Telefónica Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2024

There are 13 speakers on the call.

Operator

a reminder, today's conference is being recorded. I would now like to turn the call over to Mr. Adi Anton Tounegi, Global Director of Investor Relations. Please go ahead, sir.

Speaker 1

Thank you. Good morning, and welcome to Telefonica's conference call to discuss January March 2024 results. I'm Adrian Fontenedi from Investor Relations. Before proceeding, let me mention that the financial information contained in this document has been prepared under International Financial Reporting Standards as adopted by the European Union. This financial information is unaudited.

Speaker 1

This conference call and webcast, including the Q and A session, may contain forward looking statements and information relating to the Telefonica Group. These statements may include financial or operating forecasts and estimates or statements regarding plans, objectives and expectations regarding different matters. All forward looking statements involve risks and uncertainties that could cause the final developments and results to materially differ from those expressed or implied by such statements. We encourage you to review our publicly available disclosure documents filed with the relevant securities market regulators. If you don't have a copy of the relevant press release and the slides, please contact the LIFO Nigas Investor Relations team in Madrid or London.

Speaker 1

Now let me turn the call over to our Chief Operating Officer, Mr. Arcelorvilla.

Speaker 2

Thank you, Adrian. Good morning and welcome to Telefonica's Q1 results conference call. With me today are Laura Abasolo, Marcus Hass, Luke Schuler and Eduardo Navarro. As usual, we will first walk you through the slides and we'll then be happy to take any questions. We are pleased to report a solid start to the year with accelerating revenue and EBITDA growth momentum.

Speaker 2

Our performance demonstrates the continued strength of our operating model and our strategic execution. Across our key markets, commercial dynamics remain favorable. In Spain, we saw further improvement in EBITDA as our growth and efficiency efforts continue to bear fruit. Meanwhile, our operations in Brazil and Germany sustained consistent profitable growth, reaffirming the solid fundamentals and our execution in these important markets. Notably, we achieved record low churn levels in both Spain and Brazil, reflecting our superior value proposition and helping maintain robust commercial momentum across the business.

Speaker 2

In Germany, contract churn stands at a remarkable 1%. On the network front, we are deploying fiber and 5 gs as per our plans. We continued to invest significantly in next generation networks to support best customer experience, helping maintain commercial momentum. In Spain, we're on the verge of a significant milestone by nearing the completion of the copper network switch off. We will be the 1st European Union operator to do so.

Speaker 2

We are making good progress and we remain confident in achieving our financial outlook for the full year 2024. And in addition, we see near term characteristics and positive opportunities in all our core markets. In Spain, we have already signed an MoU for a new long term mobile network agreement with DG, which we expect to complete in a few weeks. In Brazil, negotiations are underway to potentially migrate to an authorization regime. In Germany, spectrum extension is the expected scenario.

Speaker 2

And in the UK, fiber build is accelerating as projected Netco receives strong interest from infra investors. Going into greater detail on Slide 3, we continue building a stronger Telefonica. We accelerated the rollout of our fixed infrastructure, passing an additional 9,000,000 premises with fiber to the home in the last 12 months. Telefonica Infra played a key role here, contributing around $7,000,000 of these new premises. Our 5 gs coverage continues to progress rapidly, with coverage now extending to 63% of the population across our core markets with Spain and Germany above 90%.

Speaker 2

Our customers remain at the center of our transformation journey. By evolving along with our needs through AI powered tools and over 650 uses use cases, we are reshaping our revenue mix towards higher value digital services and connectivity solutions. This customer centric approach is paying off with a group Net Promoter Score of 31. Wider and better networks allow us to continue expanding our global customer base. We ended Q1 with 388,000,000 total accesses, adding 500,000 new customers.

Speaker 2

Simplifying our operations and corporate structure is another integral part of our transformation. We successfully concluded the delisting process for Telefonica Ochsland, achieving an ownership stake of nearly 97% to enable full operational integration going forward. Profitable growth remains our key priority. The workforce restructuring program in Spain now complete will start yielding further cost savings from Q2 onwards, fueling higher EBITDA growth in Spain. In parallel, we continue the nationwide switch off of our legacy corporate network with more than 4,000 central offices now closed since 2014.

Speaker 2

This is a process that is almost completed and another source of past and future efficiencies. In summary, our strategic initiatives around building next generation networks, putting customers first and creating leaner future fit operations are bearing fruit. This bodes well for delivering on our growth, profitability and sustainability ambitions. Moving to Slide 4, we show how all of these translates into tangible financial results. Growth.

Speaker 2

Our commercial momentum is underpinned by high quality customer additions across our fiber and mobile accesses. This allowed us to accelerate our top line growth to 0.9% year over year, increasing by 1.4 percentage points sequentially from the 4th quarter. Revenue growth was fueled by robust service revenue performance as well as our market leading B2B segment, which typically sees further uplift in the coming quarters due to seasonality. Profitability. Importantly, this healthy top line expansion drove profitable growth, with our EBITDA rising 1.9% year over year.

