Telefónica Q3 2026 Earnings Call - Upgraded Guidance, 3.2x FCF Surge, and a VMO2 Restructuring Ultimatum

Conference Operator: Good morning. Thank you for standing by, and welcome to Telefónica’s January to September 2026 results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. If you’d like to ask a question, please press star followed by one and one on your telephone keypad. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star, one again. We would kindly ask you to ask a maximum of two questions per participant. As a reminder, today’s conference is being recorded. I would now like to turn the call over to Mr. Torsten Achtmann, Global Director of Investor Relations. Please go ahead, sir.

Torsten Achtmann, Global Director of Investor Relations, Telefónica: Good morning, and welcome to Telefónica’s conference call to discuss January to September 2026 results. I’m Torsten Achtmann 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. This conference call and webcast, including the Q&A session, may contain forward-looking statements and information relating to the Telefónica 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 development and results to be materially different from those expressed in 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 Telefónica’s Investor Relations team.

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

Emilio Gayo, Chief Operating Officer, Telefónica: Good morning, everyone, and welcome to Telefónica’s third quarter and nine-month results call. I am here today with Juan Azcue, Chief Financial Officer, Santiago Argelich, CEO of Telefónica Germany, Borja Ochoa, Director of B2B Spain, Óscar Candiles, Director of B2C Spain, and Lutz Schüler, CEO of Virgin Media O2. We will walk you through the slides, and then we will be happy to take your questions. We are pleased to report strong third-quarter results with further evidence of our execution and the transformation of our operations. First, commercial traction again continued to be outstanding, with a solid performance in Spain and Brazil. Second, growth in key financial metrics accelerated, both in real and constant terms. Top-line growth reached 2.2% year-on-year, boosted by the ramp-up in service revenue and the return to growth on handset sales.

Adjusted EBITDA growth accelerated to 2.8% versus the third quarter of 2025, underpinned by robust performance in Spain and Brazil. Our transformation continued to deliver efficiency gains through simplification, redundancy programs, digitalization, and AI. These gains supported an acceleration in adjusted operating cash flow after leases growth to 7.2%, alongside margin expansion. Third, acceleration in free cash flow throughout the year is significant, increasing 3.2-fold in the third quarter, and we have further developed. Net debt declined to EUR 25.2 billion as of September. Finally, we are upgrading our full-year guidance of adjusted EBITDA, adjusted operating cash flow after leases, and free cash flow, mainly on strong operational and financial momentum, especially in Spain and Brazil, expected improvement in Germany, and the progressive improvement in operating leverage year-on-year. Revenue guidance is adjusted to the range of 1%-1.5%, mainly due to handset sales.

Revenue are performing well, and we expect to grow around 1.5% in 2026. The 2026 dividend of EUR 0.15 in cash will be paid in June 2027. Moving to slide two. We continue to progress across every strategic pillar of our Transform and Grow plan. We are better serving our customers, as reflected in our low churn rates and increase in NPS. In Spain, the network growth is resilient amid record traffic growth. In Germany, more than 80% of in-care customer interactions are now supported by AI. In the U.K., we launched a new voice AI agent to handle broadband phone calls. In B2C, we continue expanding our offering, and we are reaching an outstanding constant growth of 3.9% year-on-year. In Spain, O2 plans now include Disney+ and Movistar+ optionally across the whole package.

In Brazil, Vivo has become the first mobile operator with a nearly 100% coverage in the country, leveraging the partnerships with Starlink. In Germany, we are enhancing our fixed broadband offer with additional fiber reach thanks to being the new wholesale partners with NetCologne and Deutsche Glasfaser. In B2B, we are growing close to 6% year-on-year while strengthening our capabilities for future growth, particularly around cloud, defense, and cybersecurity. For example, in Spain, we launched new cybersecurity services for SMEs. Vivo is expanding its partnership with Palo Alto Networks, and O2 Germany launched its business portfolio combining mobile with integrated service for digital security and international use. On technology, on top of further reinforcing our network capabilities across markets, I would like to highlight Vodafone. Finally, we are taking key steps towards a simpler and more agile organization.

In Spain, our new operating model will help us accelerate growth, capture synergies, and execute with greater agility. The model pivots around three business units with differentiated customer and dynamics, B2B, B2C, and wholesale, to focus on growth opportunities and scale digital services. The B2B segment brings together the capabilities of Telefónica Spain with those of Telefónica Tech. It also implies a new vision for all our support functions in Spain. In Germany, the 2026 voluntary labor program was well accepted and executed according to plan. We are working on further resizing measures and have entered into an agreement for the sale of two call centers in coming months. VMO2 is taking action to create a simpler company, reducing costs and prioritizing investment to improve customer experience and commercial performance. Moving to operating business and starting with Spain on slide three.

In the third quarter of the year, Telefónica España continued to improve its strong commercial and financial performance. Of note are, contract mobile net adds increased quarter-on-quarter, reflecting positive portability results, well above 2025 average. It is the second quarter ever with positive results with all players. Growth in fixed broadband was supported by more convergent connection and secondary homes. TV accesses increased by 6% year-on-year, driven by our unmatchable content offering. TV penetration in O2 grows 7 percentage points year-on-year. Convergence, the lowest churn rate ever is maintained, 0.7%, while ARPU, the best in the market, grew 1.2% year-on-year, driven by the excellent management of sports customers between football seasons. This momentum reflects a loyal customer base to a continuously improved value proposal for our investment on differentiated assets and customer service.

