; 2/6 Digital Access x30. Company’s accesses for internal use included. Includes VoIP and Naked ADSL.
(3) Includes ADSL, satellite, optical fiber, cable modem and broadband circuits.
The below table shows the contribution of each item for which we have adjusted to our reported growth. With respect to each line item, the contribution to reported growth of such line item, expressed in p.p., is the result of dividing the impact of each item for which we have adjusted by the amount of such line item, on a reported basis, for the prior year:
| TELEFÓNICA
SPAIN 2015 |
%Reported YoY |
%Organic
YoY (1) |
DTS |
| Pay TV | 94.8% | 10.5% | 76.3 p.p. |
| Final Clients Accesses | 3.1% | (0.9%) | 4.0 p.p. |
| Total Accesses | 1.9% | (1.6%) | 3.5 p.p. |
(1) In order to calculate organic changes, we have added the accesses of DTS as of December 31, 2014 to our accesses as of such date.
In 2015 the commercial activity was leveraged on the differentiated assets of the Company and, in the second half of 2015 was strengthened by the convergent offer “Movistar Fusión+” launched in July 2015 as well as the promotion that included all “TV Premium Extra” content from 9.90 euros/month, launched in August 2015. This promotion was subscribed by almost 700 thousand customers, reflecting the attractiveness of the offer (new TV contents and ultra-speed fiber in an economic environment where private consumption continues to improve).
Churn evolution has been positive in 2015, especially taking into account the elimination of “Fusión” long-term contracts on August 1, 2015. This fact, together with the good evolution in adds since the launching of “Movistar Fusión+” has resulted in a positive performance of commercial activity. In 2015, broadband net adds duplicated year-on-year, fiber net adds grew by 25.3%, mobile contract net adds resumed growth (+0.2 million customers) and in fixed telephony the net loss of accesses decreased by 31.1% year-on-year.
The results of Telefónica Spain in 2015 showed a lower decrease in revenues compared to the year-on-year results of 2014-2013, as a result of the transformation strategy implemented in recent years which relies on a high value offer based on the differentiated assets of Telefónica Spain, a more rational market in competition terms and a more favorable macroeconomic context, with improvement in private consumption.
Telefónica Spain had 42.0 million accesses at the end of December 2015, up 1.9% year-on-year, after the consolidation of the DTS satellite TV accesses (0.9 million accesses at December 2015). The organic variation was down by 1.6%, explained by the decrease in mobile accesses and fixed telephony accesses, although it is important to highlight that retail accesses grew by 3.1% year-on-year.
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“Movistar Fusión”, with a customer base of 4.2 million with 1.5 million additional wireless lines to the base offer as of December 31, 2015, maintained a solid year-on-year growth (+13% and +8% respectively compared to December 2014) and contributed 81% of the fixed retail broadband customer base and 63% of the wireless contract customer base. There was significant growth in the penetration of the high value services of “Movistar Fusión”, with 31.8% of the customer base already using 100 Mb or 300 Mb ultra-fast broadband (+10.9 p.p. year-on-year) and 62.4% of the customer base with Pay-TV as of December 31, 2015 (+17.7 p.p. year-on-year).
Fixed accesses decreased 4.2% year-on-year, with a net loss of 442 thousand accesses in the year 2015. This decrease was mainly due to a lower fixed access market growth.
Retail broadband accesses totaled 6.0 million and grew 1.3% year-on-year, with net adds of 76 thousand accesses, due to the good evolution of fiber adds (+37.1% year-on-year) and lower churn (1.4% in 2015, -0.1 p.p. year-on-year).
Fiber accesses posted a new record in terms of net adds (0.9 million new accesses in 2015), reaching 2.2 million customers (1.7 times compared to December 31, 2014), representing 37.3% of total broadband customers (+14.9 p.p. year-on-year). Two thirds of fiber accesses are benefiting from the new speeds (30 and 300 Mb) launched in May 2015.
Ultra-speed fiber accesses, with 100 or 300 Mb (with additional ARPU of 12 euros, including VAT) reached 1.5 million accesses (68.6% of total fiber accesses), after the new record of 0.5 million accesses in 2015, triggered by the higher level of adds (+25.9% year-on-year) and contained churn (0.9%, +0.1 p.p. year-on-year).
At December 31, 2015 our fiber deployment reached 14.3 million premises, 4 million more than at December 31, 2014.
Total mobile accesses stood at 17.3 million, down 1.8% compared with year-end 2014 as a result of the decrease in prepay accesses. The contract access base accelerated its growth during 2015, growing by 1.6% year-on-year. The positive evolution of contract portability (-162 thousand customers at December 31, 2015, compared to -508 thousand customers at December 31, 2014), resulted in a positive contract net adds base (excluding M2M) (+68 thousand customers at December 31, 2015, compared to -113 thousand customers at December 31, 2014). Smartphone penetration stood at 66.3% of the mobile voice base (+5.7 p.p. compared to year-end 2014) and significantly boosted data traffic growth to 86.8% year-on-year in 2015 due to the higher number of customers with the renewed portfolio containing superior data packages.