Speaker 2

We continued enhancing our operating leverage through diligent cost management initiatives mentioned previously. This virtuous cycle of growth and efficiency flows through to our operating cash flow. Our EBITDA minus CapEx margin remains stable year on year, supported by our ongoing capital expenditure discipline with CapEx over revenue ratio of just 10.4% for the quarter. Sustainability. Under the new free cash flow definition, our Q1 performance was growing year on year once adjusted for a €75,000,000 positive nonrecurring received in Brazil working capital in Q1 2023.

Speaker 2

As anticipated, Q1 free cash flow is seasonally the lowest, but we expect it to ramp up through the remainder of 2024 to achieve our full year guidance. Laura will provide more details on this later. Our growth and profitability vectors reinforce the sustainability of our financial model, and we remain fully focused on our commitment to enhance ESG standards across the organization. Our Spanish operations, which we review on Slide 5, again showed a solid commercial performance during this quarter. We grew in main accesses and now for 3 quarters in a row have been adding customers in all segments.

Speaker 2

In fact, during the last 9 months, we have turned around customer losses in conversions and Pay TV. In the latter case, we went from 100 and 30,000 customers lost in the prior 9 months to positive net adds of 16,000 in the last three quarters. In convergence, we posted net adds, thanks to an all time low churn rate of 0.9%, This within a quarter of tariff upgrades and return to gross adds growth for the first time since the Q2 of 2021. All this resulted in growing revenue despite declining handset sales and wholesale and improving EBITDA growth. While we still saw limited contribution from the redundancy program savings, we expect to see further positive impact from this initiative starting in Q2.

Speaker 2

Accordingly, you should expect Q1 EBITDA growth to be the lowest in the year. Finally, and as a proof of the superior quality of our nationwide network infrastructure and confirming the confidence partners have in our ability to provide high quality services over such infrastructure, we can confirm that we have made very substantial progress in the negotiation of our new long term network agreement with DG. We have already signed a non binding MoU with DG under which terms and conditions are agreed in principle. We expect to conclude this agreement subject to definitive final long form documentation in the next few weeks. Brazil on Slide 6 maintains its very strong performance in all lines.

Speaker 2

A rational marketplace allows for sustained growth in accesses, 12% more fiber to the home customers and ARPU, where we continue growing our digital ecosystem and OTT subscriptions raised 14% year on year. With outstanding results in mobile contract where we simultaneously showed double digit growth in ARPU and our lowest churn rate ever at below 1%. Accordingly, our revenue grew well above inflation, with service revenue growth in the quarter of more than 10%. As for EBITDA growth, once again, OpEx growth remained below top line growth despite rising costs in digital services, resulting in double digit EBITDA increase year on year. Operating cash flow also continues to expand, nearing an 18% EBITDA minus CapEx margin.

Speaker 2

Our German operations saw a solid start into the year as shown on Slide 7, supported by executing well on the accelerated growth and efficiency plan with front loaded efficiencies and growth in outer years contributing to GPS strategy. Our core business continued to perform strongly, adding more than $150,000 in the quarter, leveraging on improved 5 gs coverage within a quarter of repricing action resulted into ARPU growth year on year. Hence, solid mobile service revenue momentum with above 2% growth was temporarily offset by declining handset sales on a tough comparison base effect. Nevertheless, this flattish top line growth translated into a 5% EBITDA growth, showing improved operating leverage. In fact, EBITDA minus CapEx grew more than 14% year on year with more than 1 percentage point improvement in margin.

Speaker 2

Moving to Slide 8 to review our UK JV, VMO2. The growth of the UK telco market remains subdued, but we have been able to show improved service revenue growth across both mobile and consumer fixed, with ARPU stabilization for the latter and low levels of churn in mobile contract. Furthermore, and despite short term pressures, we remain committed and we continue deploying fiber with build base up 80% year on year in the quarter. Telefonica Tech on Slide 9, again showed strong double digit growth in sales. Usual business seasonality and phasing means year on year growth will accelerate throughout the year, supported in addition by a strong backlog with bookings showing growth higher than 30% during the Q1 of the year.

Speaker 2

Bookings growth was driven by the private sector with large contracts awarded in the financial, healthcare and manufacturing sectors. Growth is also coming in a more balanced way with increased contribution from higher value added services and a better currency mix. We continue to gain relevance in higher growth markets, a performance that continues to be recognized by industry leaders. Telefonica Eufra remains a key driver for our improved CapEx intensity with whilst adding coverage that results into revenue growth. FTTH build base accelerates as much as 60% from last year, contributing to increased network differentiation and capabilities under optimal investment models.

Speaker 2

In parallel, Telxius, our best in class international connectivity infrastructure maintained a high profitability above 50% and is opening a new route connecting to the Dominican Republic. I will now hand over to Laura, who will guide you through Hispam performance, MIM Financial topics and ESG.