Our 100% fiber and 5G standalone networks are the largest in the country and capable to cope with extra traffic loads. Mobile data traffic in the quarter was the highest ever and showed the biggest year-on-year growth in three years. It demonstrates our ability to deploy high-quality networks with a strong financial discipline. We have a higher NPS, improving year-on-year, supported by an exceptional service delivery, with year-to-date claims reducing 28% year-on-year. In B2C, we continue to leverage the richest digital ecosystem and the best entertainment offer in the market. Our alarm service surpassed 650,000 connections. We record more than 450,000 activation of our eSIM flag in the first nine months of the year. Regarding devices, more than two-thirds of our customers purchase their handset directly from us.

In B2B, our complete solution of digital services and proven expertise make us the most trustful partner for enterprises and public administration in the digital transformation. In August, the European Commission approved the bid for our consortium for one of the European AI Gigafactories, a key strategic project that will strengthen our cloud position in combination with our premium edge and cybersecurity capabilities. More recently, we have been selected in a partnership with Indra by the European Central Bank to deploy the communication and security infrastructure that will underpin a future digital euro. In addition, we have reached an agreement with NOS to foster defense and secured communication capabilities. Furthermore, we acquired a 10% stake of the company OGA to drive advanced AI solutions. Financial results are strong, delivering a solid cash generation fostered by consistent top-line growth.

Growth in revenue was 2.6% year-on-year in the quarter, posting the highest growth in the first nine months in more than 15 years. Of particular note, retail revenue grew about 4%, with double-digit growth in digital services, more than offsetting lower wholesale and other revenue. Adjusted EBITDA growth accelerated to 2.6% year-on-year due to higher revenue and larger savings from the redundancy plan, with operating cash flow after leases up to 2.8%. To sum up, Telefónica España sustains a solid momentum of financial growth. As anticipated, we expect better TR on GR behavior in H2 versus H1. Leveraging this strong momentum, we are progressing further in the transformation with a new operating model, as explained before, to speed up growth and accelerate simplification. On to slide four. Vivo delivered another quarter of solid operational and financial performance with continued strong momentum.

Commercial performance remained robust across both mobile and fixed businesses, driving above inflation growth in key financial metrics. Operationally, growth in our highest volume accesses continued, supported by the attractiveness of our- Esta reunión se está grabando. Esta reunión está siendo transcrita. At the same time, we maintain progressive price adjustment across our customer base. In mobile, we deliver premium growth with the highest contract net adds in 11 quarters, sustained strong ARPU levels, and very low churn. These results reflect the strength of our premium value proposition and the quality of our network, recently recognized by Opensignal as the fastest 5G network in the world. In fixed, our transformation towards fiber continues, with convergence and quality as key differentiators. Vivo ranked number one in four broadband internet performance categories in a worldwide survey.

The addition of around 200,000 fiber connections per quarter supports a higher value and more profitable fixed revenue mix. On financial results, Vivo delivered a solid top-line momentum, with revenue growth above 7% for the fourth consecutive quarter, driven by the ongoing transformation of the revenue mix. B2B performance remained strong, supported by connectivity and digital services. New digital services revenue grew close to 40% over the last 12 months, with OTT services and consumer electronics up 30.5% and 69.4%, respectively. Vivo continued to enhance its B2B offering, and some examples are: a new prepaid flagship offer featuring Vale Saúde Farma and Google Cloud Storage, new streaming bundles combining up to six services at a fixed monthly fee on a single bill. Vivo has also become the first telecom operator in Latin America to offer AppleCare+. B2B continues to scale with best-in-class solutions.

B2B digital services maintain solid momentum, with double-digit growth in cloud and cybersecurity revenues. In addition, the launch of an AI-enabled security operational center with Palo Alto Networks will further strengthen its cybersecurity capabilities and digital solution offering for companies of all sizes. The consistent growth in adjusted EBITDA and the high margin is supported by top-line growth and cost efficiencies. Adjusted operating cash flow after leases growth accelerated to 21.5% year-on-year in the third quarter, reflecting also the benefits of gains from migration-related asset sales and the strong cash-generating profile of the business. Overall, Vivo further reinforced its leadership position by combining strong commercial momentum, sustaining financial growth, and continuing expansion of its digital ecosystem. Looking ahead, we expect these positive trends to continue along the year, supported by the strength of our differentiated assets and disciplined execution. Moving into slide five.

In Germany, we continue to see signals of lower promotional activity in the market. Telefónica Deutschland is progressing in its transformation, focused on profitable and sustainable growth. The O2 Mobile Plus bundle has been well received by the market and is supporting our value strategy. We see first benefits with O2 contract ARPU trends stabilizing quarter on quarter. However, it will take some more time to flow through the customer base. Mobile contract net addition accelerated quarter on quarter, while O2 contract churn remained low. Our objective remains to uphold our postpaid market share while improving the value of our customers. The IoT business expanded, driven by emerging technologies such as 5G RedCap for smart metering gateways. In addition, we continue to enhance partnerships like Simsalasim and Revolut to capture new growth opportunities in the B2P segment. In fixed broadband, momentum remains healthy.

