Telefónica Q1 2026 Earnings Call - Record Churn, Hispam Exit, and Germany's Value Pivot

Borja Ochoa, Executive, Telefónica2: Good morning. Thank you for standing by, and welcome to the Telefónica’s January to March 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 11 on your telephone keypad. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. We would kindly ask you to ask a maximum of 2 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.

Borja Ochoa, Executive, Telefónica4: Good morning, and welcome to Telefónica’s conference call to discuss January to March 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 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 Telefónica’s investor relations team. Now let me turn the call over to our COO, Mr. Emilio Gayo.

Emilio Gayo, Chief Operating Officer, Telefónica: Good morning, and thank you for joining the call. With me today are Juan Azcué, CFO, Borja Ochoa, Santiago Argelich Hesse, and Lutz Schüler, CEO of Spain, Germany, and U.K. We are pleased to report a good start to the year. We are growing in revenue, adjusted EBITDA and adjusted operating cash flow after leases, both in constant and current terms, with an appropriate CapEx to sales ratio to deliver this growth. At the same time, we are reducing net financial debt despite the usual seasonality of free cash flow in Q1. Across markets, year-on-year growth rates accelerated in Spain and Brazil with a strong commercial performance. In Spain, we recorded the best-ever churn. In Brazil, we achieved a record high mobile ARPU. In Germany, O2 contract churn remained at a low level. In the U.K., fixed line net adds continue to improve.

Revenue growth is driven by retail with a steady growth in B2C and B2B. This performance more than offset the loss of 1&1 revenues in Germany and the impact from the extension of wholesale agreement in Spain, which provide a more predictable and sustainable business long term. I like to highlight the steady growth in service revenue, partially offsetting weaker handset markets in some European countries. On the operating model front, we are reaping the benefits for leaner operations, including the first savings from restructuring plans in Spain and our global units and the copper networks shutdown in Brazil. We are executing consistently against our Transform and Growth Plan, making good progress. We remain confident in achieving our financial outlook for 2026 and reiterate our EUR 0.15 dividend per share. On slide 2, let me share our progress across the strategic pillars of our plan.

First, on customer experience, hyper-personalization and network quality initiatives are leading to lower churn and a sound NPS. Second, in B2C, we are sustaining steady growth. We are fostering convergence with a solid traction of our offering in Brazil and Germany. At the same time, we’re enhancing our ecosystems. In Spain, we have enriched our premium content offering with the FIFA World Cup rights, and we are fostering digital security. In Brazil, we have reached more than 600,000 health subscriptions. We are also expanding the customer electronic business, recording significant growth in Spain and Brazil. Third, in B2B, we have seen a strong momentum with revenue growth close to 6%. Noteworthy is the launch of Titan Connect portfolio and acquisition of Altim in Spain and the São Martinho partner-partnership in Brazil in the agro business.

4, we continue to enhance our infrastructure, expanding our fiber and 5G coverage while improving network quality. 5th, on simplification, we are capturing the efficiencies from redundancy programs and legacy network reach out. At the same time, we continue to make solid progress on our Hispam exit with 6 assets sold in the last 12 months. Overall, this action reflect strong execution, positioning us well to continue delivering sustainable growth throughout the year. On slide 3, we will review our domestic business. In the first quarter of the year, Telefónica Spain continued to deliver a strong operating and financial performance. We recorded solid commercial KPIs, reaching the lowest churn ever, 0.7%, despite the tariff update in mid-January. This figure proves the high stickiness of our customer to our excellent service and superior network quality, our differential ecosystem, and a small segmentation.

Such a competitive advantage is driving a positive balance in portability ratios. We have outperformed our competitors year on year, surpassing the 2025 average and 3 times higher year on year. As a result, we achieved record customer base in fixed broadband and in contract mobile, a significant milestone. In B2C, converted RPU increased about EUR 91. It remains at leading levels in the market, both in absolute and in relative terms. Our premium digital ecosystem continues to support the highest customer lifetime value in the market, while driving revenues up. In B2B, we also started the year with strong traction. We are growing both in comms and IT services. I would like to highlight the recent launch of innovative service on network resilience for business continuity, advanced cybersecurity, drones in defense, and sovereign technology. They will drive further growth in this segment.