Speaker 3

Thank you, Angel, and good morning, everyone. Before reviewing this quarter's financials and ESG performance, let's go through Hispam performance. As shown on Slide 11, we continue taking steps towards a more rational environment. We are consistently delivering growth in accesses, both in mobile contract and FTTH cable connections, leading the market with more than 17,000,000 fiber to home premises passed. Back in 2021 and 2022, we set up neutral wholesale FTTH carriers in Chile and Colombia.

Speaker 3

In Chile, 3 years later, we have been able to incorporate first Sendel and now Claro BTR, fostering a more rational environment and avoiding overlap. This, together with a cooling down approach in terms of commercial activity, seems to be finally translated into healthier competition in which we are starting to see early signs. In the meantime, we remain focused on cash generation. And though Q1 financials show large hits both from FX and handset sales with stable underlying trends, we expect a market improvement in the second half of the year. Moving on to free cash flow on Slide 12.

Speaker 3

We think it's important to provide some context given we have now moved to the new In the Q1, free cash flow came in at minus €41,000,000 slightly below the minus €9,000,000 during the same period last year on an apples to apples basis. However, this year over year comparison is impacted by 1x €75,000,000 benefit related to the monetization of the tax asset in Brazil, which boosted our free cash flow in the Q1 of 2023. Excluding these nonrecurring items, as per quarter 2024 free cash flow could actually show an increase year over year of as much as EUR 43,000,000 This free cash flow seasonality in the opening quarter is very much in line with our expectations and what we have said during our Q4 call. We expect free cash flow to ramp up as we progress through 2024 consistent with prior years. And most importantly, we remain fully on track to deliver our communicated target of more than 10% free cash flow growth for the full year.

Speaker 3

Moving to our capital structure on Slide 13. Telefonica maintains a robust balance sheet position to navigate any market environment. As of March 2024, our net financial debt stood at EUR 28,500,000,000, translating to a net debt to EBITDA ratio of 2.71 times. This anticipated increase from year end 2023 was primarily driven by a strategic move to raise our stake in Telefonica Deutschland and to a lesser extent free cash flow flow seasonality in the Q1. Despite this temporary uptick in leverage, we remain firmly on track to align with our outlook in target range for 2026.

Speaker 3

We continue optimizing our debt stack and tapping diverse funding sources. We maintain ample liquidity covering debt maturities through 2026. Furthermore, over 80% of our debt is insulated for rising rates by being long dated fixed rate and primarily euro denominated. Our proactive liability management has partly reduced the average cost of debt to 3.51% through timely refinancing exercises, allowing immunization to raising rates environment. We have demonstrated an excellent market execution this year.

Speaker 3

We have been active in the capital markets, raising EUR 3,200,000,000 long term financing at the group, mainly through a EUR 1,750,000,000 dual transgenual green bond and a new green hybrid amounting to EUR 1,100,000,000, reinforcing our position as one of the leading issuers of ESG Capital Market Financing in the international telco sector. Ultimately, we are managing our balance sheet to fuel our capital allocation priorities. We remain focused on investing for sustainable growth, putting our board in a great position to pay the dividend with euro 0.30 per share as a floor, steadily deleveraging towards our target range of 2.2 to 2.5 times net debt to EBITDA by 2026 and evaluating all opportunities, including share buybacks to create shareholder value with any excess cash. We believe that by progressing across the pillars of ESG, we can advance our GPS agenda. On the environmental side, we are seeing growth opportunities via our EcoSmart portfolio, which has been recently recognized by the ITU.

Speaker 3

We are also working to review scope 3 emission. And as a result, CDP has included us in their supply engagement leaderboard for the 5th consecutive year. On the social side, we see the importance of diversity in attracting and retaining talent and our progress is evidenced by our results. Since last year, we have 858 additional people with disabilities working with us and a third of our executives are women. Finally, with regards to governance, all Board of Directors proposed resolutions were approved at the AGM and the issuance of the 2 tranche, senior green bond and green hybrid this quarter reaffirms our commitment to sustainable financing.

Speaker 3

I will now hand back to Angel, who will wrap up.

Speaker 2

Thank you, Laura. Moving to Slide 15, we are well on track to achieve our 2024 guidance. We had a solid start to the year, delivering accelerating revenue and EBITDA growth in Q1. Looking ahead, we expect EBITAL minus CapEx to resume its upward trajectory from Q2 onwards. This will be driven by 2 main factors, realizing the full benefits of cost savings from the Spanish workforce program and moving past the big impacts from this inflation and accelerated 5 gs deployment that impacted Q1.

Speaker 2

Consistent with prior years, our free cash flow generation is back end loaded. And as such, we anticipate acceleration over the remaining 3 quarters of 2024 and we are confident in our full year guidance. This will translate into a resumption of our deleveraging trajectory. After the anticipated Q1 uptick, we expect both net debt levels and leverage ratios to resume their declining path, keeping us firmly on track towards our 2026 targets. Importantly, this free cash flow growth allows us to more than cover our dividend.

