Telefonica Earnings: Steady Performance Across All Geographies Sustains EBITDA

We were pleased with no-moat Telefonica’s TEF performance across most of its portfolio in the first quarter, as the company was able to protect and increase its service revenue, helping to offset inflationary pressures in its cost base and protect margins. Telefonica Deutschland (Germany) and Virgin Media O2 (U.K.) increased revenue 8% and 4% organically, respectively, thanks to market share gains and price raises, growing EBITDA around 1.5% in both geographies. Vivo’s (Brazil) performance was also very satisfactory, with sales up 12% organically thanks to market share gains and pricing increases, which also resulted in healthy EBITDA growth of 9.5%. Overall company revenue increased 5% organically while EBITDA was up 1% (31.5% margin). We are maintaining our EUR 4.90 fair value estimate with the shares trading at EUR 3.90 at the time of the writing. However, investors interested in Telefonica might need patience until value materializes through portfolio simplification, network transactions, and divestiture of noncore operations in Latin America.

In Spain, EBITDA pressures continued to ease, with a 1.7% decline this quarter compared with a 5% decline a year ago and a 2% decline last quarter. Price increases together with lower energy and content costs helped improve the trend in EBITDA. In January, Telefonica implemented an average 7% price increase across some of its products, although management says some customers have migrated to cheaper plans inside Telefonica. Telefonica Tech, which provides IT services in Europe, grew 27% organically and 43% with acquisitions. The Hispam division (Latin America), which we consider value-destructive for Telefonica given its poor returns on invested capital, saw EBITDA decline 4% for the quarter. Capital expenditures were flattish year over year, with growing investments in Spain (5G and fiber) offset by Germany and Brazil. Telefonica expects capital expenditures to be 14% of revenue this year compared with 14.8% in 2022.