LTE network rollout continued to progress well and coverage reached (based on our estimates) approximately 75% of the population at the end of 2015, up 17 p.p. compared to December 31, 2014, due to the deployment of the 800 MHz. As a result, the LTE customer base reached 3.3 million customers at December 31, 2015, doubling the customer base at December 31, 2014, while the penetration reached 21% (+10 p.p. year-on-year).
Pay-TV accesses reached 3.7 million, up by 94.8% in reported terms compared to December 31, 2014 as a result of the acquisition of DTS (+10.5% in organic terms), including 926 thousand satellite TV accesses from DTS.
The table below shows the evolution of Telefónica Spain’s results over the past two years:
| Millions of euros | ||||
| TELEFÓNICA SPAIN | 2014 | 2015 | %Reported YoY |
%Organic
YoY (1) |
| Revenues | 12,023 | 12,402 | 3.2% | (2.1%) |
| Mobile Business | 4,556 | 4,337 | (4.8%) | (4.8%) |
| Mobile service revenues | 3,888 | 3,677 | (5.4%) | (5.4%) |
| Fixed Business | 8,543 | 9,359 | 9.6% | 1.9% |
| Other income | 635 | 516 | (18.7%) | 7.0% |
| Supplies | (2,592) | (2,996) | 15.6% | (2.7%) |
| Personnel expenses | (2,139) | (5,173) | 141.8% | 4.0% |
| Other expenses | (2,256) | (2,413) | 7.0% | (0.2%) |
| OIBDA | 5,671 | 2,336 | (58.8%) | (4.3%) |
| OIBDA Margin | 47.2% | 18.8% | (28.3 p.p.) | (1.0 p.p.) |
| Depreciation and amortization | (1,805) | (1,898) | 5.2% | 2.4% |
| Operating Income (OI) |
3,866 |
438 | (88.7%) | (7.8%) |
| CapEx | 1,732 | 1,827 | 5.5% | 4.5% |
| OpCF (OIBDA-CapEx) | 3,939 | 509 | (87.1%) | (8.3%) |
(1) See adjustments made to calculate organic variation below.
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Adjustments made to calculate organic variations
As explained above, year-on-year changes referred to in this document as “organic” or presented in “organic terms” intend to present year-on-year variations on a comparable basis.
With respect to Telefónica Spain, we have made the following adjustments in order to calculate 2015/2014 variations in organic terms:
| · | Changes in the scope of consolidation: We have excluded the impact of changes in our consolidation perimeter in 2015 and 2014. The only change to our Telefónica Spain consolidation perimeter in such years is related to the consolidation of DTS in Telefónica Spain since May 1, 2015. In order to exclude the impact of such change in our perimeter, we have consolidated DTS’s results from May 1 to December 31, 2014 in our 2014 results. |
| · | Restructuring costs: We have excluded the impact of the 2,896 million euros of restructuring costs in 2015, mainly those related to the Voluntary Suspension Plan in Spain. The restructuring process is aimed at increasing future efficiency, representing a further step towards the transformation and simplification initiatives carried out by Telefónica. |
No restructuring costs were excluded from our 2014 results to calculate organic variations.
| · | Results of tower sales: The results attributable to the sale of towers in 2015 and 2014 have been excluded in both years. In 2015, the results from the sale of towers totaled 38 million euros. In 2014, the results from the sale of towers totaled 191 million euros. |
| · | Spectrum acquisition: We have excluded the impact of spectrum acquisitions in 2015, which totaled 49 million euros. |
| · | Real Estate Efficiency Plan: We have excluded the impact of certain urban assets qualification changes in Telefónica Spain in 2014, totaling 49 million euros. |
| · | Spain distribution channel: We have excluded the impact of the 30 million euros provision recorded in 2015 in Telefónica Spain to optimize the distribution network. |
The table below shows 2015/2014 variations in reported and organic terms (the latter, calculated in accordance with the adjustments referred to above) of certain income statement and other measures, and the contribution of each item for which we have adjusted to our reported growth:
| YoY variation | Contribution to reported growth (percentage points) | ||||||||
| TELEFÓNICA
SPAIN 2015 |
%Reported YoY |
%Organic
YoY |
Perimeter change (DTS) | Restructuring costs | Towers sales | Spectrum acquisition | Real Estate Efficiency Plan | Spain distribution channel | |
| Revenues | 3.2% | (2.1%) | 5.4 | -- | -- | -- | -- | -- | |
| Other income | (18.7%) | 7.0% | 0.9 | -- | (24.5) | -- | -- | -- | |
| Supplies | 15.6% | (2.7%) | 18.7 | -- | -- | -- | -- | -- | |
| Personnel expenses | 141.8% | 4.0% | 2.4 | 135.4 | -- | -- | -- | -- | |
| Other expenses | 7.0% | (0.2%) | 5.9 | -- | (0.1) | -- | -- | 1,3 | |
| OIBDA | (58.8%) | (4.3%) | (0.4) | (51.1) | (2.7) | -- | -- | (0.5) | |
| CapEx | 5.5% | 4.5% | 1.1 | -- | -- | 2.8 | (2.8) | -- | |
| OpCF (OIBDA-CapEx) | (87.1%) | (8.3%) | (1.0) | (73.5) | (3.9) | (1.2) | 1.3 | (0.8) | |
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Results Discussion
Revenues in Telefónica Spain in 2015 were 12,402 million euros, up 3.2% year-on-year in reported terms mainly as a result of the consolidation of DTS since May 1, 2015 (which accounted for +5.4 p.p. of the year-on-year increase). In organic terms, revenues were down by 2.1% due to lower mobile service revenues in the mobile business and lower access and voice revenues in the fixed business.