Speaker 2

Overall, our Q1 performance reinforces our confidence in delivering our full year guidance across the board. To summarize on Slide 16, Telefonica's Q1 2024 performance demonstrated solid execution as we continue delivering against our strategic roadmap. We reported a solid set of results to start the year, keeping us firmly on track to achieve our full year 2024 guidance across all key metrics, as well as our overarching GBS plan targeting more than 10% free cash flow growth CAGR between 20232026. Across our core markets, we witnessed robust operational trends, starting with an altered good commercial momentum. Our growth and efficiency efforts in Spain drove an EBITDA recovery, while Brazil and Germany maintained consistent profitability growth.

Speaker 2

Our strategic investments in fiber and 5 gs infrastructure elevate Telefonica's customer experience proposition further, positioning us for continued commercial momentum and top line expansion. In parallel, we continue to streamline our operations by digitally transforming processes, optimizing our workforce and shutting down legacy networks. Our capital allocation priorities remain firmly focused on deleveraging towards our target ranges, sustaining our dividend by growing free cash flows and investing in focused growth areas. And finally, we see positive near term opportunities ahead in all our core markets, as mentioned at the beginning of the presentation, including a mobile network MOU agreement with each in Spain, potential change in regime to authorization in Brazil, expected extension of spectrum in Germany and in the UK, whilst fiber built and netco carbide progress, interest from infra investors is mounting. Thank you very much for listening.

Speaker 2

We are now ready to take your questions.

Operator

Thank There will be a short silence while questions are being registered.

Speaker 1

Excuse me, operator, and our non audience, We will take the usual two questions per participant as always. Thanks.

Speaker 4

Okay,

Speaker 5

2.

Operator

The first question comes from the line of Andrew Lee from Goldman Sachs. Please go ahead.

Speaker 6

Good morning, everyone, and thanks, Adrian, for letting me ask 2 questions. So I'll use the full quote if possible. First question is on leases. So there's a clear kind of distinction between your EBITDA growth in Spain or minus 3.5%. And your Spanish leases look to have gone up relatively meaningfully on a year on year basis.

Speaker 6

They've been going up kind of 20%, which is a reasonably high level anyway on average and looked to have gone up around 30% in the quarter. Could you just take us through the key drivers of your expanding lease costs? And maybe give us some help in terms of understanding where they go from here. Thank you. And then the second question is just on the MO2 fixed broadband net adds.

Speaker 6

Obviously, we also had Liberty Global report them last week, and the negative net adds remain, I guess, a concern for investors. So I wonder if you could talk through your confidence or in some form of recovery and whether the negative trends on the fixed line side represent any risk to your confidence in the dividend out of VMO2? Thank you.

Speaker 2

Thank you for your two questions. I'll take the first one on Spanish leases. And Laura, please feel free to complement. First, as you know, since this year, we guide on EBITDA minus CapEx, and we just reaffirmed that we are reiterating all the group 2024 guidance of course, including this EBITDA minus CapEx growing between 1% 2% in the year and by 5% CAGR in the 2023, 2026 period. So the Q1 is aligned with expectations here that we have two factors to affirm that both EBITDA and EBITDA in Spain in Q1 are the weakest and you will see this improving across the year.

Speaker 2

Now first is the workforce, savings partly contributed to Q1 EBITDA, just 1 month in the quarter. There will be a full impact from Q2 going forward. Then there is an element in phasing. Leases themselves in Q1 are affected by volume additions. And the larger rate of mobile sites for 5 gs also by inflation as contract renewal in Q1 is a large one and then higher rates that affect the accounting of leases, an impact that is already softening and may even reverse later on in the year.

Speaker 2

Also, we suffer comparison spaces going forward will lead to improving EBITDA in Spain starting from Q2 and going forward. So again, all guidance reiterated, including EBITDA minus guidance and Spain will be contributing positively going forward on this.

Speaker 3

If you want me to

Speaker 1

talk about the cost of

Speaker 3

capital, we are definitely working on its optimization, monitoring the evolution of our businesses, situation of markets, macro context. I think in 2022, there was definitely an impact in leases going up due to tower deal, OE sites, FX revaluation, higher rates, inflation adjustments, but definitely we do expect more normalized trends with higher correlation to the evolution of the lease liability balance. In the GPS plan, we have high growth in EBITDA minus CapEx. For this year 2024, the guidance was 1 to 2 and Angel just confirm it. And I think when you look at our leases going forward, there will be some increase, but it's fully embedded in the free cash flow guidance of 10%.

Speaker 3

It's distributed differently across geographies. You will see some increase in Germany driven by B2C obligations, site expansion as well in Brazil. But Spain should maintain a broadly flat lease position with all additions in line with principal payments and Ispani is going to show declining leases. So a lot of focus on this and this is just quarter affected by seasonality and we reiterate our short and mid term guidance regarding EBITDA minus CapEx.

Speaker 6

Thanks both. Can I just make sure I understood that, Laura, on what you're saying on Spain going forward? So you're expecting it to be for leases to be broadly flat going forward. What is the normalized trend in leases once we get the top comps, etcetera?

