Telefonica Q2 Earnings Call Highlights

Key Points

• Telefonica raised its 2026 adjusted operating cash flow outlook to growth of more than 3%, citing stronger operating leverage and momentum in Spain and Brazil. Other targets were maintained, although revenue growth is expected at the low end of guidance due to weaker handset sales, especially in Germany.
• Second-quarter performance improved at the group level, with service revenue up 0.9%, adjusted EBITDA up 2.7%, and free cash flow reaching €611 million. Spain and Brazil led growth, with Brazil’s adjusted EBITDA and operating cash flow after leases rising 11% and 18%, respectively.
• Germany and the U.K. remained areas of pressure: Telefónica Deutschland plans to cut about 1,100 jobs and close 60 stores, while Virgin Media O2 faced declining service revenue and EBITDA and continues to target deleveraging from roughly 5.8 times leverage.

Telefonica NYSE: TEF raised its 2026 outlook for adjusted operating cash flow after leases after reporting stronger second-quarter momentum in Spain and Brazil, while maintaining its other full-year targets amid handset weakness in Germany and pressure in the U.K.

Chairman and CEO Marc Murtra said the company now expects adjusted operating cash flow after leases to grow by more than 3% in 2026, up from its prior outlook of more than 2%. He said the upgrade reflected improved operating leverage and performance in Spain and Brazil.

“We are on track to fulfill 2026 guidance in all other metrics,” Murtra said. However, he said revenue growth is expected to land at the low end of the company’s range because of weaker handset sales, particularly in Germany. Telefonica maintained its adjusted EBITDA outlook and expects to finish at the high end of that range.

Group Financial Performance and Cash Flow

At the group level, service revenue rose 0.9% year over year in the second quarter, supported by accelerating growth in Spain and, to a lesser extent, Brazil, according to CFO Juan Azcue. B2B revenue increased 6.7%, while B2C revenue rose 1.4%.

Adjusted EBITDA increased 2.7% in the quarter, and adjusted operating cash flow after leases grew 2.9%. The operating cash flow after leases margin expanded by 0.4 percentage points year over year in both the second quarter and the first half, while capital expenditures represented 11.6% of revenue in the first six months, unchanged from a year earlier.

Current free cash flow was €611 million in the second quarter, up €278 million from the first quarter. First-half free cash flow totaled €944 million. Azcue said free cash flow remained seasonally weighted toward the second half and that the company expects performance to accelerate later in the year.

Net financial debt declined to €25.3 billion. Azcue said net debt to EBITDA stood at 2.78 times at the end of June, compared with 2.72 times in March, and reiterated Telefonica’s target of reducing leverage to 2.5 times by 2028. The company completed five financing transactions year to date, raising €4.5 billion in long-term funding, he said.

Telefonica also reiterated its planned 2026 dividend of €0.15 per share, payable in June 2027.

Spain and Brazil Drive Growth

Telefónica España recorded accelerating growth across its main financial measures. Revenue rose 2.9% year over year in the second quarter, adjusted EBITDA increased 2.3%, and adjusted operating cash flow after leases rose 3.7%.

COO Emilio Gayo said the Spanish business delivered positive net additions in key services for a 12th consecutive quarter. Contract mobile net additions nearly doubled from the preceding quarter, while television accesses increased 7%. The company reported its lowest-ever churn rate in Spain of 0.7%, while convergent average revenue per user remained above €91.

Gayo said Spain’s redundancy program produced close to €90 million in savings during the first half, compared with €20 million in the first quarter. The company remains on track to achieve €250 million in savings for the full year.

In Brazil, Vivo continued to deliver revenue and EBITDA growth ahead of inflation. Contract mobile net additions rose 6% year over year, total mobile ARPU increased 5.7%, and churn remained at 1.1%.

Brazilian adjusted EBITDA rose 11% year over year, while adjusted operating cash flow after leases climbed 18%. Gayo said the company expects second-half trends in Brazil to be similar to those seen in the second quarter. He added that management does not foresee a more difficult competitive environment, despite some product launches that appeared more aggressive.

Germany Restructuring and U.K. Leverage

Telefónica Deutschland’s second-quarter revenue declined more than 11% year over year, primarily because handset sales fell 26%. Fixed revenue, however, increased 6.5%. Adjusted EBITDA declined 7.2%, though the company said the trend improved due to efficiency measures, cost management and a better revenue mix. EBITDA margin reached 52.7%.

The German operation is undertaking an operational reorganization that will reduce roughly 1,100 full-time positions in 2026 and close 60 underperforming owned stores. The company recorded a €265 million provision in the second quarter and expects additional restructuring provisions of up to €155 million, most likely in the second half.

Telefonica expects the German measures to deliver approximately €185 million in annual run-rate savings by 2028, beginning at the end of 2026. Santiago Argelich, CEO of Telefónica Germany, said the company is prioritizing profitable growth and value over volume, including through new O2 Mobile Plus bundles.

At Virgin Media O2, results were affected by weaker handset trends and market pressure in both fixed and mobile services. Service revenue declined 3.9% and adjusted EBITDA fell 2.9%, though Gayo said EBITDA remained at the high end of the unit’s guidance range.

Azcue said VMO2’s leverage of about 5.8 times is above the company’s desired 4-to-5-times range. He said Telefonica and Liberty Global are aligned on a plan to accelerate deleveraging through operating expense and capital expenditure efficiencies, as well as longer-term opportunities in B2B, convergence and wholesale. VMO2 has no refinancing maturities until 2029, he added.

Murtra said Telefonica remains focused on executing its Transform & Grow strategy and aims to become “a best-in-class telco worldwide by 2035.”

About Telefonica (NYSE:TEF)

Telefónica, SA is a Spanish multinational telecommunications company headquartered in Madrid. Founded in 1924 as Compañía Telefónica Nacional de España, it has grown into one of the world's largest telecommunications groups. Telefónica provides a broad range of communications services to residential and business customers, including mobile and fixed-line telephony, broadband internet, and pay-TV. The company also develops and sells network infrastructure and related services to support connectivity at scale.

Beyond traditional voice and data services, Telefónica has expanded into digital and IT services aimed at enterprise customers and public-sector clients.

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