Telefónica Is Finally Getting Its Act Together

THE GIST

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Telefónica has spent years disappointing investors with a sprawling, debt-heavy business that struggled to grow. The first quarter of this year suggests something is beginning to change, and the market noticed, sending shares up more than 6% on Thursday.

WHAT HAPPENED

Telefónica, a Spanish multinational telecom firm, reported first quarter adjusted EBITDA of €2.84 billion (about $3.3 billion), up 1.8% in constant currency terms and ahead of the €2.79 billion consensus estimate. Revenue grew 0.4% to €8.13 billion, also beating expectations. Free cash flow from continuing operations came in at €333 million, above the €300 million forecast. Net financial debt fell by €1.5 billion during the quarter to €25.34 billion, helped by the completed sale of operations in Colombia and Chile.

Spain delivered the standout performance. Revenue and EBITDA both rose 2%, with convergent churn hitting a historic low of 0.7%. That figure, which measures how many bundled broadband and mobile customers are leaving, is the most closely watched indicator of competitive health in Spanish telecoms, and 0.7% is a genuinely strong result. Movistar Plus, the pay-TV platform, added 86,000 subscribers in the quarter, its best performance since the turnaround began, taking total subscribers to 3.88 million and approaching the 4 million threshold for the first time since 2021.

Brazil was equally strong. Adjusted EBITDA rose 8.7% to €1.05 billion, with the Brazilian real’s appreciation against the euro adding further boost to the contribution in reported terms. Revenue rose 7.4%.

Net losses narrowed 68.5% to €411 million, though on an organic basis excluding disposals and restructuring charges, Telefónica would have posted a net profit of €482 million. The company confirmed its full-year guidance for organic revenue and EBITDA growth of 1.5% to 2.5%, and reiterated its €0.15 dividend per share.

Shares rose as much as 5.8% in Madrid, the biggest intraday gain since late February. The stock is up 16% year to date.

WHY IT MATTERS

Telefónica’s turnaround under Chairman Marc Murtra, who took over late last year has involved painful medicine.

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He cut the dividend, slashed the free cash flow outlook, announced significant job reductions, and committed to a wholesale restructuring of costs across networks and energy. That kind of announcement tends to punish a stock in the short term in exchange for credibility over the medium term. Six months in, the Q1 numbers suggest the operating side of that bargain is beginning to hold up.

The Spain story is the most important piece. Spanish telecoms was characterized for years by brutal price competition, with carriers discounting aggressively to win and retain customers in a market where everyone was largely selling the same bundled fiber and mobile product. That dynamic appears to be easing. Churn at 0.7% is not just a good number in isolation, it suggests customers are staying put, which means Telefónica is spending less on customer acquisition and getting more predictable revenue from its existing base.

Brazil provides a second growth engine that tends to get under-appreciated by investors focused on Telefónica’s European story. The Brazilian unit, operating under the Vivo brand, is the country’s largest mobile operator, and it is generating both revenue and earnings growth that many European operators would envy. The currency tailwind in Q1 was favorable, but the underlying operational momentum in Brazil is real and structural.

Germany is the remaining problem that needs time to resolve. Losing a major wholesale contract to Vodafone was always going to create a multi-quarter revenue headache, and it has. The company’s own messaging, that losses are past their peak and the second half will show improvement, is the credible direction of travel, but investors will need to see that in the numbers before fully discounting the German drag.

The debt reduction is also meaningful. Bringing net financial debt down by €1.5 billion in a single quarter, aided by the LatAm disposals, moves the balance sheet in the direction Murtra has committed to. Telefónica has historically carried a debt load that left little room for strategic flexibility, and the deleveraging process, while still in early stages, is at least moving in the right direction.

WHAT’S NEXT

The second half of this year is when management has promised improvement in both Spain and Germany, and that is where the turnaround story either builds credibility or hits its first real test. Spain’s continued low churn will be the key metric to watch, since any rebound in competitive intensity could quickly reverse the margin progress seen in Q1.

Full-year guidance of 1.5% to 2.5% organic growth looks achievable on current trends, but Telefónica’s history of disappointing on guidance means investors will need a second strong quarter before fully trusting the recovery narrative.