Regarding financial, Spain is delivering a solid cash generation with growth acceleration across all financial metrics. Growth in revenues accelerated to 2% year on year, supported by service revenue. B2B digital services maintain robust growth. Adjusted EBITDA grew over retail revenue, delivering a 56% margin due to revenue growth and savings from the redundancy program. This more than offset the anticipated lower wholesale revenues. In addition, CapEx discipline and the more stable leases led to a 2.3 growth in adjusted operating cash flow after leases. In a nutshell, our domestic business has a strong start into the year, and we are in a strong position to continue to excel. On to slide 4. Telefônica Brasil’s performance was once again remarkable. Vivo recorded solid commercial momentum in the most valuable segments and grew above inflation across all key lines.

We maintain a clear leadership position in the market, leveraging our strong commitment to quality and customer satisfaction and our continued evolution in a broader digital platform. In mobile, we reached record levels, both in contract net adds and RPU, with a sustained churn reduction. We added 850,000 new contract customers in the quarter, the highest figure of the last 5 quarters. RPU is the highest ever, driven by our value-driven growth in the increase in recharge frequency in prepaid. In fact, we increased fiber connection to almost 8 million. This strong performance was driven by Vivo Total, resulting in a lower churn. Turning to financials, revenue and adjusted EBITDA grew year-on-year well above inflation and accelerated versus the previous quarter.

Revenue increased by 7.4%, supported by consistent growth in mobile service revenues and continued strength in the fixed business. In B2C, new digital businesses maintained a strong momentum. Consumer electronics stand out, growing 56% in the last 12 months, thanks to the launch of new financing options. In B2B, digital solution were once again the main growth engine, driven by cloud and IoT. Adjusted EBITDA and operating cash flow after leases both grew 9%, boosted by solid revenue growth and continued improvements in OpEx. Overall, Vivo delivered another strong set of results, showing growth across key financial KPIs. Moving on to slide 5 to discuss Germany. Telefónica Deutschland core business momentum showed resilience in market with lower promotional activity. We have recently seen some positive price moves in the market.

Since March, we have maintained or even increased prices across all promos, stopping O2 mobile promos at price point below EUR 20. This is consistent with our strategy to prioritize profitable growth, focus on value over volume, while maintaining a low churn level. This quality of our customer base is improving, with a growing number of customers with a second or third SIM card. This strategy impacts RPU, support loyalty and higher net adds. Fixed broadband accesses grew for the third consecutive quarter, with a better mix in the base, lower churn, and higher RPU. Notably, IoT accesses recorded another quarter of outstanding growth. Regarding financial results, the 1&1 customer migration continued to impact revenues, with the year-on-year peak on this effect in Q1. Additionally, following a record fourth quarter last year, handsets decline in a weak German handset market.

Nevertheless, MSR trends slightly improved quarter-on-quarter, and fixed revenue increased 4% year-on-year. Adjusted EBITDA was likewise affected by the in-year peak of 1&1 impact. However, efficiencies and cost control led to an increase in the adjusted EBITDA margin year-on-year, showing the solid performance of the healthier part of our business. To summarize, underlying performance remained resilient in Germany with a high single-digit year-on-year growth in adjusted EBITDA, excluding the 1&1 effect. We continue working to return to growth in 2027. Let’s move to slide 6. Virgin Media O2 started 2026 making clear progress in the line with its strategy. During the quarter, we achieved several important milestones. O2 Satellite was launched, making us the first U.K. mobile network to switch on direct-to-device satellite connectivity. At the same time, we continue to advance our mobile network transformation.

We signed new strategic RAN upgrade agreements and completed the second tranche of a spectrum transfer from Vodafone UK. As a result, O2 now has the largest 5G standalone footprint in the U.K., reaching 86% of the population. 86% of the population. From a commercial perspective, we continue to show improvements in Q1. In fixed, we reduced losses supported by commercial initiatives, while RPU remains impacted by the high promotional intensity in the market. In mobile, contract churn decreased quarter-on-quarter, while RPU remained broadly stable year-on-year. In wholesale, we maintained our leading position in the MVNO market and continue to strengthen our wholesale fixed credentials. Regarding financials, both service revenue and adjusted EBITDA trends are on track with our 2026 guidance. Service revenue decreased, mainly driven by consumer revenue due to prior year customer losses and continued pressure on fixed ARPU.

Business revenue declined, largely reflecting lower margin products. This was partly offset by a strong performance in wholesale, supported by growth in MVNO revenue. Total revenues are also affected by reduced Nexfibre build activity compared with the year before. Adjusted EBITDA decreased mainly due to the evolution of service revenue. Finally, we continue to progress as expected with the Netomnia acquisition, which, together with a targeted network investment, further strengthens Virgin Media O2 foundation for 2026. Now, I would like to hand it over to Juan, who will cover financial results with more detail.