We recorded the fifth consecutive quarter of successes growth. As already mentioned, we have enlarged our fiber reach with new partnerships. We also maintained a strong pace of network rollout, with around 1,100 new sites going live. We are making significant progress in the simplification of our operating model. The voluntary leave program was successfully executed, with cost benefits starting in Q4. We are now addressing the next step and confirm additional restructuring demand of up to EUR 155 million, subject to concrete measures of the further resizing of our customer service organization and retail footprint. We expect this provision to be booked in Q4. In this context, Telefónica Deutschland has recently entered in an agreement for the sale of its call center in Bremen and Rostock to TP, a leading provider of digital customer services, at the turn of the year.

We are committed to an annual run rate savings of around EUR 185 million in 2028. Financial performance in the third quarter reflected improving top-line trends. Furthermore, temporary headwinds in the partner business that will last until year-end started to ease, and finally, handset sales have started to normalize. Revenue recovered significantly to minus 2.9% year-on-year. Mobile service revenue improved sequentially, reflecting the resilience of the core business and some support from international roaming. Fixed service revenue grew for the 15th consecutive quarter on improved value mix and good trading momentum. Handset sales returned to growth. B2C customer demand for O2 My Handy remains healthy, with additional support from the launch of new devices in Q3. We resumed trading in selected wholesale channels following improved device availability, maintaining our focus on profitability.

Improved revenue trends were not reflected in adjusted EBITDA performance due to, first, the higher mix of revenue with lower margin. Roaming costs were higher than expected, mainly in the context of the FIFA World Cup. Second, the extraordinary high marketing expenses linked to the launch of the new O2 plans bundles, commercial campaigns to foster growth. Third, the non-linear phasing of efficiency measures compared to a strong contribution in the third quarter of 2025. In Q4, we expect service revenue trends to continue to recover. We expect a major uplift to adjusted EBITDA following the revenue trends. In summary, Telefónica Deutschland continues to execute its Transform and Grow strategy, laying the foundation for a return to profitable growth in 2027. Let’s move to slide six. VMO2 remained on track to deliver its 2026 guidance. This reflects the resilience of the business despite a challenging market environment, particularly in fixed.

VMO2 continued to take important steps to strengthen its competitive position and support long-term value creation. During the quarter, introduced a new AI-powered customer service tool, supporting faster resolution of selected broadband queries and the ongoing digital transformation of customer care. In addition, the rollout of 2 Giga broadband service has been extended across its existing cable or network, making multi-gigabit speed available over its cable network for the first time. As a result, more than 9 million U.K. households can now access VMO2 fastest broadband services. VMO2 also extended the naming rights agreement for the O2 Arena through 2038, further strengthening the long-standing partnership behind one of the world’s most successful entertainment venues. From a commercial perspective, trends continue to improve quarter-on-quarter. Mobile net losses narrowed during the quarter. At the same time, our value management strategy supported a 2% year-on-year increase in ARPU.

In fixed, competition remained intense, particularly from the altnets. Even so, customer losses decreased during the quarter. ARPU declined by 5% year-on-year, mainly due to competitive pressure and the phasing of annual price rises. In wholesale, the company maintained its leadership position in the MVNO segment. Turning to financial performance, service revenue declined by 3.5%, reflecting pressure in consumer fixed and the ongoing streamlining of the B2B portfolio. Adjusted EBITDA decreased by 2.6%, remaining at the top end of the guidance range. Let me now turn to VMO2’s transformation program on the next slide. VMO2 has outlined the direction of its upcoming strategic plan and cost reduction measures. The plan will create a simpler company with prioritized investment to improve customer experience, commercial performance, and cash generation, with a commitment to reduce leverage.

VMO2 is targeting approximately 800 million pounds of run rate OPEX and CAPEX savings by 2029. Savings will build progressively from around 400 million in 2027 to around 600 million in 2028, and approximately 800 million in 2029. Around 300 million of the 2029 savings are expected to come from a reduction in the size of our workforce. This represents about 50% of the company’s total people cost over the next two years, with the majority of the reduction coming from the non-customer facing roles. Restructuring costs are expected to be 250 million pounds, with a payback of less than one year. VMO2 will make greater use of AI tools and digital channels to drive efficiency and productivity while improving the customer experience. VMO2 will focus on projects with clear, quick paybacks and where they make strategic sense. For example, VMO2 will help further fiber address beyond its existing commitments.

The company’s cable network will continue to deliver market-leading broadband at scale, with a low-cost upgrade being deployed to bring 2 Giga services to the majority of the network in 2027. Where any future fiber investment makes strategic sense, it will be supported but off-balance sheet and only in the non-altnet areas. The company is also exploring wholesale agreements to support the expansion of its services to off-net areas not covered by VMO2 or Nexfibre Networks, providing an incremental revenue opportunities and flexibility for future with minimal CAPEX. Overall, this action will create a leaner and more focused business with a stronger cash generation and a clear commitment to reduce leverage. On Netomnia, we remain fully committed to the acquisition. We fundamentally disagree with the CMA’s interim report.