We consider revenue breakdown to be increasingly less relevant given the high penetration level of our convergent offer, by which we mean the offer of more than a single service for a single price. However, we continue to report revenue separately for information purposes. Fixed business revenues were up by 9.6% year-on-year in 2015, due to the consolidation of DTS, the repositioning of tariffs, higher retail broadband revenues and new services, mainly related to TV and IT services. Excluding the impact of DTS, fixed revenues increased by 1.9%. Mobile business revenues fell 4.8% year-on-year in 2015 due to the decline in mobile accesses and the 3.6% drop in ARPU.
Mobile ARPU was 15.3 euros in 2015, down by 3.6% year-on-year. Mobile ARPU is becoming less representative of the Group’s business performance, owing to its high dependence on the allocation of revenue in convergent offers.
| TELEFÓNICA SPAIN | 2014 | 2015 | %YoY |
| Voice Traffic (millions of minutes) | 35,600 | 36,368 | 2.2% |
| ARPU (EUR) | 15.9 | 15.3 | (3.6%) |
| Prepay | 6.2 | 5.7 | (8.2%) |
| Contract (1) | 20.6 | 19.5 | (5.3%) |
| Data ARPU (EUR) | 7.0 | 7.8 | 11.0% |
| % non-SMS over data revenues | 95.0% | 95.5% | 0.5 p.p. |
Notes:
(1) Excludes M2M.
OIBDA amounted to 2,336 million euros in 2015, down 58.8% year-on-year in reported terms, mainly due to provisions recorded in 2015 totaling 2,926 million euros (relating to restructuring cost accounted for 51.1 p.p. of the year-on-year decrease and 0.5 p.p. of the year-on-year decrease in distribution channel restructuring) and, to a lesser extent, the lower proceeds (38 million euros in 2015 compared to 191 million euros in 2014) from the sale of towers (-2.7 p.p.). This decrease was partially offset by the sale of real estate assets amounting to 73 million euros (net of costs).
In organic terms OIBDA decreased 4.3% year-on-year, mainly due to the lower revenues, higher personnel costs and higher content costs. The higher personnel costs, up by 4.0% year-on-year in organic terms, were primarily due to the resumption of the Company’s contribution to its pension plan in July 2014, and to a lesser extent, the acquisition of DTS. Telefónica Spain had 32,171 employees at the end of December 2015, up 7.2% year-on-year, due mainly to the acquisition of DTS.
OIBDA margin was 18.8% in 2015, down 28.3 p.p. year-on-year.
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TELEFÓNICA UNITED KINGDOM
As explained above, the consolidated income statement for the year ended December 31, 2015 has been amended to retroactively show the reclassification of Telefónica United Kingdom´s results as continuing operations. Therefore, the results below differ from the results previously published for such period. The segmented financial information shown below has been amended for 2015 as discussed above.
The table below shows the evolution of accesses in Telefónica United Kingdom over the past two years as of December 31 of such years:
| ACCESSES | |||
| Thousands of accesses | 2014 | 2015 | % Reported YoY |
| Fixed telephony accesses (1) | 228.0 | 247.1 | 8.4% |
| Internet and data accesses | 19.2 | 21.0 | 9.4% |
| Broadband | 19.2 | 21.0 | 9.4% |
| Mobile accesses | 24,479.1 | 25,018.8 | 2.2% |
| Prepay | 10,761.2 | 10,561.4 | (1.9%) |
| Contract | 13,717.9 | 14,457.4 | 5.4% |
| M2M | 2,192.0 | 2,383.9 | 8.8% |
| Final Clients Accesses | 24,726.4 | 25,286.9 | 2.3% |
| Total Accesses | 24,726.4 | 25,286.9 | 2.3% |
Notes:
(1) Includes "fixed wireless" and Voice over IP accesses
In 2015, Telefónica United Kingdom maintained market momentum, as a result of O2’s brand recognition, the success of commercial proposal success and customer loyalty. These factors have allowed the company to keep growing in a competitive market.