Juan Azcué, Chief Financial Officer, Telefónica: Thank you, Emilio, and good morning to all. Moving to slide 7, we show how the strong underlying momentum that Emilio explained translate into tangible financial results, with growth both in constant and current FX terms for the second quarter in a row. Our growth in current is supported by the strengthening and well-performing Brazilian real. Revenue reached EUR 8.1 billion, growing 0.8% year-on-year in constant terms, underpinned by a 1% increase in service revenue. B2B continues to be the growth driver, with an outstanding growth of 5.7%, alongside a consistent B2C increase of 1.5%. Adjusted EBITDA and adjusted operating cash flow after leases came in at EUR 2.8 billion and EUR 1.4 billion respectively, 1.8% and 2.4% higher than a year ago.

As such, operating leverage in the business is the main driver behind the higher OpEx-adjusted operating cash flow after leases margin, 0.3 percentage points more year-on-year. CapEx to sales stood at 10.7%, declining by 0.2 percentage points year-on-year. Current free cash flow is EUR 333 million, affected by the usual seasonality. Net financial debt decreased to EUR 25.3 billion, primarily due to the receipt of proceeds from Colombia and Chile this quarter. After the sale of Chile in February 2026, the agreement to sell Mexico in April 2026, both companies are classified as discontinued operations in the first quarter. Slide 8 show free cash flow performance in the first quarter of the year. Our performance remains solid and fully on track.

We are committed to our free cash flow trajectory and our ability to meet our full year free cash flow guidance of around EUR 3 billion. Consistent with prior years, our free cash flow generation of EUR 333 million reflected the usual seasonality of the quarter, mainly due to working capital and its back-ended loaded profile. As such, we anticipate acceleration through the year. With this behind us, we are delivering a constant execution towards the risk-free cash flow, as operational efficiency drives us to our target of over a year. As such, we are progressing in a stronger position due to, first, a more predictable free cash flow following the successful execution of the sale of 6 Hispam countries over the last 12 months, with a total firm value above EUR 4 billion. Second, a solid free cash flow, thanks to the execution of our efficiency plan.

With the work, workforce structuring in Spain and global units already in place, among other initiatives. Third, a growing free cash flow with upgraded guidance for 2026 after exceeding it in 2025. On slide 9, you can see that net financial debt has decreased by EUR 1.5 billion in the first three months of the year, mainly due to the disposal of our subsidiaries in Colombia and Chile. Our net debt to EBITDA ratio has decreased to 2.72 times from the 2.78 times in December last year. The leveraging is on track towards our 2.5 target in 2028. Telefónica has demonstrated an excellent refinancing execution this year.

We have been active in the capital markets, raising EUR 3 billion long-term financing at the group ahead of recent market volatility while maintaining an ample liquidity position. Finally, the average cost of debt has been reduced year-over-year from 3.30% in March 2025 to 2.81% in March 2026. Turning to slide 10. In Telefónica, sustainability is a driver of competitiveness and resilience. On the environmental side, we continue to enhance operational efficiency by decoupling traffic growth from energy consumption and supporting our customers in meeting their environmental goals. On the social front, we keep bridging the digital divide and promoting STEM talent. Moving to governance, we have a balanced and diverse board. We also uphold the highest standards of fiscal transparency. Lastly, we are proud to report positions across prestigious markets. Now, I hand over to Emilio for the final remarks.

Emilio Gayo, Chief Operating Officer, Telefónica: Thank you, Juan. To summarize, let me share with you some key takeaways. Telefónica’s performance in the 1st quarter of 2026 demonstrated consistent execution as we continue to deliver against our transform and growth plan. We reported a good set of results to start the year, with KPIs firmly on track to achieve our full year 2026 guidance across all key metrics, including free cash flow. We are building a company that is more focused, more efficient, and more profitable. Thank you very much for your time. Now, we are ready to take your questions.

Borja Ochoa, Executive, Telefónica2: The first question today comes from the line of Andrew Lee from Goldman Sachs. Please go ahead.

Andrew Lee, Analyst, Goldman Sachs: Good morning, everyone. I had 2 questions. One was on the sustainability or outlook for Spanish growth through the year. Secondly, just on Germany cost-cutting. On Spain, I think your remarks suggested you think that the growth delivered in the first quarter is at least sustainable. I’m also conscious that there was obviously some lumpiness in the wholesale revenue trends. What is it that gives you the confidence that you can sustain or improve the Spanish growth through the year? Are you seeing an improving market? Is competition going even better than expected as we ran into 2Q? Just any help on that would be really useful. Secondly, on Germany cost-cutting, it looked like the cost-cutting accelerated in the first quarter. I wonder if you could just talk through that a little bit.

