Executive Summary / Key Takeaways

• Strategic Reorientation and Deleveraging: Telefónica is undergoing a significant portfolio transformation, divesting non-core Hispam assets to reduce leverage and reallocate capital to its priority markets in Europe and Brazil. This strategy, including €3 billion in Hispam disposals, is expected to reduce net financial debt to €26.0 billion post-closing, improving the quality of free cash flow and leverage ratios.
• Fiber and 5G Leadership as a Core Moat: The company is a world-class infrastructure provider, leading in fiber deployment and copper network shutdowns in Europe. Its extensive FTTH footprint (81.4 million premises passed by Q2 2025) and expanding 5G coverage (77% in core markets) are critical technological differentiators, driving efficiency and customer value.
• Consistent Operational Performance in Core Markets: Telefónica's core units in Spain, Brazil, and Germany are demonstrating solid commercial momentum and accelerating financial growth. Spain achieved 1.9% organic revenue growth in Q2 2025, while Brazil delivered 8.6% EBITDA growth since Q4 2023 in local currency, significantly above inflation.
• Robust Financial Outlook and Shareholder Returns: Telefónica has confirmed its 2025 guidance, projecting organic growth in revenue, EBITDA, and EBITDAaL minus CapEx, with free cash flow generation similar to 2024. This is expected to be sufficient to cover a €0.30 per share dividend and support continued deleveraging.
• Technological Innovation and Efficiency: Through initiatives like network virtualization, AI-driven automation, and strategic partnerships (e.g., Telefónica Tech's B2B solutions, collaboration with Google (GOOGL) on subsea cables), Telefónica is enhancing operational excellence, streamlining CapEx deployment, and driving future growth in high-value digital services.

Telefónica's Enduring Vision and Market Evolution

Telefónica, S.A., incorporated in Madrid in 1924, has evolved into a global telecommunications powerhouse, deeply embedded in the digital lives of millions across Europe and Latin America. The company's enduring vision centers on customer engagement, network transformation, and operational efficiency, foundational pillars that have shaped its strategic responses to a dynamic industry landscape. Telefónica's historical journey, marked by continuous investment in infrastructure and a proactive approach to portfolio management, underpins its current strategic direction.

The broader European telecom market is characterized by fragmentation, prompting a growing consensus on the need for consolidation to foster efficiency and accelerate investment in next-generation technologies. Telefónica's strategy is acutely attuned to this shift, aiming to reinforce its position as a leading telecommunications and technology company. The company's foundational strengths include its scale customer relevance, boasting 348.6 million customers by Q2 2025, a world-class infrastructure leadership in fiber and copper network shutdowns, and proven operational know-how. This strategic positioning, coupled with a disciplined industrial rationale, is designed to enhance execution, simplify operations, and ultimately drive corporate valuation.

Technological Edge: The Backbone of Telefónica's Future

At the heart of Telefónica's competitive strategy lies its advanced technological infrastructure, particularly its extensive Fiber-to-the-Home (FTTH) and 5G networks. These technologies are not merely assets but serve as critical differentiators, enabling superior service delivery, driving operational efficiencies, and forming a robust competitive moat.

Telefónica is a recognized leader in fiber deployment across Europe. By Q2 2025, its FTTH footprint reached an impressive 81.4 million premises passed, with an additional 1.5 million premises added quarter-on-quarter. This extensive reach is complemented by the company's pioneering copper network switch-off program in Spain, a significant milestone completed in Q2 2025. This modernization effort has yielded substantial benefits, including significant savings in operating expenses (OpEx) and capital expenditures (CapEx), contributing to EBITDA margins above 36% in Spain. The Spanish operation is targeting a CapEx to revenues intensity of 10%, a leading figure in Europe.

In the realm of mobile connectivity, Telefónica's 5G network is rapidly expanding, achieving 77% coverage in its core markets by Q2 2025. Germany, in particular, boasts 98% 5G population coverage, reflecting strong progress in densification and innovation. The activation of a standalone 5G network in Spain further underscores the company's commitment to advanced mobile capabilities.

Beyond core connectivity, Telefónica is deeply invested in technological innovation and efficiency. The company's networks are becoming more open and intelligent through softwarization, automation, and virtualization, leveraging go-to-cloud strategies, open run, and open broadband models. Artificial intelligence (AI) is embedded across the business, streamlining CapEx deployment and boosting efficiency. Telefónica Tech, the B2B technology segment, is a testament to this focus, driving digital transformation for customers in areas like AI & Data, Cloud, IoT, Data Protection, and Cybersecurity. Strategic partnerships, such as the collaboration with Google to provide infrastructure for their new subsea cable Sol in Spain, highlight the company's role as a growth enabler in the digital ecosystem. These technological advancements translate directly into a stronger competitive position, enabling lower operational costs, improved service quality, and enhanced customer lifetime value, all of which are crucial for sustainable financial performance and long-term growth.