The total access base grew 2.3% year-on-year and stood at 25.3 million at December 31, 2015, mainly driven by a 2.2% increase in the mobile base.
The contract mobile customer base grew 5.4% year-on-year and reached 14.5 million accesses, with a broadly stable 57.8% share over the total mobile base. Net adds reached 539 thousand accesses due to the solid contribution of postpay accesses. Smartphone penetration reached 60% of the total mobile accesses base, up 15.4 p.p. year-on-year, driven by the continued growth of LTE customers (+85.8% year-on-year reaching 7.6 million at December 31, 2015). LTE penetration reached 35% of the total mobile access base.
The prepay access base decreased 1.9% year-on-year to 10.6 million at December 31, 2015.
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The table below shows the evolution of Telefónica United Kingdom´s results over the past two years:
| Millions of euros | ||||
| TELEFÓNICA UNITED KINGDOM | 2014 | 2015 | %Reported YoY |
%Organic
YoY (1) |
| Revenues | 7,062 | 7,837 | 11.0% | (0.1%) |
| Mobile service revenues | 5,397 | 5,778 | 7.1% | (3.6%) |
| Other income | 184 | 170 | (7.5%) | (16.7%) |
| Supplies | (3,520) | (3,769) | 7.1% | (3.6%) |
| Personnel expenses | (460) | (549) | 19.5% | 6.8% |
| Other expenses | (1,522) | (1,760) | 15.7% | 4.1% |
| OIBDA | 1,744 | 1,929 | 10.6% | (0.2%) |
| OIBDA Margin | 24.7% | 24.6% | (0.1 p.p.) | (0.0 p.p.) |
| Depreciation and amortization | (1,121) | (1,196) | 6.7% | (3.9%) |
| Operating Income (OI) | 623 | 733 | 17.6% | 6.5% |
| CapEx | 755 | 883 | 17.0% | 5.3% |
| OpCF (OIBDA-CapEx) | 989 | 1,046 | 5.7% | (4.4%) |
(1) See adjustments made to calculate organic variation below.
Adjustments made to calculate organic variations
As explained above, year-on-year changes referred to in this document as “organic” or presented in “organic terms” intend to present year-on-year variations on a comparable basis.
To calculate the organic growth for 2015 of Telefónica United Kingdom, we have made the following adjustments:
| · | Exchange rate effect: we have excluded the impact of changes in exchange rates by assuming constant average foreign exchange rates for 2014 and 2015. In particular, we have used the average foreign exchange rates of 2014 for both years. |
| · | Restructuring costs: we have excluded the impact from 2015 of restructuring costs, associated with certain simplification processes implemented in Telefónica United Kingdom amounting to 4 million euros. There were not restructuring costs in Telefónica United Kingdom in 2014. |
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The table below shows 2015/2014 variations in reported and organic terms (the latter, calculated in accordance with the adjustments referred to above) of certain income statement measures, and the contribution of each item for which we have adjusted to our reported growth:
| YoY variation | Contribution to reported growth (percentage points) | |||
| TELEFÓNICA UNITED KINGDOM 2015 | % Reported YoY | % Organic YoY | Exchange rate effect | Restructuring costs |
| Revenues | 11.0% | (0.1%) | 11.0 | - |
| Other income | (7.5%) | (16.7%) | 9.2 | - |
| Supplies | 7.1% | (3.6%) | 10.7 | - |
| Personnel expenses | 19.5% | 6.8% | 11.8 | 0.8 |
| Other expenses | 15.7% | 4.1% | 11.5 | - |
| OIBDA | 10.6% | (0.2%) | 11 | (0.2) |
| CapEx | 17.0% | 5.3% | 11.6 | - |
| OpCF (OIBDA-CapEx) | 5.7% | (4.4%) | 10.5 | (0.4) |
Results Discussion
Total revenues were 7,837 million euros in 2015, up 11.0% year-on-year in reported terms due mainly to the appreciation of the pound sterling (which accounted for 11 p.p. of the year-on-year increase). In organic terms, revenues decreased by 0.1% year-on-year due mainly to lower handset sales, down by 13.9%.