Speaker 3

The flat position is more across the line of the plan. So here we are talking long term and we do not disclose our lease evolution nor for the group. It's part of the free cash flow growth nor for any specific region. But over time, Spain will not be increasing this. This has been more a one on effect.

Speaker 3

And the liability it will be quite raw additions will be very much in line with the principal payments. I hope that Okay.

Speaker 6

But more normal trends from Q2 even this year, not flat but more normalized?

Speaker 3

The normalized again is I was talking long term in the GPS plan 24 to 26. 1 quarter has seasonality and is not showing a trend. I wanted to focus on the long term trend, which I think is the more valuable comment.

Speaker 6

That's helpful. Thank you. And on VMO 2?

Speaker 2

Yes. On VMO 2, if you could please, Lutz comment on the net adds and the corresponding question.

Speaker 7

Sure. Good morning. So compared to a year ago, we made 50,000 less net adds. Where is that coming from? 2 drivers, I would say.

Speaker 7

1 is that the market is simply smaller this year compared to a year ago according to our data 9%. 2nd, we have obviously more aggressive offers from Ornette. They're impacting us obviously, fiber in our network expanded area. And this is a new technology, a new product and we are doing better month over month over month. Now second part of your question, will the evolution of the fixed P and L have an impact, a negative impact on the dividend.

Speaker 7

I would say the opposite is the case. We have when you look at our ARPU, the 2 years before, the ARPU was shrinking month over month, and then we did a price increase, and then it kept shrinking. Since 6 months, our fixed ARPU is flat before the price rise. And now obviously in April, the price rise kicked in and therefore you will see a growing ARPU. The reason for that is that we put everything now in place what we planned for in 2023, understanding each household, coming up with personal pricing and personal offering, And that helped us to maximize the retained revenue, which is nothing else than ARPU.

Speaker 7

So therefore, if I compare it to my budget, we are doing better in fixed, not worse. So we are very confident on the fixed P and L. Thank you.

Speaker 6

Thank you.

Operator

Thank you. We will now take the next question from the line of Ondrej Kaveczejc from UBS. Please go ahead.

Speaker 4

Hi, everyone. Good morning and thanks for the presentation. Two questions for me then as well, please. So just on the DG memorandum of understanding, I know you said it's early days, but can you just conceptually speak about how the fundamentals of that might be different because obviously we have a different situation in the case of in the form of remedies basically being given for Digi. We have an experience in Germany that obviously is a momentum.

Speaker 4

You have got maybe 2 competitors now, one with a fallback option to Digi as part of the remedy, then the other one openly talking about wanting to get Digi onto their network. So just in the context of all of this, how long term is the deal? For example, is it longer than the previous one? Conceptually, how different that might be compared to the current one? That's one question, please.

Speaker 4

And then the second question, just I guess on the Spanish market where again we've got some deals happening, some consolidation, some further potential consolidation. We've got plans for further fiber builds. So again, conceptually just talking about wholesale costs, I think the same way that you're seeing in the UK, would you think by the or is the outlook in terms of wholesale cost on fiber in Spain? Are you likely to see further pressure to basically prevent overbuild and drive further consolidation of some kind of stabilization in the market towards a small number of infrastructure players? Thank you very much.

Speaker 2

Thank you for your questions. The line was a bit cut, but I think I got them. The first one on Digi. As I said during the presentation, we have already signed an initial MoU agreement, which is pending the long form documentation that we expect to complete in the next few weeks. As you can understand, the terms under negotiation are subject to confidentiality agreements.

Speaker 2

But in any case, I can share with you some principles or some high level comments. First, this is a mobile network collaboration agreement that goes beyond roaming to include some sharing. 2nd, the deal is a long term agreement, initially aimed to last for longer much longer than the existing agreement. It's a contract that goes way beyond traditional roaming agreements. 3rd, that under the agreed unit costs and the projected volumes over the life of the agreement, we expect revenue flow to be equivalent at least that what we received in the existing contract with DG.

Speaker 2

And this is a max, I can say, other commercial terms are under confidentiality agreements. And when the contract is completed, we will be able to share potentially order details. This should be a win win. This is designed to be a win win agreement for both parties. We have a long standing relationship with DG as a partner.

Speaker 2

We have excellent relationship with them. We have lots of respect for this partner. And this confirms the confidence that partners have in the superiority of our nationwide infrastructure and our ability to provide high quality services over that infrastructure. This will add sustainability and long term visibility to our wholesale activities in the Spanish market, which is a relevant line. On your second question regarding the evolution of, if I understood right, of the market environment, what could apply to wholesale according to recent deals, silver build and so on.

Speaker 2

But as we have stated in the past, we think that the map of the Spanish telco sector is being redefined with the birth of Mas Orange, the new status of DG as remedy taker and now continued partner with us. And then the proposed transaction between Vodafone and Segona. We believe that this reconfiguration of the sector, we have lived through previous scenarios similar to this, and we have been and we have a proven track record of adaptation to conditions. We will have conversations with Masera and also regarding our wholesale contracts with them, again with the mentality of win win approach. And regarding Vodafone and Zeigona, well, we in the past have been opened to conversations with Vodafone regarding possibility of them migrating their totally or partially their fiber their cable into our fiber infrastructure.