We believe the report is flawed, with conclusions and counterfactuals that not reflect the commercial and financial reality of the U.K. market. Even more with the recent developments, BT’s acquisition of TalkTalk, CityFibre and certain debt restructuring process, and VMO2’s fiber upgrades announcement. Finally, VMO2 is reviewing its option regarding the planned cash distribution to shareholders in 2026. An update will be provided in Q1 2027 when VMO2 announce its full-year results and knows the outcome of the Netomnia transaction. The full strategic plan and financial guidance will follow. I will now hand it over to Juan, who will provide a more detailed overview of our financial performance and ESG.

Juan Azcue, Chief Financial Officer, Telefónica: Thank you, Emilio. Slide eight shows how the strong underlying momentum has translated into tangible financial results. It is the fourth quarter in a row of constant and real growth across the board. Real growth rates exceeded constant growth. Revenue growth in constant currency of 2.2% accelerated 2.2 percentage points sequentially. Service revenue growth accelerated by 0.9 percentage points to 1.8% year-on-year in constant terms. This was driven by improving B2C growth to 3.9% thanks to strong ecosystem expansion and B2B growth of up to 5.6% thanks to digital services. Handset sales returned to growth of +7.4%, driven by German handset sales. Adjusted EBITDA and operating cash flow after leases ramped up in the quarter to +2.8% and +7.2% year-on-year, with margin expansion of 0.8 percentage points year-on-year in the Q3.

In the nine months, operating cash flow after leases grew of 4.2%, demonstrated solid operating leverage in the business. CAPEX over revenue stood at 12% in the nine months, in line with our full-year target of approximately 12%. Free cash flow amounted to EUR 1,018 million, improving EUR 407 million versus the second quarter. For the nine months to September period, free cash flow reached EUR 2 billion, +10.7% higher than one year ago. Net financial debt declined to EUR 25.2 billion as of September, 11% lower than a year ago. Moving to slide nine. Free cash flow has improved quarter by quarter in absolute terms. In Q3, it showed a significant momentum and was 3.2 times higher than in the third quarter 2025. Nine months free cash flow grew by 10.7% year-on-year.

Q3 free cash flow reflected good execution in our operating performance and the positive cash-in of the tax refund in Spain of EUR 334 million. We expect free cash flow to continue to improve again in the fourth quarter. As such, the Q3 performance and the expected Q4 improvement gives us confidence to surpass our free cash flow guidance for 2026 and to upgrade to approximately EUR 3.1 billion from the previous EUR 3 billion, having reached EUR 2 billion in the first nine months of the year. Good operational momentum driving the second adjusted operating cash flow after leases upgrade is the main driver of our free cash flow upgrade. Moving to slide 10. I would like to highlight our commitment to our investment-grade credit rating. We have a clear deleveraging strategy in place, with a target of 2.5 by 2028.

We have made significant progress over the first nine months of the year and remain on track to achieve this target. As of September, our net debt to EBITDA ratio decreased to 2.63 times from 2.78 times in December 2025, while at the same time, our net debt decreased in absolute terms by EUR 1.6 billion to EUR 25.2 billion. To highlight that the net debt evolution, this is the largest net debt reduction in the first nine months of the year since 2021. Our interest cost payments decreased in the last 12 months from 3.05% to 2.85% as of September 2026. We maintain a strong liquidity position and have fully covered the maturities for the next three years. In summary, we keep reducing our net debt and leverage, have a long debt life, contain interest costs, and are well protected in the current volatile market environment.

See slide 11 for examples of how our sustainability plan is driving competitiveness and innovations since two decades. We continue our transformation through sustainable finance, enable network modernization and renewable energy projects in Spain, Germany, and Brazil, while avoiding more than 1 million tons of CO2 emissions since 2019. We also strengthen circular asset management through the new customer premises equipment with 70% of recycled content. At critical moments, such as the summer wildfires, we help affected communities and emergency teams connected. We strengthen business resilience and trust through ESG supplier audits and employee training. Finally, our ESG leadership continues to be recognized externally, achieving a record ISS rating of B+ in October, up 3.7 points year on year, with A+ in environmental management and A in eco-efficiency. Now, I would like to hand over to Emilio, who will cover the main takeaways.

Emilio Gayo, Chief Operating Officer, Telefónica: Thank you, Juan. In the third quarter, we delivered another good set of results through constant execution of our Transform and Grow plan. We achieved consistent and sustainable growth in real and constant terms in the main financial metrics for the fourth quarter in a row, with growth acceleration in key metrics. We are deepening our transformation with new milestone in simplifying our operational model in Spain, Germany, and the U.K. AI is embedded across our strategic plan and is a key catalyst to improve customer experience, commercial performance, network automation, and process efficiency. The strong free cash flow is the main driver for our net debt and leverage reduction. We are driving our adjusted EBITDA, adjusted operating cash flow after leases, and free cash flow, mainly in a strong operational and financial performance and significant operational leverage. Finally, we are strategically positioned to accelerate European technology sovereignty.