That’ll be helpful. Thanks.

Emilio Gayo, Chief Operating Officer, Telefónica: Andrew, thank you very much for your question. Regarding Telefónica Spain, first of all, I would say that we are very happy with the results of the first Q. This result, I have to say that results are slightly above our expectation. We are happy for that. These results are based on fundamentals in our commercial strategy, in our efficiency program, in our ecosystem, in our B2B revenues growth. For the next quarter, we are seeing similar trends. I will say that for the rest of the year, we are seeing in H2 even better than H1. Our result is that we can confirm our outlook that is to grow above 2025.

Regarding Germany, I have to say that in Germany we are a best-in-class company managing the efficiencies. We have launched several cost efficiency programs that results in a underlying EBITDA growing. It is based in different elements of the company. Everything around channels, cost channel, everything around energy, everything about the operating model, all the aspects are reviewed. As a result of everything is a good performance in this kind of efficiency programs.

Andrew Lee, Analyst, Goldman Sachs: Thank you. Can I just follow up on the Spanish side of things? Are you seeing any improvement in market dynamics? You’ve done the price rises this January. Are they holding better than last year or is it more company specific efforts that’s driving that improvement?

Emilio Gayo, Chief Operating Officer, Telefónica: I would say that we feel more comfortable still than other years in our commercial trends. Again, the fundamentals that we are managing in Spain are key fundamentals. Our offer is our segmented offer demonstrate that it’s the right approach in this market. The manage of the ecosystem really is performing very well with a very strong position in everything around the consumer electronics or the financial options in all the alarm market. We have reached more than 600,000 clients at this moment. Everything demonstrate that the main elements of the offer and or the main effects that we need that happen in the market is on the table.

In the case of B2B, we are growing at the same level that we were doing during the last years and demonstrated that Telefónica Spain is the best in terms of IT services in Asseco in Spain, or I would say in Europe.

Andrew Lee, Analyst, Goldman Sachs: Thank you.

Borja Ochoa, Executive, Telefónica2: Thank you. As a reminder, we kindly ask you to ask a maximum of 2 questions per participant. We will now go to the next question. Your next question today comes from the line of Mathieu Robilliard from Barclays. Please go ahead.

Borja Ochoa, Executive, Telefónica0: Good morning. Thank you for the presentation. I had a question on Germany. We see that there’s a step down in the mobile ARPU trends in Q1. I wanted to understand what was behind that, and what we could expect for the rest of the year, and whether that reflects more competition, or you see a similar competition. Coming back to the question from Andrew. You’re saying that you didn’t really comment, I think, or at least I didn’t get that, about the competitive environment in Spain. If you could clarify if you think it has improved a bit since the beginning of the year or it’s pretty stable. Thank you.

Emilio Gayo, Chief Operating Officer, Telefónica: Yeah. Thank you for your questions. First of all, about the ARPU in Germany. Let me say, first of all, that the ARPUs, the result of different effects. One of these effects, for example, is the change in our strategy. We think that we are launching a more successful strategy in terms of 2 and 3 SIM bundles. This is an example how to move from volume to value and can have an impact in the ARPU in this case, but we think this is the right way. Anyway, I’m going to hand over to Santiago Argelich Hesse in order to give you more color about this.

Borja Ochoa, Executive, Telefónica3: Mathieu. When looking at the ARPU, it is impacted by the success of family plans, which naturally result in a dilution of ARPU. We have a higher share today on second and third SIMs, which consolidate our household and conversion strategy. The market overall has largely embraced the family plans. The O2 ARPU performance is in line and even slightly better than the competitor’s ARPU in this sense. What’s more important is that our household ARPU is growing year-on-year.

Borja Ochoa, Executive, Telefónica0: Okay.

Emilio Gayo, Chief Operating Officer, Telefónica: Okay.

Borja Ochoa, Executive, Telefónica0: I guess the follow-up to that is that we don’t really see the net adds accelerating in Q1. I wonder how it can reconcile better SIM cards, which obviously has to be the case with the fact that net adds are not really moving up.