| • | Mobile service revenues totaled 5,778 million euros in 2015, up 7.1% year-on-year in reported terms due mainly to the appreciation of the pound sterling (which accounted for 10.7 p.p. of the year-on-year increase). Excluding this impact, mobile service revenues decreased by 3.6% due to the “Refresh” commercial model as well as the low interconnection fares. Under the Refresh commercial model, certain revenues related to handset are not considered as mobile service revenues, but as handset revenues. |
Mobile ARPU increased by 2.9% year-on-year in reported terms due mainly to the appreciation of the pound sterling. In organic terms, ARPU went down by 7.3% adversely affected by the “Refresh” commercial model, as well as a decrease in data ARPU of 5.7%. Revenues under the “Refresh” commercial model, are not considered as service revenues but as handset revenues, therefore, smartphone sales are not reflected in ARPU.
| TELEFÓNICA UNITED KINGDOM | 2014 | 2015 | %YoY | %Organic
YoY |
| Voice Traffic (millions of minutes) | 49,096 | 50,231 | 2.3% | 2.3% |
| ARPU (EUR) | 18.8 | 19.4 | 2.9% | (7.3%) |
| Prepay | 7.3 | 7.7 | 4.4% | (6.0%) |
| Contract (1) | 33.1 | 33.5 | 1.4% | (8.7%) |
| Data ARPU (EUR) | 10.8 | 11.3 | 4.7% | (5.7%) |
| % non-SMS over data revenues | 57.9% | 59.4% | 1.5 p.p. | (1.5 p.p.) |
Notes:
(1) Excludes M2M.
OIBDA totaled 1,929 million euros in 2015, up 10.6% year-on-year in reported terms, as a result mainly of the appreciation of the pound sterling. In organic terms, OIBDA decreased by 0.2% year-on-year due to lower service revenues, which was partially offset by expense restraint.
The OIBDA margin stood at 24.6% in reported terms for 2015, down 0.1 p.p. compared to 2014.
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TELEFÓNICA GERMANY
The below table shows the evolution of accesses in Telefónica Germany over the past two years as of December 31 of such years:
| ACCESSES | |||
| Thousands of accesses | 2014 | 2015 | % Reported YoY |
| Fixed telephony accesses (1) | 2,036.4 | 1,997.8 | (1.9%) |
| Internet and data accesses | 2,387.0 | 2,330.6 | (2.4%) |
| Broadband | 2,143.8 | 2,098.0 | (2.1%) |
| VDSL | 256.5 | 516.8 | 101.5% |
| Mobile accesses | 42,124.9 | 43,062.8 | 2.2% |
| Prepay | 23,350.7 | 23,979.4 | 2.7% |
| Contract (2) | 18,774.1 | 19,083.4 | 1.6% |
| M2M | 414.0 | 632.0 | 52.7% |
| Final Clients Accesses | 46,548.3 | 47,391.2 | 1.8% |
| Wholesale Accesses | 1,113.3 | 972.0 | (12.7%) |
| Total Accesses | 47,661.5 | 48,363.2 | 1.5% |
Notes:
(1) Includes "fixed wireless" and Voice over IP accesses.
(2) In the fourth quarter of 2014, 428 thousand E-Plus accesses were excluded before integration, due to the criteria harmonization.
In 2015, Telefónica Germany maintained market momentum, increasing slightly its estimated mobile service revenue market share.
The total access base grew 1.5% year-on-year and stood at 48.4 million at December 31, 2015, mainly driven by a 2.2% increase in the mobile base (which reached 43.1 million).
The contract mobile customer base grew 1.6% year-on-year and reached 19.1 million accesses, with a broadly stable 44.3% share over the total mobile base. Net adds reached 309 thousand accesses due to the solid contribution of partners (second brands). Smartphone penetration reached 54.2% of the total mobile access base, up 5.5 p.p. year-on-year driven by the continued growth of LTE customers (+154.5% year-on-year reaching 7.9 million at December 31, 2015). LTE penetration reached 18.6% of the total mobile access base.
The prepay access base increased 2.7% year-on-year to 24.0 million. Prepay posted 629 thousand net additions in 2015, 32.5% more than in 2014 due to the strong contribution from wholesale agreements (second brands). The retail broadband access loss trend continued to improve, with 46 thousand net loss in 2015, more than halving the number of 2014. VDSL was once again the main growth engine of fixed performance with 260 thousand net additions (+55% year-on-year) in 2015.