Our ambition is to be the best gateway for the citizen to access digital technologies and to become a best-in-class telco in Europe by 2030. Thank you for your time. We are now happy to take your questions.

Conference Operator: Thank you. If you would like to ask a question, please press star followed by one and one on your telephone keypad. Once again, that is star one one to register a question. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. We would kindly ask you to ask a maximum of two questions per participant. There will be a short silence while questions are being registered. Thank you. First question today comes from Andrew Lee from Goldman Sachs. Please go ahead.

Andrew Lee, Analyst, Goldman Sachs: Good morning, everyone. I had a couple of questions, but all on your debt position. It is a little hard for us to work out underlying trends today, given some tax one-offs and discontinued operations. Just wanted to ask, is underlying net debt coming down, and how material can your deleveraging be over the next year? If we look at slide 10, it shows a reduction of just over 0.15x over the last nine months. Do you expect a more rapid deleveraging in 2027? That is question number one. Question number two, your bonds are implying materially higher rates at the moment than you currently pay. How much of a risk do you see from more expensive refinancing in the coming few years, and how can you reassure investors on that front? Thank you.

Juan Azcue, Chief Financial Officer, Telefónica: Good morning, Andrew, and thank you for your question. On the first one, net debt, you should not measure net debt linearly. The decrease of that does not happen in a linear way quarter by quarter. Probably, the best way to see it is to meet year on year. We have decreased EUR 1.6 billion in these nine months, and we have reached the 263, which is well in line towards the 2.5 that I mentioned. The fact that you are not able to maybe do the math and compute the free cash flow generation of the quarter with the figure we are giving is because there are some moving parts below free cash flow. For instance, you mentioned the taxes.

The tax credit of 334 that is included in the free cash flow, you have to take into account that was also included already as a collectible, as an asset in our net debt. That 334 that flows in our free cash flow does not move the net debt figure. That is the most important one. There are other topics below the free cash flow line that you already mentioned. You have the free cash flow of discontinued operation like Mexico. You do have bits and pieces like the share buyback that Brazil does, the share buyback that we have done, and we announced that we surpassed the 1% a few weeks ago. That is why probably the math is not working for you. On the second part of your first question, because you did three actually, the second part has to do with the guidance on 27.

We do not guide on 27. We will do that accordingly at the right moment, which is February 26. Right now, we are guiding for the 2.5. We are committed to that ratio, and we are on track to do so. Remember, we started the year with 278. If you think about it, back a year ago, it was 289, and we are already at 263. We are progressing towards that. I would like to stress that once we reach the 2.5, we will keep on delivering. On the cost of debt. The first thing is that approximately half of our debt is fixed, with fixed coupon. That gives us a protection. Then the other one is that we have a solid liquidity position of EUR 17.5 billion. That is EUR 7.3 billion in cash and EUR 3 billion in committed lines now.

If there was an interest rate increase as the one you mentioned, first, it will only tap what we have to refinance. We have a strong liquidity position in case we didn’t find attractive windows in the market, which we’ve done in the past. For instance, this year, we have already financed the full year. We’re reducing net debt, we’re progressing towards our leverage, and we feel we’re well protected in these volatile market times.

Andrew Lee, Analyst, Goldman Sachs: Thank you.

Conference Operator: Thank you. We’ll now take the next question. Next question is from Ondrej Cabejsek from UBS. Please go ahead.

Ondrej Cabejsek, Analyst, UBS: Yeah, good morning, everyone, and thank you for the presentation. I had two questions, please, I guess predominantly focused on Spain. The first one would be around your convergent ARPU trends, which have been improving in Spain. Overall, I guess what we observe is that the big three players are all seeing improving revenue trends in Spain over the past couple of quarters. I was curious to get your updated view on competition pricing, the kind of saturation of the lower mid-end markets in Spain, and whether the improved revenue or service revenue dynamics in Spain are sustainable in your view. That’s question number one. The second question, on wholesale, which has obviously been a bit volatile this year, but improved quite a bit sequentially.

So, if you could please remind us, what are the various major drivers of this over the coming year, and when should the trends see some improvement or stabilization, if at all? I guess including some of the RAN sharing benefits that should be coming online from Digi Spain. This is not a Spain-specific question, just to be clear, but overall for the group. Thank you.

Emilio Gayo, Chief Operating Officer, Telefónica: Thank you. Thank you very much for your question. First of all, talking about Telefónica Spain and the price evolution and revenue evolution. First of all, to mention that our evolution is based on our strong commercial model. It means that we are able to sustain revenues with a high ARPU, with a low churn, even taking account that during all these years, we have been able to raise prices, maintaining this churn. We don’t see any change in these trends. First of all, because we are very well positioned in the high-end market. We think that our strong offer in content, in digital ecosystem, and handsets, devices, is strong enough to maintain and to have a healthy and sustainable business. In the case of the low end, there is more pressure, something that we have seen during the last quarter.