Emilio Gayo, Chief Operating Officer, Telefónica: The net adds results is again a mix of different strategies. One is the SIM card bundling, other strategies to move from volume to value or even to reduce promotional activity. The results in the KPIs is effect of different aspect. At the end, we believe that this permit us to have a more profitable way to growth in Germany. Secondly, regarding again about Spain competitive environment, we don’t see important change in front of us. We are seeing a rational market in the high value market and our expectation that everything following in the same way.

In the case of the low end. It’s a more competitive market, but we think that now we are not expecting special change in this market too. Anyway, we think in our O2 strategy, our segmented strategy permits us to be very resilient and then most of the movements that can happen in the market. Remember, for example, that in the first quarter we have increased the prices, but we have reached the lowest churn ever.

Borja Ochoa, Executive, Telefónica0: Thank you very much.

Borja Ochoa, Executive, Telefónica2: Thank you. Your next question today comes from the line of Georgios Ierodiaconou from Citi. Please go ahead.

Georgios Ierodiaconou, Analyst, Citi: That’s great. Thank you very much. I wanted to ask firstly on expectations for other EBITDA going forward. Other was the biggest absolute beat versus consensus in today’s results at EBITDA. If I go back a few years before Hispam was included in an other EBITDA used to be broadly flat to slightly negative. Obviously other now includes Hispam, you sold most of those assets. I was just wondering if you could help us with what we should be expecting for other going forwards. Should we expect it to revert to the broadly flat EBITDA we had seen a few years ago? Have something structurally changed, meaning that today’s kind of circa EUR 50 million positive a quarter results is sustainable going forwards?

Secondly, I just wanted to ask a bit about why we’re seeing such differences in mobile handset trends in different markets. In Germany you’ve seen 15% handset decline, and you’re citing launch cycles and availability of devices, as well as lower demand. In Spain, handset revenues are up 7%. Why have launch cycles impacted Germany but not Spain? Thank you.

Juan Azcué, Chief Financial Officer, Telefónica: Okay. Karl, I will take the first one on other. As you know, other is a group of bits and pieces. In the last quarter, we included here the Hispam units, but as we have kept on selling and discontinuing them, there’s been quite a lot of movement. Right now, the only assets, Hispam assets here are the Venezuela and the holding company and some other minor assets there. You also, what we’ve seen this quarter is a positive performance from Telefónica Tech, offsetting the weakness of other global units. By being more specific on that, as a result of the sales in Hispam, these are affecting, for instance, our procurement units. That’s, those are the ones having a small negative.

All in, we expect this to be rather stable during the year, but as you know, we don’t, we don’t guide for this line.

Emilio Gayo, Chief Operating Officer, Telefónica: Regarding the handset revenues, I have to say that the market has different situation. In some markets, clearly in Spain and Brazil, we have a range of consumer electronics that we are selling the market wider than in other countries, and permits us to be more resilient in the change that the market can have due to the different facing of the launch or due to some shortage in the supply chain. In the case specifically of Germany, we have less revenues, handset revenues, due to this less range of product that we sell. The results of the Q4. Q4 in handset sales was very strong. The comparison with the Q1 is worse for Q1.

Even in the case of Germany, we have reduced sales in some specific channels due to the supply chain situation. Anyway, these kind of sales are at a very low margin sales.

Georgios Ierodiaconou, Analyst, Citi: That’s great. Can I just ask a clarification? On other, when you said stable, does that mean 0 or does it mean the same as Q1 through the rest of the quarters of the year?

Juan Azcué, Chief Financial Officer, Telefónica: Stable versus what you’ve seen in this quarter.

Georgios Ierodiaconou, Analyst, Citi: That’s great. Thank you.

Borja Ochoa, Executive, Telefónica2: Thank you. Your next question for today comes from the line of David Wright from Bank of America. Please go ahead.

David Wright, Analyst, Bank of America: Hi, guys. Thank you for taking the questions today. Just a couple of, well, essentially a higher level question. There was a lot of discussion last year following the change in management around scale in the business across Telefónica Group. Now, obviously, we’ve seen where there is lack of scale, perhaps in LatAm, we’ve seen the rapid divestment there. Apart from that, not really too much change. I guess when I now look at Germany, you know, there is a clearer strategy, there is an accelerated cost cutting. Is Germany okay here, or does Germany need either more customer scale or perhaps less capital allocation? Could you look to change that business at all, or are you very happy with where it is right now?

If I might also ask the same question in Spain. You have a very strong position in the premium market. I think, how can I say this? It’s, you know, sort of half a toe in the water in the lower end with O2. Do you need more scale in the low end of Spain? Do you have an ambition to have more scale in the low end of Spain? Or again, are you happy where you are? The reason I ask the questions is there was a lot of talk from your chairman about scale, but so far, we haven’t seen too much action. Thank you.

