28 Nov Telefonica’s euro 2B Growth Plan Fails to Excite | Light Reading
It would be unfair to say Telefnica’s
latest strategy has been welcomed like an animal-rights activist at a bullfight, but investors are hardly giddy with excitement. The Spanish operator’s share price was up just 1.7% in Madrid this morning after it targeted another 2 billion ($2.2 billion) in annual revenues by 2022. It is valued 11% less than it was this time last year.
That is probably not what the fabulously named Jos Mara lvarez-Pallete, Telefnica’s chairman and CEO, was expecting late Wednesday when, in a letter to shareholders, he said: “These lines are undoubtedly the most important ones that I have written to you since I was appointed chairman.” The slides and documents accompanying that letter contain all sorts of information about restructuring activities and further “digital transformation.” But the target of generating
2 billion in additional sales is the most attention-grabbing item.
It is supposed to come from a new unit called Telefnica Tech, which will bring together existing digital businesses and focus on three areas: Cybersecurity; IoT (the Internet of Things) and big data; and the cloud. These businesses are currently on a roll at the Spanish operator. For the recent third quarter, it made 439 million ($483 million) from what it calls “advanced digital services,” a 32% increase on the year-earlier figure. Its cloud business is outperforming the market in every country, it boasts. IoT and security are booming areas.
The 2 billion target, therefore, looks ambitious but achievable with effective management and canny investments. The restructuring should provide some focus and scale and help Telefnica to attract the talent it needs. Acquisitions are an option, it says, and expansion into new geographical markets is planned. It is not as though Telefnica has suddenly decided it can make 2 billion annually by selling 5G-based virtual-reality services to consumers.
Even so, Telefnica made just 1.45 billion ($1.6 billion) from these advanced digital services last year. An extra 2 billion implies more than doubling revenues by 2022. Competition in new geographical markets will make that tough to achieve organically, and acquisitions could show up unfavorably on the balance sheet. Some debt relief might come from the divestment of operations in Latin America, which Telefnica is spinning off into a separate unit. But shareholder skepticism may be warranted.
The details are also thin. An investor presentation on the operator’s website contains one slide about the new Telefnica Tech business and a few generic statements about its commercial strengths. It will have differential capabilities and platforms, according to the operator, and form alliances with third parties in new geographical markets. How, exactly, does it differ from the US and Chinese tech giants targeting similar opportunities, analysts may wonder. What role would it have in alliances with such players?
Telefnica’s track record will not help it to overcome the doubts. In 2011, it set up a business called Telefnica Digital with similar transformational objectives. Three years later the unit was shut down as part of restructuring and cost-cutting activity. Now, under new management, Telefnica is again setting up a discrete digital unit with a different name. Even if that does have more of a business-to-business focus than its predecessor, market watchers must feel they have been here before.
The Spanish operator is certainly not unique. Other service providers — from Italy’s Telecom Italia to Russia’s MTS and VEON — have also been jabbering about digital transformation, the cloud and IoT this year amid concern that overhyped 5G technology will ever pay off for the companies operating networks. Behind the latest banners and bold announcements, there is quiet desperation.
Iain Morris, International Editor, Light Reading