But again, Telefónica is stable with the O2 brand and some products of the Movistar brand to maintain the position. Remember that we have been able to have positive portability figures with all the players. Together with the evolution of these market trends, we consider that we are able to maintain the same price strategy for the next coming years. We have proven a lot of times that we are able to manage how to increase prices at the same time that we maintain the low churn and the ARPU. Regarding the wholesale, first of all, to remember that we don’t separate revenues on wholesale and others, and we are talking always about wholesale and others. As we mentioned in the last quarter, we were expecting to reach the peak of the wholesale revenues decline due to the new agreements during this Q3, and it is happening.

This Q3 is the peak of the impact of the wholesale agreement. We think we will see a correction in the planning revenues in the next coming quarter and to be stabilized in 2027. Together with the wholesale, we include others that is non-linear project mainly, and it’s more difficult to predict. Anyway, we are confident with the evolution with the service revenue, with the retail revenue, and everything that is happening in this line of revenue is something that we have planned and is what’s predicted. Then it means that when we say that we are confident in the evolution, it’s because we know perfectly how it’s going to be this evolution. During the Q1 of next year, we’ll provide, of course, the outlook of the year to see how we see this positive trends the next year.

Ondrej Cabejsek, Analyst, UBS: Thank you. If I may have one quick follow-up on the low end. Do you consider yourselves pretty well shielded from this going forward as well, or is there going to be some catch-up in terms of the more aggressive campaigns on the lower end translating into ARPU a bit further down the road?

Emilio Gayo, Chief Operating Officer, Telefónica: Excuse me. Excuse me, I closed the microphone. Yes, we think that we can maintain the same trends. We have demonstrated that we are able to maintain our offers, including, for example, the ecosystem in the O2 bundles, and permit us to maintain, again, churn, ARPU, in very low levels in the case of churn, and in the high level in the case of ARPU. That is something that is important always in this kind of situation, that is the customer experience and customer service. When we highlight the churn and NPS, we are seeing, or we can say that clients want to be with us. It is as simple like this. It is our offer, our customer service experience, and our way to provide the services forward. I know that the low end of the market has a lot of pressure sometimes.

It is true that everybody needs to be profitable, and then this pressure has a limit. Anyway, we are very confident to be able to maintain our strong position that we have today.

Ondrej Cabejsek, Analyst, UBS: Thank you very much.

Conference Operator: Thank you. We will now take the next question. This is from Nick Lyall from Berenberg. Please go ahead.

Nick Lyall, Analyst, Berenberg: Hi. Morning, everybody. Could I ask you a couple of questions on Germany, please? It looks like your German ARPU for the quarter is starting to rise year-on-year. Is that fair, firstly? Is that just because of the lower promotions this quarter, or could you maybe help us out with some of the drivers into next year, please? The family plans and others. Do you expect ARPU to rise from here into 2027? The second question was on M&A in Germany as well. Do you have to reconsider any offers for one&one or United Internet now? Do you think it’s been a year since the CMD, and have you exhausted all options there? Are there any options remaining, do you think? Thanks very much.

Emilio Gayo, Chief Operating Officer, Telefónica: Thank you for your question. I’m going to answer the second one, then I hand over to Santiago to explain a little bit more about the ARPU and the evolution of the ARPU in Germany. Just to remember that we always comment that we don’t comment anything about M&A, and we are not going to change this strategy. That’s a mission for us to explain what is our strategy in the M&A decision. Anyway, as we mentioned in the CMD, we consider all the options, and we maintain open all options that would be interesting for us in all markets, in any situation. We don’t comment about any specific decision in the area. Regarding ARPU, I’m going to hand over to Santi, to Santiago, to answer your question.

Santiago Argelich, CEO of Telefónica Germany, Telefónica: Yes, Nick. On your ARPU question, it was not fully clear. I will try to answer. If I don’t cover fully, just let us know what else you want us to cover. The quality of our B2C customer base is steadily improving. We see a constantly growing number of customers with multi-SIM and/or convergence contract, and that’s supporting the loyalty and the service revenue. At the same time, due to our typically 20 more month contract periods, postpaid ARPU and MSR continue to reflect the combination of a higher share of second and third SIM cards and the intense competitive environment of the past years. So, it takes time for the improvement to reflect in the front book ARPU and to feed through the postpaid base of 18 million accesses. However, we are seeing early benefits of our value strategies.

Our O2 customer contract ARPU decline stabilized quarter-on-quarter, and overall, in line with our competitors’ ARPU. What’s more important, though, is that households’ ARPUs are growing year-on-year, in line with our strategy.

Nick Lyall, Analyst, Berenberg: That’s great. Thank you very much.

Conference Operator: Thank you. We’ll now take the next question. This is from David Wright, Bank of America. Please go ahead.

David Wright, Analyst, Bank of America: Thank you, guys. A couple of questions from me. Back to the debt. Obviously, we’ve seen the Brazilian real devalue recently following the elections, and there still seems to be quite a significant imbalance in the EBITDA coming up from Brazil and the debt that’s held in Brazilian real. I think it’s like 40% of your group EBITDA is Brazil, around 15%-16% of your debt is Brazil. So, it’s a little bit like 2016. Are you at risk with the devaluation that your EBITDA impairs more than your debt, and it actually threatens to raise your leverage? How should we think about that, please? Second of all, you talk about your 2.8x and 2.5x leverage, and obviously, it’s a very different equation that the rating agencies use. Do you know where your 2.5x is under the S&P definition, for instance?