Emilio Gayo, Chief Operating Officer, Telefónica: Let me say that we are happy, of course, with the scale that we have. We have developed transformer group brand based in the asset that we have, and we are pretty sure, and we feel comfortable, confident that we are able to reach our targets, our guidance in the plan with the scale, with the operation that we have. Of course, we have talk and we could talk a lot during the last months about the opportunity for more scale related to create or to invest in technology in Europe and related to be more profitable. Of course, scale is a, in telco business is, provide better profits.

We feel that with the operation that we have, with the site operation that we have, we are able to compete in the markets in the right way, in a profitable way.

Borja Ochoa, Executive, Telefónica3: Let me continue. Let me answer your second subdued question, which is asking about M&A, which has, without mentioning M&A. We don’t comment on specific transactions or rumors. In this case, what I would say is our business plan is organically based. We have a plan to organically grow in Germany and Spain and grow scale organically. That doesn’t mean that we will not consider opportunities where it makes sense, as we have seen done, for instance, in the T-Mobile, and opportunities may happen in Germany is that the case or even in Spain. We will consider them as long as they fit on our M&A criteria, which was core markets, core business, clear and measurable synergies and right terms.

David Wright, Analyst, Bank of America: I appreciate that. Thank you, guys.

Borja Ochoa, Executive, Telefónica2: Thank you. Your next question today comes from the line of Nick Lyall from Berenberg. Please go ahead.

Borja Ochoa, Executive, Telefónica1: Hi. Morning, gents. Hope you can hear me. It was a couple of questions, please. The first on German ARPU, to come back to Mathieu’s question, please. How much more can ARPU benefit from the removal of promotions and the price rises that you talked about towards the end of the quarter? With the value strategy, is it sensible to assume that you’re gonna at least maintain ARPU at this level from here through the year, even with the family SIM cards, added in? The second one was, funnily enough, coming back to David’s point just there on M&A, is that you’ve seen the draft merger guidelines now. Is there anything in there that slows you down on this gaining of scale if you want to do it? Is there anything that you object to or were concerned wasn’t addressed, please? Thank you.

Emilio Gayo, Chief Operating Officer, Telefónica: Okay. Nick, thank you for the question. From the first one, I’m going to hand over to Santiago, just only to remember that ARPU is not the only KPI related to value. Anyway, I’m going to hand over to Santiago to give you more color about that.

Borja Ochoa, Executive, Telefónica3: We are seeing an increasing mature market with lower activity, commercial activity. The core business momentum in Germany remained resilient, and the customer postpaid mobile service revenue was flattish. Okay? That creates an outlook and in Germany of a potential stability, and that would create the base of a, let’s say, positive outlook on the ARPU evolution in the next periods. The quality of the O2 customer base is steadily improving for us. We are constantly growing the number of customers with multi-SIM and converged contracts supported by customer loyalty and the overall mobile service revenue trends. We are looking to an ARPU that will be impacted by the success of family plans, which naturally result in higher share of second and third SIM cards in the base.

In a market that has largely embraced family plans, the O2 consumer ARPU performance is in line or even slightly better than the competitor’s ARPU.

Emilio Gayo, Chief Operating Officer, Telefónica: Related the second question about mergers guidelines. I will say that from the point of view of theoretical analysis of the new guidelines, we think that these guidelines are more close to our vision. I think these guidelines are opening the option to consider other reasons in order to evaluate the mergers and talking about investment and talking about creating technology and so on. Again, from the theoretical point of view, we are happy with the evolution in the recent that are behind these guidelines. Anyway, again, it’s theoretical.

We have to see, if really the change, is a real change. When we see, any operation that, can be analyzed under this, new umbrella.

Borja Ochoa, Executive, Telefónica1: Understood. Thanks very much.

Borja Ochoa, Executive, Telefónica2: Thank you. Your next question comes from the line of James Ratzer from New Street Research. Please go ahead.

James Ratzer, Analyst, New Street Research: Yes, thank you very much indeed. Good morning, thanks for taking the question. I have two questions, please. The first one, let’s just stick with Germany again for a moment, and maybe you can help us to be a bit more kind of specific on the numbers. I think in Q1 mobile service revenues were down 8.5%. Obviously, that’s very influenced by the 1&1 migration, but you don’t disclose the underlying revenues excluding 1&1. I estimate that might be around -2% year-on-year. Really, I suppose the first question is do you think that’s a fair estimate? It looks to me like that trend’s been stable for the last few quarters.