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The table below shows the evolution of Telefónica Germany’s results over the past two years:
| Millions of euros | ||||
| TELEFÓNICA GERMANY | 2014 | 2015 | %Reported YoY |
%Organic
YoY (1) |
| Revenues | 5,522 | 7,888 | 42.9% | 1.2% |
| Mobile Business | 4,375 | 6,832 | 56.2% | 2.8% |
| Mobile service revenues | 3,580 | 5,532 | 54.5% | 0.1% |
| Fixed Business | 1,138 | 1,043 | (8.3%) | (8.3%) |
| Other income | 106 | 265 | 150.4% | 14.7% |
| Supplies | (2,144) | (2,712) | 26.5% | (3.4%) |
| Personnel expenses | (828) | (655) | (20.9%) | (10.1%) |
| Other expenses | (1,923) | (2,928) | 52.2% | (1.1%) |
| OIBDA | 733 | 1,858 | 153.7% | 20.9% |
| OIBDA Margin | 13.3% | 23.6% | 10.3 p.p. | 3.8 p.p. |
| Depreciation and amortization | (1,426) | (2,128) | 49.3% | (3.8%) |
| Operating Income (OI) | (693) | (270) | (61.0%) | (57.2%) |
| CapEx | 849 | 2,230 | 162.8%. | (11.1%) |
| OpCF (OIBDA-CapEx) | (116) | (372) | n.m. | 126.2% |
(1) See adjustments made to calculate organic variation below.
Adjustments made to calculate organic variations
With respect to Telefónica Germany, we have made the following adjustments in order to calculate 2015/2014 variations in organic terms:
| · | Changes in the scope of consolidation: We have excluded the impact of changes in our consolidation perimeter in 2015 and 2014. The only change to our Telefónica Germany consolidation perimeter in such years related to the consolidation of E-Plus in Telefónica Germany since October 1, 2014. In order to exclude the impact of this change in our perimeter, we have consolidated E-Plus’s results from January 1 to September 30, 2014 in our 2014 results. |
| · | Restructuring costs: We have excluded the impact of restructuring costs associated with certain simplification processes implemented in Germany. In 2015, restructuring costs had a 74 million euros impact on OIBDA. In 2014, restructuring costs had a 414 million euros impact on OIBDA. |
| · | Spectrum acquisition: We have excluded the impact of spectrum acquisitions in 2015, amounting to 1,198 million euros. There were no spectrum acquisitions in 2014. |
| · | Adjustments to the final purchase price of E-Plus: In 2015 we have excluded the result from the difference between the preliminary purchase price of E-Plus (as estimated at the end of the valuation period) and the final purchase price agreed with KPN, totaling 104 million euros (which had a 102 million euros positive impact on OIBDA net of costs related to the acquisition). |
The table below shows 2015/2014 variations in reported and organic terms (the latter, calculated in accordance with the adjustments referred to above) of certain income statement and other measures, and the contribution of each item for which we have adjusted to our reported growth:
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| YoY variation | Contribution to reported growth (percentage points) | |||||
| TELEFÓNICA GERMANY 2015 | %Reported YoY | %Organic YoY | Perimeter change (E-Plus) | Restructuring Costs | Spectrum acquisition | Adjustments to the final purchase Price of E-Plus |
| Revenues | 42.9% | 1.2% | 41.1 | -- | -- | -- |
| Other income | 150.4% | 14.7% | 32.3 | -- | -- | 98.6 |
| Supplies | 26.5% | (3.4%) | 30.9 | -- | -- | -- |
| Personnel expenses | (20.9%) | (10.1%) | 26.9 | (39.0) | -- | -- |
| Other expenses | 52.2% | (1.1%) | 54.7 | (0.9) | -- | 0.1 |
| OIBDA | 153.7% | 20.9% | 50.2 | 46.5 | -- | 13.9 |
| CapEx | 162.8% | (11.1%) | 36.8 | -- | 141.2 | -- |
| OpCF (OIBDA-CapEx) | n.m. | 126.2% | (47.1) | (293.2) | 1,031.3 | (87.7) |
Results Discussion
Total revenues were 7,888 million euros in 2015, up 42.9% year-on-year in reported terms due mainly to the consolidation of E-Plus since October 1, 2014 (which accounted for 41.1 p.p. of the year-on-year increase). In organic terms, revenues increased by 1.2% due mainly to higher handset sales arising from Christmas campaigns.
Mobile service revenues totaled 5,532 million euros in 2015, up 54.5% year-on-year in reported terms, due mainly to the consolidation of E-Plus since October 1, 2014 and to a lesser extent, the increasing share of the partner segment (second brands) within the customer base. Telefónica Germany continued to focus on data revenues, which increased by 58.4% and accounted for 51.3% of mobile service revenues in 2015. Non-P2P SMS data revenues amounted to 2,034 million euros (increasing 4.9% year-on-year), accounting for 71.6% of the total data revenues (+0.4 p.p. year-on-year).
Fixed revenues were 1,043 million euros in 2015, down 8.3% year-on-year, due to continued decrease in accesses.