Strategic Reorientation: Core Markets and Portfolio Optimization

Telefónica's strategic narrative is currently defined by a decisive reorientation towards its core markets and an aggressive portfolio optimization, particularly in its Hispam operations. This disciplined approach aims to unlock value, reduce financial risk, and reallocate capital to areas with higher returns. The company has explicitly prioritized Europe and leadership in Brazil as its strategic focal points.

The acceleration of Hispam disposals has been a cornerstone of this strategy. In early 2025, Telefónica completed the sale of Telefónica Argentina for €1.2 billion in February, followed by the sale of Telefónica Peru in April. Binding agreements were also signed for the sale of Telefónica Colombia (€368 million) in March, Telefónica Uruguay (€389 million) in May, and Telefónica Ecuador (€330 million) in June. These five transactions collectively represent a total firm value of €3 billion. The rationale behind these divestitures is clear: to reduce exposure to the more volatile Hispam region, improve free cash flow generation, and significantly reduce group leverage. Credit rating agencies have viewed these disposals positively, recognizing the improvement in the quality of Telefónica's free cash flow and leverage ratios.

Complementing its divestment strategy, Telefónica is actively forging strategic partnerships to enhance its network assets and market position. In Spain, a definitive 16-year agreement for national roaming and spectrum sharing was finalized with Digi in Q2 2024, designed to be value-accretive by monetizing networks and increasing wholesale revenue visibility. Furthermore, a non-binding Memorandum of Understanding (MOU) was signed with Vodafone Spain for the creation of a FiberCo, aiming to cover 3.5 million premises with fiber-to-the-home and optimize network utilization. In the UK, the mobile network sharing agreement with Vodafone UK was extended to 2030, strategically positioning VMO2 for future market dynamics. These initiatives underscore Telefónica's commitment to an asset-light model where appropriate, leveraging partnerships to enhance efficiency and unlock value from its extensive infrastructure.

Operational Excellence and Financial Resilience

Telefónica's strategic reorientation is yielding tangible results in its operational and financial performance, particularly within its core markets. The company reported solid Q2 2025 results, demonstrating consistent execution and a clear path towards its financial objectives.

In Q2 2025, Telefónica's reported revenue reached €8,953 million, marking a 3.7% year-on-year increase, with service revenue growing 3.8% to €8,104 million. On an organic basis, revenue grew by 1.5% and service revenue by 1.6%. This growth was broad-based, with B2C revenue increasing 4.8% (2.1% organic) and B2B revenue rising 0.2% (5.2% organic). Profitability also saw healthy expansion, with EBITDA up 4.8% to €2,921 million (1.2% organic) and EBITDAaL-CapEx increasing 6.2% to €1,212 million (0.1% organic). It is important to note that foreign exchange fluctuations had a notable impact on reported figures, with H1 2025 seeing a -4.5 percentage point impact on revenue, -4.8 percentage points on EBITDA, and -4.2 percentage points on EBITDAaL-CapEx.

Breaking down performance by segment:

• Telefónica España demonstrated accelerating growth, with Q2 2025 revenue of €3,186 million (+1.9% organic) and EBITDA of €1,125 million (+1% year-on-year). The segment achieved its best quarterly net additions since Q3 2018, driven by a strong commercial momentum and an outstanding digital ecosystem.
• Telefónica Brasil delivered a standout performance, with Q2 2025 revenue of €2,279 million (+7.1% organic) and EBITDA of €960 million (+8.6% year-on-year). The segment achieved record EBITDA growth since Q4 2023 and a robust EBITDAaL-CapEx margin of 16.3%, up 1 percentage point. This growth, significantly above inflation in local currency, was fueled by higher ARPU, mobile contract and fiber access growth, and strong B2B performance.
• Telefónica Deutschland (Germany), while facing the impact of 1&1 migration, reported Q2 2025 revenue of €2,040 million (-2.4% reported) and EBITDA of €638 million (+6% reported). The segment added 184,000 mobile contract customers in Q2 2025 and achieved 98% 5G coverage.
• VMO2 (UK) reported Q2 2025 total revenue of £2,526.8 million (-5.5%) and Guided Adjusted EBITDA of £985.9 million (+1.1%), supported by cost efficiencies. The joint venture's full fiber footprint now surpasses 7 million premises, with 5G coverage reaching 77%.
• Hispam showed sequential improvement, with Q2 2025 revenue of €1,042 million (-2.9%) and EBITDA of €208 million (+2.8%). The segment recorded positive contract net adds in Mexico, Colombia, and Chile, and achieved 99% FTTH/FBB accesses.
• Telefónica Tech, the B2B technology segment, continued its strong growth trajectory, with H1 2025 revenue of €1,074 million (+12.5% organic). This growth is driven by demand in financial, healthcare, and public sectors, with a healthy commercial funnel.
• Telefónica Infra saw its FTTH JV premises passed increase to 29.1 million by June 2025, representing 35% of Telefónica's total FTTH footprint.