You know, as we go through the year, do we see service revenues kind of improve, but we’re exiting the year at a kind of -2% run rate? I’d just love to kind of hear a bit more about where you see the underlying overall revenue growth and how that might develop through the year. Secondly, it’s, you know, widely reported that you are leading a consortium to bid for one of the AI gigafactories, and in particular, the kind of Spanish government-backed project in Spain. If you were to win that contract, could you kind of give us an order of magnitude of how much capital you think Telefónica might have to deploy into this AI gigafactory project?

Can you then talk us through how you’d expect to make a return on that capital as well and, you know, what kind of IRR you think is feasible? Thank you.

Emilio Gayo, Chief Operating Officer, Telefónica: Yeah. Okay, thank you for your questions. Okay, it’s right, we don’t discuss the underlying revenues, but we can say that we are very stable as other quarters. We don’t see a critical change in this evolution. The whole service revenue, the total service revenues of this quarters is very impacted, as I mentioned during the conference call, due to the 1&1 effect peak. Then answering without figures because we don’t give the figures. Answering you again, we see the underlying being very resilient and revenues and be very positive even in EBITDA.

This is the first. Regarding the second question, just to clarify, we are at the beginning of the process. I’m going to hand over now to Borja Ochoa Gil to explain a little bit more of the process. Anyway, the investment that Telefónica can do here is always limited. Of course, in the parameters that we consider that are value accretive for the group. I’m going to hand over to Borja in order to give you more color.

Borja Ochoa, Executive, Telefónica: Yeah. Okay. Thank you, James. Yeah, exactly. We are participating in the process of building a gigafactory network along Europe. We are leading the Spanish consortium, and right now we are concentrated in all the works behind the preparation of the offer or the final offer. In terms of timeframe, the final offer has to be presented between June and July. We are expecting outcome by the end of the year. We cannot give any further information apart from that.

James Ratzer, Analyst, New Street Research: Okay. It sounds like the kind of potential capital size would be limited, i.e., kind of, to like only a few hundred million EUR or is that even too much?

Juan Azcué, Chief Financial Officer, Telefónica: Let me take that one. Leading from an operational level, but as Borja said, but from an investment level, we’re talking about a minority. When I talk minority, I’m talking about between 10% and 15% or something around that. It’s below. It’s definitely below the amount you’re saying, because you have to remember that around two-thirds of that, if not more, is financed via debt. The rest is equity, and it’s a consortium with the state, and we’re only taking an amount of that size. Therefore, the amount is way lower than the figures you put, and the returns that you’ve mentioned will be consistent with returns in the InfraDigital world.

James Ratzer, Analyst, New Street Research: That’s clear. Thank you very much.

Borja Ochoa, Executive, Telefónica2: Thank you. Your next question today comes from the line of Joshua Mills from BNP Paribas. Please go ahead.

Joshua Mills, Analyst, BNP Paribas: Hi, guys. Thank you for taking the question. There were reports in the press earlier in the year around potential German consolidation and some suggestion that from a Telefónica perspective, 1&1’s network quality might be an issue in any future negotiations. I’m not expecting you to comment on that specifically, but could you maybe give us a high level view of how you think about the value in any potential consolidation deals, be that Germany, Spain, U.K.? Perhaps more specifically, how you view the importance of the network quality of competitors. The reason I’m asking is I think a lot of people view consolidation upside as really a, you know, a debate around market repair, potential cost synergies rather than network complementarity. I’d love to hear a view on that. Thanks very much.

Emilio Gayo, Chief Operating Officer, Telefónica: Let me start answering you about the network and going to hand over to Juan Azcué to talk about the M&A options. We are very happy with the evolution of the network in Germany. We have reached the second position as in terms of quality in the market. This perhaps or not, can be important in any potential merger in the future or not, but it’s sure that it’s critical in the performing of Telefónica Germany in the next coming years. I think this is not the key reason for the quality Although to develop a very quality, high-quality network is not mergers or acquisition, it’s the quality of services.

Now I hand over to Juan in order to give you more color about the M&A process.

Borja Ochoa, Executive, Telefónica3: Just 1. Not sure how much color I’m gonna give you because in real terms, as I’ve said, we will pursue transactions that are value accretive and therefore that have clear measurable synergies and that’s quite plain vanilla in telco. That’s mostly cost and network. That’s what you can quantify. Yes, there’s always revenue synergies, but then those you have to believe in them. It’s cost and network synergies. These changes between market to market deal, different deals and different structures, you know. Netomnia. There is some revenue synergies, but it’s mostly CapEx synergy, you know, of us having access in fiber. But that can be different depending on the transaction.