Mobile ARPU was 10.7 euros in 2015, down 8.9% year-on-year, while contract ARPU stood at 17.2 euros down 6.5% year-on-year, as a result of the higher share of wholesale customers in the customer base. Data ARPU was 5.5 euros, down 6.8% year-on-year, mainly as a result of the continued decline of SMS volumes.
| TELEFÓNICA GERMANY | 2014 | 2015 | %YoY |
| Voice Traffic (millions of minutes) | 41,186 | 62,696 | 52.2% |
| ARPU (EUR) | 11.8 | 10.7 | (8.9%) |
| Prepay | 5.4 | 5.8 | 8.2% |
| Contract (1) | 18.4 | 17.2 | (6.5%) |
| Data ARPU (EUR) | 5.9 | 5.5 | (6.8%) |
| % non-SMS over data revenues | 71.2% | 71.6% | 0.4 p.p. |
Notes:
(1) Excludes M2M.
OIBDA totaled 1,858 million euros in 2015, up 153.7% year-on-year in reported terms, as a result mainly of the consolidation of E-Plus (which accounted for 50.2 p.p. of the increase), the lower restructuring costs recorded in 2015 (+46.5 p.p.) and the positive result from the E-Plus preliminary acquisition price and the final acquisition price agreed on with KPN (+13.9 p.p.). In organic terms, OIBDA increased by 20.9% year-on-year, driven by the increased synergies, which mainly affected personnel expenses and supplies.
The OIBDA margin stood at 23.6% in reported terms for 2015, up 10.3 p.p. compared to 2014.
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TELEFÓNICA BRAZIL
The below table shows the evolution of accesses in Telefónica Brazil over the past two years as of December 31 of such years:
| ACCESSES | ||||
| Thousands of accesses | 2014 | 2015 | %Reported YoY |
%Organic
YoY (1) |
| Fixed telephony accesses (2) | 10,743.4 | 14,654.5 | 36.4% | (1.6%) |
| Internet and data accesses | 4,082.6 | 7,195.5 | 76.2% | 2.5% |
| Broadband | 3,939.8 | 7,129.5 | 81.0% | 3.6% |
| Fiber | 374.6 | 3,779.9 | n.m. | 14.0% |
| Mobile accesses | 79,932.1 | 73,261.3 | (8.3%) | (8.3%) |
| Prepay | 51,582.4 | 42,194.4 | (18.2%) | (18.2%) |
| Contract | 28,349.7 | 31,066.9 | 9.6% | 9.6% |
| M2M | 3,506.9 | 4,234.7 | 20.8% | 20.8% |
| Pay TV | 770.6 | 1,787.9 | 132.0% | 9.7% |
| Final Clients Accesses | 95,528.6 | 96,899.3 | 1.4% | (6.4%) |
| Wholesale Accesses | 25.9 | 22.3 | (14.0%) | (14.0%) |
| Total Accesses | 95,554.5 | 96,921.5 | 1.4% | (6.4%) |
Notes:
(1) In order to calculate organic changes, we have added the accesses of GVT as of December 31, 2014 to our accesses as of such date.
(2) Includes "fixed wireless" and Voice over IP accesses.
The below table shows the contribution of each item for which we have adjusted to our reported growth. With respect to each line item, the contribution to reported growth of such line item, expressed in p.p., is the result of dividing the impact of each item for which we have adjusted by the amount of such line item, on a reported basis, for the prior year:
| TELEFÓNICA
BRAZIL 2015 |
%Reported YoY |
%Organic
YoY (1) |
GVT |
| Fixed telephony accesses | 36.4% | (1.6%) | 38.6 p.p. |
| Internet and data accesses | 76.2% | 2.5% | 72.0 p.p. |
| Broadband | 81.0% | 3.6% | 74.6 p.p. |
| Fiber | n.m. | 14.0% | 785.0 p.p. |
| Pay TV | 132.0% | 9.7% | 111.5 p.p. |
| Final Clients Accesses | 1.4% | (6.4%) | 8.3 p.p. |
| Total Accesses | 1.4% | (6.4%) | 8.3 p.p. |
Notes:
(1) In order to calculate organic changes, we have added the accesses of GVT as of December 31, 2014 to our accesses as of such date.
Telefónica Brazil closed the year 2015 improving its competitive position in the mobile as well as in the fixed market. In the mobile business, Telefónica Brazil kept its leadership in the higher value segments, which permitted the operator to capture mobile market revenue growth in 2015. In the fixed business, the transformation towards fiber and Pay-TV was strengthened by the GVT consolidation in May 2015, adding as of December 31, 2015, 8.5 million customers to the Group.
Revenues and OIBDA evolution were positively supported by the acceleration of mobile data and the good evolution of fixed broadband and Pay-TV. Additionally, Telefónica Brazil carried out costs control measures aimed at offsetting the adverse macroeconomic situation.
However, results in 2015 were adversely affected by the interconnection tariff reduction in the mobile business (-33.0%) and in the retail fixed-mobile tariff (-23.3%) since February 24, 2015.