Speaker 2

And these type of options and structures would be available for conversations with Segona when their deal completes.

Speaker 4

Thank you. Angel, can I just clarify, did you can you just confirm the Digi deal that includes RAM sharing, yes, you basically said?

Speaker 2

It goes beyond pure roaming, and it will include sharing components. We will give more details when the deal is with the Affinitiv agreement.

Speaker 4

Thank you very much.

Operator

Thank you. We will now take the next question from the line of Navar Chastini from Morgan Stanley. Please go ahead.

Speaker 8

Thank you very much for taking my question. When you have provided your Capital Market Day targets back in November, there were a number of unknowns, including the confirmation of the Orange Mass Mobile Remedy package and of course, the outcome of the review of the DG contract that you've just discussed. So today, you have clarity on both. So I was keen to hear how these have landed versus the initial assumptions that you have baked in the guidance? And Hari, you've just discussed how the terms compare to the previous contracts, but it will be interesting as well to give us a bit of color on how these terms compares to the assumptions that you have baked in the guidance.

Speaker 8

Thank you so much.

Speaker 2

Thank you, Nawa for the question. Well, we had been stating all along last year and in the Capital Markets Day that we didn't see the need for remedies in the Orange Pass Mobile transaction. Now we have a storage with us with some remedies that entail this acquisition of Spectrum by Digi and the option for a national roaming agreement with Masera Ranch. We also have been stating that we would be very active in negotiating with Igi to maintain them with us to continue the relationship, which we can confirm that we are going successfully in that direction. In the Capital Market Day, we were making assumptions on some erosion or dilution that we could have in the renewal of some wholesale contracts, which we maintain the guidance that we have stated to the market.

Speaker 2

If at some point we need to change or upgrade that guidance, it's too early. It's too early to do now. There are still lots of moving pieces. We are progressing very well with DG. We have conversations with Maserans now that they have closed.

Speaker 2

And we will be open to have conversations with Vodafonezagona when they close. Again, in the digital contract, I cannot be very explicit at this stage. But with the unit cost, the term and conditions that we have in the MOU and the projected volumes, we expect revenue flow to be equivalent at least to what we have in the current contract and with a much, much longer extension than the current contract in that. So this should provide Spain.

Speaker 8

Thank you very much, Amhal. I have just a follow-up on the DG renewal. So the competition over this year seems incense, in particular, when it comes to price because other competitors were, I believe, also trying to make a proposal over this business. And if we look at the previous MVNO renewal across Europe, it seems to be that the main driver of them is price. So could you discuss the key ingredients which drove success for you guys here given the competitive pressure that was over this contract from a price perspective?

Speaker 2

Again, the agreement is pending definitive final form. So I cannot share more details, but this is not a pure roaming agreement. It also entails component of sharing, which have not necessarily the same dynamics as pure roaming conversations have.

Speaker 8

Thank you very much. Looking forward to hear more.

Speaker 2

Thank you.

Operator

Thank you. We will now take the next question

Speaker 1

from

Operator

the line of Georgios Irodiancaou from Citi. Please go ahead.

Speaker 9

Good morning and thank you for taking my questions. There are both follow ups on Spain, please. The first one is a big link between the DG extension and also what we've seen around leases. I'm just curious, Angel, you mentioned the revenue flow is expected to be similar. If you can give us an indication as to what affects any arrangements you could have on run sharing or net slicing or whatever you may agree with another partner could have on lease cost or OpEx, whether that is also neutral or maybe positive, just to get a bit of a feeling around the bottom line implications?

Speaker 9

And then my second question is on your comments around wholesale arrangements in FTTH. If you can give us an idea in terms of the timing or any processes that are still pending for you to start agreements and negotiations about fiber arrangements in what used to be the non competitive areas in the past? Thank you.

Speaker 2

Thank you. On your first question, I'm afraid I need to insist that agreement is pending and the definitive final form. So I cannot give more details, but we are we will be wholesaling to Digi. And the lease obligations probably would appear on their side rather than on ours. With respect to other conversations, we're already in conversations with Mass Orange.

Speaker 2

Of course, we had to wait until they would complete the transaction. We have plenty of existing wholesale relationships with them coming from the former Orange, from the former Mass Mobile, this entail fiber, decent tail soccer content. So we have plenty of elements that we are working so that we can achieve a win win situation for both players in these contracts. With respect to the other proposed combination until that completes. Of course, we cannot start the conversation because it would imply possibly gun jumping from 1 of the sites on the transaction, which we are not part to.

Speaker 9

To. And can I check-in terms of your ability to execute these contracts? There are no pending regulatory hurdles to reaching these agreements at this point? Or do you have to wait for any technical changes?