Borja Ochoa, Executive, Telefónica4: Great. Thank you.

Borja Ochoa, Executive, Telefónica2: Thank you. Our next question today comes from the line of 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 in Spain. I would like to zoom a little bit more in the wholesale revenue line performance. After falling significantly last year, in year-over-year basis, we have seen a material deceleration on that fall pace. I would like to understand what has been the driver and what should we expect for coming quarters from wholesale in Spain. The second question is coming back to Germany, but now on an organic point of view. One of the key messages that you have shared in your Capital Markets Day was your push for convergence in Germany. I would like to understand which kind of steps are you pursuing on that front. Thank you.

Emilio Gayo, Chief Operating Officer, Telefónica: Fernando, thank you for your question. In the case of the wholesale revenues in Spain, you have to see to know that the line is wholesale and others. In this case, there are some linear, non-nonlinear effects that improve this line. We are seeing the impact of the wholesale new agreements for the next quarter and probably till the peak of this effect will be in the second quarter of the year. Again, the first quarter is impacted by some nonlinear impact and some comparison with the last year. Anyway, the evolution of the wholesale is a absolutely expected evolution.

It was included in our expectation, then it’s included in the, in the outlook that we are giving to you that we are expecting to improve H2 compared with H1. Related to German question, we said that this is our strategy to develop the convergence in Germany. We are working hard in order to develop our fixed business. That is the part of the convergence that we have to do more effort.

In this case, we can’t explain so much about the negotiation that we have, but we are working in order to have better access to the infra networks of our competitors in, or our providers, in this case, in Germany.

Borja Ochoa, Executive, Telefónica3: If you allow me to complement.

Fernando Cordero, Analyst, Banco Santander: Please.

Borja Ochoa, Executive, Telefónica3: Yeah. This is Santiago. Just to complement the answer from Emilio. Just we are working on realignment our offer portfolio to increase our attractiveness in multi lines at the household level. You have seen the accelerated traction in the fixed in Q1, which will also help us to combine better mobile and fixed. Additionally, we are planning to sell and combine digital services for the home, be it TV or other services that we already commercialize in other markets.

Fernando Cordero, Analyst, Banco Santander: Okay. Thank you.

Borja Ochoa, Executive, Telefónica4: Operator, time for one last question.

Borja Ochoa, Executive, Telefónica2: Thank you. We will now take the final question. Your final question comes from the line of Fernando Abril-Martorell from Alantra. Please go ahead.

Fernando Abril-Martorell, Analyst, Alantra: Hello. Thank you for taking my questions. In Spain A couple, please. In Spain, just to confirm, Emilio, when referring to improving momentum in H2, were you referring mainly to top-line trends rather than EBITDA? Linked to this, how much of the restructuring savings were already captured in Q1 and how much remains to come through over the rest of the year? Second question on guidance. Q1 performance was already within the guidance range. However, Germany appears to have bottomed out. Brazil remains quite strong. Spain should, you know, you also mentioned this, but restructuring savings should also a greater impact through the year, you know.

My question is, am I missing any relevant headwinds for the remaining of the year or it’s just a simply conservative guidance? Thank you.

Emilio Gayo, Chief Operating Officer, Telefónica: Fernando, thank you for your question. Regarding the first question about the reimbursement program in Spain, it’s true that the impact in the Q1 is limited because we started the last month of the quarter. It’s around EUR 20 million and around EUR 250 million during the whole year. Despite that, we are seeing for H2 the same improvement that I mentioned for the rest of the financial KPIs is a result of several impacts. The reimbursement program is one. The prices increase is other. The cost increase is other. The salary increase is other. The wholesale agreements is other. The ecosystem is other.

The B2B development is other. The result of everything is that we are seeing a better H2 compared with H1 in the financial metrics. In the case of Germany, we are seeing better results in H2 compared with H1. This is our expectation for Germany for the rest of the year. I forgot. Excuse me that I forget the part of the question. Regarding the guidance of the group, we are pretty confident to reach our targets. The headwinds and the tailwinds are based on the improvement in Germany, improvement in Spain and the solid performance in Brazil.

Fernando Abril-Martorell, Analyst, Alantra: Okay. Thank you, Emilio.

Borja Ochoa, Executive, Telefónica2: 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 kindly ask you to contact our investor relations department. Good morning and thank you.