Telefónica Brazil reached 96.9 million accesses at December 31, 2015, up 1.4% due mainly to the consolidation of GVT. Excluding the impact of such consolidation, accesses were down 6.4%, due to the disconnection of prepay accesses.
In the mobile business, the strategic focus remained on gaining and retaining high value customers, reaching a market share of 42.4% in the contract segment as of December 31, 2015 (Source: ANATEL). Telefónica Brazil maintained its market leadership in terms of total accesses with a market share of 29.5% as of December 2015 (source: ANATEL). The commercial offer in the contract segment included a higher data volume, more minutes of voice traffic and innovative products such as “Vivo Bis” (pursuant to which the data not consumed in a month is automatically added to data available for the following month). The contract growth was partially offset by the disconnection of 11.5 million prepay accesses.
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In the fixed business, Telefónica Brazil maintained its strategic focus on fiber deployment, with 16.6 million premises passed with FTTx at December 31, 2015 and 3.8 million homes connected, and also on increasing Pay-TV accesses (up 10% year-on-year). Fixed telephony accesses stood at 14.7 million in 2015, up 36.4% in reported terms due mainly to the consolidation of GVT. In organic terms, these accesses were down by 1.6% year-on-year. Retail broadband customers totaled 7.1 million customers as of December 31, 2015, up 81.0% year-on-year due mainly to the consolidation of GVT (up 3.6% year-on-year in organic terms due to the increase of fiber accesses). Of the 7.1 million customers at the end of 2015, 53.0% were connected with FTTC. Pay TV customers stood at 1.8 million as of December 31, 2015, up 132.0% in reported terms due mainly to the consolidation of GVT, increasing by 9.7% year-on-year in organic terms due to a higher penetration of high value and IPTV clients. IPTV accesses increased their relevance, representing 9.6% of total Pay-TV accesses.
The table below shows the evolution of Telefónica Brazil’s results over the past two years:
| Millions of euros | ||||
| TELEFÓNICA BRAZIL | 2014 | 2015 | %Reported YoY |
%Organic
YoY (1) |
| Revenues | 11,231 | 11,060 | (1.5%) | 4.5% |
| Mobile Business | 7,618 | 6,906 | (9.3%) | 6.2% |
| Mobile service revenues | 7,228 | 6,495 | (10.1%) | 5.3% |
| Fixed Business | 3,613 | 4,154 | 15.0% | 1.9% |
| Other income | 261 | 416 | 59.3% | 35.4% |
| Supplies | (2,680) | (2,568) | (4.2%) | 4.4% |
| Personnel expenses | (976) | (1,042) | 6.8% | 3.5% |
| Other expenses | (4,293) | (4,293) | (0.0%) | 8.6% |
| OIBDA | 3,543 | 3,573 | 0.9% | 2.9% |
| OIBDA Margin | 31.5% | 32.3% | 0.8 p.p. | (0.5 p.p.) |
| Depreciation and amortization | (1,762) | (1,916) | 8.7% | 12.9% |
| Operating Income (OI) | 1,781 | 1,657 | (6.9%) | (6.7%) |
| CapEx | 2,933 | 2,105 | (28.2%) | (1.1%) |
| OpCF (OIBDA-CapEx) | 610 | 1,468 | 140.8% | 9.3% |
(1) See adjustments made to calculate organic variation below.
Adjustments made to calculate organic variations
As explained above, year-on-year changes referred to in this document as “organic” or presented in “organic terms” intend to present year-on-year variations on a comparable basis. With respect to Telefónica Brazil, we have made the following adjustments in order to calculate 2015/2014 variations in organic terms:
| · | Foreign exchange effects: We have excluded the impact of changes in exchange rates by assuming constant average foreign exchange rates in 2015 and 2014. In particular, we have used the average foreign exchange rate of 2014 for both years. Foreign exchange rates had a negative impact on our reported 2015 Telefónica Brazil results as a result of the depreciation of the Brazilian real. |
| · | Changes in the scope of consolidation: We have excluded the impact of changes in our consolidation perimeter in 2015 and 2014. The only change to our Telefónica Brazil consolidation perimeter in such years related to the consolidation of GVT since May 1, 2015. In order to exclude the impact of this change in our perimeter, we have consolidated GVT’s results from May 1 to December 31, 2014 in our 2014 results. |
| · | Restructuring costs: We have excluded the impact of certain restructuring costs associated with certain simplification processes implemented in Telefónica Brazil. In 2015, these restructuring costs totaled 7 million euros. In 2014, these restructuring costs totaled 68 million euros. |
| · | Spectrum acquisition: We have excluded the impact of spectrum acquisitions in 2014 amounting to 889 million euros (related to a LTE block in the 700 MHz band) while there were no spectrum acquisitions in 2015. |