Should we be thinking around three times to then compare with their rating outlook? Those two questions. Thank you very much.

Juan Azcue, Chief Financial Officer, Telefónica: Okay. Thank you, David. On the first question, on Brazil is a significant part of our business, and it is a core one. We are long on Brazil. We believe it has a resilient economy with an independent central bank, which is keeping the interest rates high, by the way. Let us see. Right now, there is a lot of volatility after the election. Yes, the real has depreciated very significantly, but let us see how this progresses until the end of the year when the new government sets an economic team and sets the fiscal policies.

However, what I will tell you is that as part of our more prudent approach to all the financial management of the company, as you know, we always use the natural hedge that OpEx, taxes, leases in local currency provide, but we do hedge our free cash flow of the next year in Brazil. That is something we usually do end of the year or beginning of the year, but in this case, being prudent, we already hedged approximately 80% of the free cash flow of 2027 ahead of the election. I would say that we have been proactive in managing that risk, and I will repeat, we already hedged at pre-election prices around 80% of our expected free cash flow on ’27. That is for the Brazilian part. On the 2.5 that you mentioned equates to S&P, do I know the number?

Yes, of course I know it. But I will not tell you. I am sure you can do the math. You can do your own computation regarding leases, hybrids, so on and so forth. But we are fully committed to our investment grade. The Transform and Grow plans have received a constructive and supportive reception from rating agencies. Our interaction with them is positive. We got already a rating affirmation of Moody’s back in May 2026, emphasizing the ongoing portfolio simplification and the de-risking of the free cash flow, our commitment to the investment grade, the good liquidity management that we do. This is not me talking, this is Moody’s, and the disciplined execution. The S&P meeting took place back in June, and they also appreciated a more robust and de-risked free cash flow.

Fitch affirmed also our rating a few weeks ago on October 1, again talking about our solid position in Spain, our improved leverage and financial flexibility, Spain exit, et cetera, et cetera. We do not up the numbers, and we are confident that we will defend and enhance our investment grade.

David Wright, Analyst, Bank of America: Just quickly as a follow-up on the June meeting, did the agencies give any indication on the U.K. assets? As in, did they indicate that any funding, et cetera, would bring the U.K. proportionate consolidation back?

Juan Azcue, Chief Financial Officer, Telefónica: No, that’s not. Look, these are private meetings, which obviously you can understand that I cannot portray everything that is said in that one. But the meeting went well, and we are fully committed. By the way, you can do a follow-up question at some other call on our VMO2 assets, and we have a strategy in place that Emilio Gayo already commented on how to turn around the assets.

David Wright, Analyst, Bank of America: Thank you very much.

Conference Operator: Thank you. We will now take the next question. This is from Carl Murdock-Smith from Citi. Please go ahead.

Carl Murdock-Smith, Analyst, Citi: That is great. Thank you very much. Firstly, just following up on your comment there at the end, being fully committed on Virgin Media O2. Can you just expand on that and to the extent of how much is that fully committed extent to potential any equity injection? Then secondly, on other EBITDA, it has consistently been above zero, totaling, I think, EUR 127 million for the nine months. At Q1, I asked a similar question on the same topic, and you said that you expected it to be roughly around zero for the rest of the year. So, what has happened there to make it consistently be a positive value when you had expected it to be around zero? What do you expect that other EBITDA line to look like going forward into 2027? Thank you.

Juan Azcue, Chief Financial Officer, Telefónica: Okay, Carl, I will take the first one. So, Telefónica, we do not have any obligation to provide credit support to VMO2, okay? That is the clear answer, no? It is very important to distinguish between VMO2 credit profile and Telefónica Group funding position. VMO2 is a 50% JV. It is not consolidated into our accounts, okay? That is fully ring-fenced, and they have their own capital structure, and they have to stand on their feet, and we are helping them in the restructuring that they just announced, okay? I will refer to that one. Specifically on your questions, will we be putting equity back into VMO2? No, we will not. That was the first question. The second on the other, sorry. Yes, on the other. Well, yes, I remember you already did one question on the other on the first quarter, if I remember correctly.

I can understand how difficult it is for you guys to predict the other as it is for us to project it, because there is a lot of bits and pieces, no? If I look at what we have this quarter there, we have positive Hispam, which is Venezuela, as Mexico is discontinued. We also have a positive effect on Telefónica Infra, Tech, and even Global Solutions. So, what I would say is that you should expect not such a positive effect on the fourth quarter overall as the ones we had this year, and we are working towards simplifying and streamlining these other lines.

Carl Murdock-Smith, Analyst, Citi: That’s great. Thank you.

Conference Operator: Thank you. We will now take the next question. This is from Ulrich Rathe from Bernstein. Please go ahead.