Speaker 2

These are commercial agreements. We have we don't need to go through antitrust reviews of commercial agreements or wholesale commercial agreements because this is common practice as has been always in the market. Furthermore, one should expect that once we have ceased being the largest subscriber base in the Spanish market, we should be seeing deregulation on our activities in Spain because current regulation was designed when Telefonica was dominant, and this is no longer the case. Of course, it depends on the CNMC, but the regulation should apply to issues such as the fiber wholesale pricing, access to that, commercial flexibility of our offers and so on. And this is this will provide us more flexibility and more competitive levers to establish even a stronger position in the market.

Speaker 9

Thank you.

Operator

Thank you. We will now take the next question from the line of David Wright from Bank of America. Please go ahead.

Speaker 10

Yes, thank you. My two questions are, first of all, Germany. There was, I think, some discussion around the operators that you had pushed a little harder in Q1 into especially the family segment looking for kind of the second, third SIMs beyond the primary SIM. I wondered if you could talk a little about your momentum there. And also how you are using your fighter brand in Germany right now, whether just pushing a little harder?

Speaker 10

And then my second question, and I'm sorry about this, Angel. It might just be another question on Digi that you can't answer. But I think what we're all trying to understand is to what extent this is kind of a pure wholesale deal or when you say sharing, could this include some of the Digi spectrum, shared infrastructure, shared lease costs, etcetera? I don't know. I guess you're not going to be able to give us any more on that.

Speaker 10

But is rather than just, I guess, put fuel under the fire of speculation, is there anything you can say? So yes, my second question is a bit clumsy, but anything else you can give on us, I think we're all scratching our heads a little. Thank you.

Speaker 2

So Marcos, please, with the first one.

Speaker 11

Good morning, everyone. So the German market remains rationale with dynamic promotions. We tested in the Q1 clearly the sensitivity on family activities. And you have seen we have a solid momentum in the Q1, a good start into the year. So from that perspective, we clearly want to capture more of the household budget, also including fixed.

Speaker 11

And we clearly saw a fair share trading with our core brand, the O2 brand, and also our no frills brands in the market. So as said, very rational market, and we clearly see sensitivities and a way for us in order to capture more of the household budget of the German market.

Speaker 10

Markus, could I just quickly ask you, are you feeling any pushback from competition as you sort of push into those additional SIEMs? Has there been any competitive reaction of note?

Speaker 11

From our perspective, I think we followed the market very carefully last year, especially what competition was doing. And we clearly see with a very good network quality that we clearly can gain more share in households. So I think as you've seen, we further accelerated our 5 gs coverage. Network is performing on ice level with competition. So we are a clear alternative in mobile for more than one family member.

Speaker 11

And secondly, also while we can offer every household in Germany a fixed offer with our mix of cable, BDSL, fiber, we are in a very good position, as said, to really leverage the huge customer base that Telefonica has in Germany in order to gain more of the household volume.

Speaker 2

And regarding your further question on DG, again, we cannot comment. We have been the market knows and we have been stating that the spectrum transferred by Masaorens to DG does not allow to build a new network. So and it's placed in high frequency bands. So this implies that DG would need a national roaming agreement. They have the option through the remedies of doing the orange one.

Speaker 2

But one can be ambitious and aim for not a pure roaming agreement that has all these renewal dynamics and so on that were asked in a previous question, but something a bit more structural that stabilizes and gives long term visibility to the wholesale relationship. And this is the direction that we have gone, which is good for both ourselves and for our partners. So

Speaker 7

yes, go ahead. And then

Speaker 10

may I just ask one brief detail. We can see your wholesale revenue. I guess Q1 wholesale and others were showing about EUR 5 20,000,000 EUR 522,000,000 in Spain. Are you able to give us any kind of indication of what amount within that is the Digi contract and potentially the sub contract for mobile right now? Is it a €200,000,000 ballpark?

Speaker 10

Is that what we could be thinking?

Speaker 2

Again, we do not disclose this figure. Wholesale and others in this quarter has declined, but nothing to do with this. It has declined because of MTR prices declining. And then the end of the Formula 1 cycle, we used to have that content and we resold it. We are not having that content.

Speaker 2

We are not reselling it anymore. We are buying it from the zone. So any dynamic that you have seen in the Q1 on the wholesale line is completely unrelated to this contract. Actually, the MVNO line of wholesale is growing in the Q1. Thank you.

Speaker 2

Okay.

Speaker 5

Thank you so much.

Operator

Thank you. We will now take the next question from the line of Keval Khiroya from Deutsche Bank. Please go ahead.

Speaker 12

Thank you. And I've got 2 questions also following up on Germany as well. So Germany obviously had the strong EBITDA performance of 0.5% growth versus the guidance of lowtomidsingledigit growth for Germany.

Speaker 10

Do you

Speaker 12

see that 5% growth sustainable? Or are there other OpEx phasing impacts we need to think about? And could you elaborate on those if so, please? And then secondly, with all the Digi and Wholesale discussion, you've shown that you're trying to maximize network utilization in Spain. Germany has obviously gone the other way with the loss of 1 and 1.

