Morningstar | Telefonica Deutschland Reports 2Q Results in Line With Expectations; Shares Undervalued
No-moat Telefonica Deutschland reported second-quarter results that were in line with market expectations, with reported revenue up 1.6% year over year, driven by strong performance in handset revenue, which was up 12.9%. EBITDA was up 25.2% on a reported basis, mainly because of the adoption of IFRS 16. We maintain our EUR 4 fair value estimate.Mobile service revenue was flat, due to the mix effect washing out an increase in prepaid average revenue per user. Postpaid ARPU declined 2.7% to EUR 14.40, but 301,000 net additions during the second quarter increased the total base to 22.9 million. On the prepaid side, the company experienced 863,000 disconnections relative to the second quarter last year. However, prepaid ARPU increased by 1.7% to EUR 5.9. Mobile data revenue, which represented 42% of total revenue, increased 3.6% year over year, due to growing customer demand and a continued increase in ARPU.
Fixed-line revenue declined 3.5% year over year. We believe this is explained by Telefonica Deutschland’s dependency on reselling Deutsche Telekom’s capacity. However, this could change if Vodafone is given the green light to acquire Liberty Global’s operations in several European countries and is able to wholesale capacity to Telefonica. Vodafone’s faster broadband would allow Telefonica to offer a higher-quality and more differentiated service.
In the recent German 5G spectrum auction, Telefonica was awarded two blocks in the 2.1 gigahertz band and seven in the 3.6 GHz one, with both licenses expiring in 2040. The company bid EUR 1.4 billion for the spectrum on a combined basis, and management intends to fund the spectrum with additional leverage.
Telefonica Deutschland Holding is a telecommunication company. Co. offers its consumer retail and business customers postpaid and prepaid wireless communications products, along with wireless data services using Global Packet Radio Service, Universal Mobile Telecommunications System and Long Term Evolution technology as well as Digital Subscriber Line wireline telephony and high-speed internet services. Co. markets its products and its wireless and wireline communications products as well as services via the core brand O2. Co.'s secondary brands include the brands Fonic and netzclub. Co. also markets high-speed DSL internet access and wireline telephony.
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