Ulrich Rathe, Analyst, Bernstein: Yeah, thanks very much. I wanted to ask about Germany, particularly the phasing of the efficiency measures. Could you talk us through how your thinking about the efficiency improvements has evolved this year? In particular, have you adapted the restructuring plans during the year to the business trends, or is the picture more one where you would characterize the whole thing as execution of a plan that you already had at the beginning of the year? What I’m ultimately trying to find out is whether you are ramping up the restructuring because of what this business is delivering, or whether you’re essentially executing what you sort of thought would be necessary in any case. The second question, if I may, on Germany as well, the call center divestment. Could you explain the rationale? How does that impact cost savings?

Is it a deal more to raise flexibility, or is there direct cost savings from divesting these call centers? Thank you.

Emilio Gayo, Chief Operating Officer, Telefónica: Yes. Thank you very much for your question. Regarding the first question, we are executing the efficiency measures as we have planned. I am going to hand over to Santi in order to give you more color about how our plan is, and specific to answer the second question.

Santiago Argelich, CEO of Telefónica Germany, Telefónica: Regarding the efficiency initiatives in the plan 2026. We had an excellent progress on the efficiency capture, to say first. Ulrich, I would say, however, we always said that these savings are not linear. in Q3, we are facing tough comps versus strong delivery in Q3 2025. The savings in the nine months are predominantly driven by OPEX, added by CAPEX, and some optimization of lease costs. The main drivers are staff cost efficiencies, process and operational improvements, procurement and supply chain optimization, some early contribution of AI automatization, mainly network operations. We will continue working on identifying and implementing transformational efficiency initiatives across the operations to capture the savings from simplification and more structural measures. Focus will be mainly on commercial, technology, and sales. Also, there is a clear opportunity from AI initiatives and the evolution of the operating model. Now, to your second question. Yes.

Regarding the call center sale, yes. Okay. Yes. In this recent context of restructuring and transformation, we have recently agreed with TP, formerly Teleperformance, a global market leader in digital business and process outsourcing and customer service, that they will take over the company call center sites in Bremen and Rostock at the turn of the year, subject, obviously, to regulation clearance by the FCO. This transaction gives us flexibility and ensures the best solution in terms of business continuity for the transformation.

Torsten Achtmann, Global Director of Investor Relations, Telefónica: Operator, we have time for one last question.

Conference Operator: Thank you. We will now take our final question today. Question is from Fernando Cordero from Banco Santander. Please go ahead.

Fernando Cordero, Analyst, Banco Santander: Hello. Good morning, and thanks for taking my two questions. The first one is related with Spain, and particularly with the churn performance, which is also part of the discussion on the ARPU that we have had previously. I just would like to understand, I understand the churn performance is supported already with your devices strategy, devices and handsets. In that sense, I would like to understand or to know which is the level of penetration of funded devices and handsets in your customer base, just to understand which is the remaining potential to keep improving the churn through a more active role in handsets. The second question is on leases. There has been some press reports on your willingness to renegotiate some of your contracts, particularly in towers.

I am not going to ask you about these press reports, but I would like to understand which is your current approach on operating leases, and particularly, how much of your leases contracts are not having inflation caps?

Emilio Gayo, Chief Operating Officer, Telefónica: Fernando, thank you very much for your question. Regarding the churn and the devices, we mentioned during the conference call that two-thirds of our customers have a handset or device purchased from Telefónica. Of course, the penetration will increase a lot because two aspects. First of all, the number of assets of each client can acquire. I am not talking about only handsets, tablets, this kind of PCs. At the same time, and this is important, the second aspect is that we are not only selling product-related devices, related handsets. We are selling everything around the electronic elements, and we have proven that we are very successful in this kind of sales. I think around 50% of our sales in devices are not handset.

The penetration today is very low compared with the penetration that we can reach if we are able to maintain this strong commercial approach to our clients. I am going to hand over to Juan for the second question.

Juan Azcue, Chief Financial Officer, Telefónica: Okay. On your first non-question on the press, I will not answer, but what I would say is that, I have been quite constant in this, we are taking action on our leases. We are having different initiatives regarding them and having discussions with many of our suppliers, and we are working to optimize our lease cost and improve the contract efficiency. Obviously, this is a bilateral thing to be sustainable. There are two parties per contract, and that is something we are working on and will continue to working on. But this is not a short-term solution. We are working for a long-term structural solution. We will continue to try to optimize the leases and improve our efficiency. That would be on the second part on the question that you asked.

Fernando Cordero, Analyst, Banco Santander: Sorry, Juan, I did not get your last question due to the noise on the line.

Juan Azcue, Chief Financial Officer, Telefónica: Sorry. I cannot come and provide the information you ask on which amount of my leases are cap or uncapped on inflation.

Fernando Cordero, Analyst, Banco Santander: Okay. Thank you very much in any case.

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

Emilio Gayo, Chief Operating Officer, Telefónica: Thank you very much for your participation, and we certainly hope that we have provided some useful insight for you. Should you still have further questions, we keenly ask you to contact our investor relations department. Good morning, and thank you very much.

Conference Operator: Telefónica’s January to September 2026 results conference call is over. You may now disconnect your line. Thank you.