Speaker 12

Should we still think about retail being the main lever to plug that gap? Or are you starting to talk to other wholesale partners or even thinking more strategically with NetVR JVs or even consolidation? Thank you.

Speaker 11

Thank you. Let me start with Germany. I think first of all, we had a very solid start on profitability into the year, and it's clearly a mix of levers. The first one is clearly strong gross margin contribution from the trading we did last year. Also with the family offers, we clearly see lower subscriber acquisition costs because we sell more into the base.

Speaker 11

It's more profitable for us. And it was good to see the sensitivity also going forward. So it makes us also confident that in a mix of accelerated own customer growth within the base and additional products that we are going to sell and clearly leveraging the partner landscape that we have that we will be able in the mix of accelerated growth, profitable growth and also efficiencies that we already started to capture from the beginning of the year onwards that we will deliver the plan as it has been presented last November by Telefonica. So overall, we expect clearly also profitability growth within the guidance that has been given. So from that perspective, high confidence.

Speaker 11

As said on the wholesale side, we delivered a growth in a mix, as said, own customer growth, where we now see the possibilities. Secondly, B2B growth. We also had a good momentum in the SME segment in the Q1, where we accelerate step by step at Kilia's smaller P and L, but overall, it gains really momentum and contributes to the overall plan. And finally, with the existing partnerships that we have, we have all the optionality in order to push more or push less depending on the current phase of the market. So we have here we are well positioned.

Speaker 11

As you know, we have access to all sales channels in the German market with own or with branded resellers. That gives us, as I said, all the opportunities to push a little bit harder, if needed, in the quarter or to clearly accelerate the product portfolio in these channels in order to capture the growth.

Speaker 6

That's clear.

Speaker 5

Thank you.

Speaker 1

We have time for one last question, please.

Operator

Thank you. We will now take the last question from the line of Fernando Cordero from Banco Santander. Please go ahead.

Speaker 5

Hello. Good morning and thanks for taking my two questions. The first one is related to the Spain, not in this case with wholesale but with retail and I would like to understand obviously, at least on a qualitative basis, the performance of the ARPU in the rest of the year. We have seen a minus 0.4% in the 3rd quarter. Just to understand the drivers for this performance and also a qualitative impact on the rest of the year on retail on B2C ARPU.

Speaker 5

And the second question is on the UK. And I would like to understand at which time if there is any price on the potential materialization of the fiber wholesale opportunity in that market? In that sense, how is the current views of from a business media to tackle the wholesale market the fixed wholesale marketing in GDP? Thank you.

Speaker 2

Thank you, Fernando. The Spain ARPU, the convergent ARPU in the quarter reached €92,200,000 It's €1 higher than the previous quarter, thanks to the price increase that we applied in January to the Movistar portfolio. Year on year, the ARPU declined minus 0.5%, mainly on higher penetration of O2 in our base versus Mimovistar. If one looks at the sequential difference in the quarter compared to 1 year ago, the main reason is that this increase is lower is that the tariff upgrade in January 2024 has been 3.1 percent and this was softer than the one 1 year ago, which was 6.8%. So we are comfortable with the ARPU evolution.

Speaker 2

But I should say that more and more we should not look at ARPU individually. We look at it in a whole set of conversion KPIs. 1st, the net adds and the commercial momentum, which is very positive. This is correlated to the very positive evolution of customer satisfaction through the NPS with a minimum churn that we are in the slide putting 0.9%, but we are in the 0.8 high leading to 0.9. So it's the minimum in history and then the ARPU.

Speaker 2

These results in the largest subscriber lifetime value that we continue growing and we continue widening versus our competitors. The second question on the UK regarding I understand the fiber co, We are progressing as was discussed in Liberty Global's call a few days ago. We have already appointed advisors for the design and carve out of the NetCo. Simultaneously, we'll continue building at pace and accelerating the pace of fiber build and fiber migration. And we have been receiving strong inbound interest for this asset in the case that we would be open to invite investors into it.

Speaker 2

I don't know if this answers your question or do you need any deeper detail on the fiber in the UK?

Speaker 5

In the UK, you say it's basically looking also on the potential wholesale agreements that you or potential wholesale clients that you may onboard on the network? I would just stand you are close or not or regardless of your views on materializing this opportunity.

Speaker 2

Okay. Lars, can you take this one, please?

Speaker 7

Yes, sure. I mean, there are 3 possible big wholesale partners. 1 is Sky, 1 is Vodafone and 1 is TalkTalk. And I mean, as you can expect, we are in negotiation with all of them. With 1 party, we are advanced, but it's too early to disclose any details here.

Speaker 5

Okay. Thank you very much.

Operator

Thank you. At this time, no further questions will be taken.

Speaker 2

So thank you very much for attending this call. We hope we have been able to provide useful answers to your questions. And please contact Investor Relations for further follow-up conversation. Thank you.

Operator

Telefonica's January March 2024 results conference call is over. You may now disconnect your line. Thank you.

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Telefónica Q1 2024
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