Telefonica NYSE: TEF raised its 2026 free cash flow outlook after stronger third-quarter performance in Spain and Brazil helped the telecommunications company accelerate earnings growth and reduce debt.
Free cash flow reached €1.02 billion in the third quarter, 3.2 times the level a year earlier, Chief Financial Officer Juan Azcue said on the company’s January-to-September results call. The figure included a €334 million tax refund in Spain. For the first nine months, free cash flow rose 10.7% to €2 billion.
Telefonica now expects approximately €3.1 billion in full-year free cash flow, up from its previous €3 billion forecast. The company also raised its outlook for adjusted EBITDA and adjusted operating cash flow after leases, although executives did not specify the revised targets on the call. Revenue guidance was adjusted to a range of 1% to 1.5%, mainly because of handset sales.
Third-quarter revenue rose 2.2% year over year in constant currency, while adjusted EBITDA increased 2.8% and adjusted operating cash flow after leases grew 7.2%. Handset sales returned to growth, rising 7.4%, supported by Germany, Azcue said.
Spain and Brazil drive growth
Chief Operating Officer Emilio Gayo said Spain’s third-quarter revenue increased 2.6%, with retail revenue up about 4% and double-digit growth in digital services offsetting lower wholesale and other revenue. Adjusted EBITDA in Spain also rose 2.6% as revenue growth and savings from a redundancy plan supported results.
Spain’s convergent customer churn remained at a record low of 0.7%, while average revenue per user increased 1.2% year over year, Gayo said. He told analysts that Telefonica expects to maintain its pricing strategy despite pressure at the lower end of the market, citing its content, device offerings and customer service.
Gayo said the impact of new wholesale agreements on the company’s wholesale and other revenue reached its peak in the third quarter. He expects an improvement in the coming quarter and stabilization in 2027, while noting that the “other” component includes projects whose timing is harder to predict.
In Brazil, Vivo posted revenue growth above 7% for a fourth consecutive quarter, according to Gayo. Adjusted operating cash flow after leases rose 21.5% in the third quarter, helped in part by gains from migration-related asset sales. Vivo also added around 200,000 fiber connections per quarter and recorded its highest mobile contract net additions in 11 quarters, he said.
Germany restructures as U.K. venture targets savings
German revenue declined 2.9% year over year, an improvement from earlier trends as handset sales recovered. Gayo said the improvement did not translate into adjusted EBITDA because of factors including a higher mix of lower-margin revenue, higher roaming costs and increased marketing expenses.
Telefonica Deutschland expects to book a fourth-quarter restructuring provision of up to €155 million, subject to specific measures involving its customer service organization and retail footprint. It is targeting approximately €185 million in annual run-rate savings in 2028. The company also agreed to sell call centers in Bremen and Rostock to TP, subject to regulatory clearance.
In the U.K., Virgin Media O2, Telefonica’s 50% joint venture, reported a 3.5% decline in service revenue and a 2.6% drop in adjusted EBITDA amid fixed-line competition and a streamlined business portfolio.
The venture is targeting approximately £800 million in annual run-rate operating and capital expenditure savings by 2029, including around £300 million from reducing workforce costs. Gayo said Virgin Media O2 remains committed to its proposed acquisition of Netomnia and disagrees with the U.K. Competition and Markets Authority’s interim report.
Virgin Media O2 is reviewing its planned 2026 cash distribution to shareholders and expects to provide an update in the first quarter of 2027. Asked whether Telefonica would inject equity into the venture, Azcue said it would not and that the joint venture has its own capital structure.
Debt and dividend
Telefonica’s net financial debt stood at €25.2 billion at the end of September, down €1.6 billion from December 2025. Its net debt-to-EBITDA ratio fell to 2.63 times from 2.78 times over the same period, moving toward its target of 2.5 times by 2028.
Azcue cautioned that debt reduction should not be measured linearly from quarter to quarter. He said the Spanish tax refund boosted free cash flow but did not reduce net debt because it had already been included as a collectible asset in the debt calculation.
Addressing currency risk after the Brazilian real depreciated following the country’s election, Azcue said Telefonica had hedged approximately 80% of its expected 2027 Brazilian free cash flow at pre-election prices.
Telefonica plans to pay its €0.15-per-share cash dividend for 2026 in June 2027, Gayo said.
About Telefonica (NYSE:TEF)
Telefónica is a telecommunications company based in Madrid, Spain. Founded in 1924, it provides fixed-line and mobile connectivity, broadband internet, fiber-optic services, and pay television, along with digital services such as cybersecurity, cloud computing, and the Internet of Things. The company serves consumers, businesses, and public-sector organizations across Europe and Latin America. Its principal markets include Spain, Germany, and Brazil, and it participates in the U.K. market through its joint venture with Liberty Global.
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