Telefónica's liquidity position remains solid, with €18.7 billion in liquidity and an average debt life of 10.90 years. The company's net financial debt stood at €27.609 billion in Q2 2025, with a leverage ratio of 2.78x. However, post-closing of the Hispam disposals, net financial debt is expected to reduce to €26.0 billion, bringing the Net Debt/EBITDAaL ratio to 2.58x. This strategic deleveraging, coupled with a disciplined capital allocation, is crucial for enhancing financial flexibility and supporting future growth initiatives.

Competitive Landscape and Strategic Positioning

Telefónica holds a prominent position in the telecommunications market, particularly in Spain and Latin America, where it maintains a leading role in mobile and broadband services. Its growth trajectory aligns with broader industry expansion, though it faces intense competition across its markets.

Against key direct competitors such as Vodafone , Deutsche Telekom , Orange , and AT&T , Telefónica leverages its deep regional expertise and customer-focused strategies. In markets shared with Vodafone , Telefónica's established infrastructure and customer loyalty programs provide an edge in retention, while its bundled services in emerging markets offer greater efficiency. Deutsche Telekom (DTE), with its significant investments in 5G, often demonstrates faster network speeds, posing a technological challenge. However, Telefónica's cost-effective operations in emerging economies and broad geographic diversification offer a distinct advantage. Compared to Orange (ORAN), Telefónica's comprehensive service bundles provide a more integrated customer experience, and its extensive Latin American presence offers greater accessibility. While AT&T's (T) U.S.-centric, content-heavy approach differs, Telefónica's strengths in international diversification and operational reliability are key differentiators.

Telefónica's competitive advantages, or moats, include its strong brand in Latin America, fostering customer loyalty and pricing power, and its extensive network infrastructure, which supports efficient service delivery. Regulatory licenses provide exclusive access to spectrum, enhancing its ability to compete effectively. However, vulnerabilities exist, notably high debt levels that could limit investment capacity and technological gaps in 5G deployment, which might result in materially lower network speeds compared to some rivals.

The company actively responds to competitive forces through strategic partnerships, such as the Digi and Vodafone (VOD) FiberCo agreements in Spain, which optimize network utilization and monetize infrastructure. Its focus on high-value B2B services through Telefónica Tech and an asset-light approach in Hispam further demonstrate its strategic agility in a competitive environment. Barriers to entry in the telecommunications sector, such as high capital requirements and strict regulatory approvals, generally favor incumbents like Telefónica, protecting its market share and financial performance.

Outlook and Guidance: A Clear Path Forward

Telefónica has provided a clear and confident outlook for 2025, reaffirming its commitment to organic growth and disciplined financial management. The company expects organic growth in revenue, EBITDA, and EBITDAaL minus CapEx for the year. CapEx intensity is projected to continue declining, reaching less than 12.5% of sales by year-end 2025.

A cornerstone of the 2025 guidance is the expectation for free cash flow generation to be similar to that posted in 2024. This level of free cash flow is deemed sufficient to cover the announced €0.30 per share dividend (€0.15 cash payable in December 2025 and €0.15 cash payable in June 2026) and support continued deleveraging. Management anticipates performance to improve as the year progresses, driven by easing comparative figures around mid-year and sustained positive operational trends. Key assumptions underpinning this outlook include a positive working capital contribution, less impact from volume changes and lower inflation on lease payments, and stable debt-related interest costs.

The strategic review, initiated in Q1 2025, is on track to conclude in the second half of 2025. This review will inform the company's future capital structure and financial policy, aligning them with the evolving European telecom landscape. For Spain, the outlook for 2025 includes low-single-digit EBITDA growth above revenue growth, propelled by retail revenue expansion, tailwinds from last year's redundancy plan, technological transformation, and efficiencies from simplification and AI automation. Brazil is expected to maintain its strong underlying performance, with local currency growth continuing to exceed inflation, a crucial factor in mitigating foreign exchange volatility. In Germany, the focus remains on profitable organic growth, leveraging the strength of its network and brands.

Telefónica's technological roadmap is integral to its forward-looking strategy, aiming to reduce CapEx to sales from 13.3% in 2023 to less than 1% by 2026. This will be achieved through business evolution towards low-CapEx segments like B2B and digital services, network optimization via virtualization and AI, and strategic investments in tech cycle optimization.

Despite this positive outlook, risks and challenges persist. Intense competition and foreign exchange volatility remain significant factors impacting financial metrics. The ongoing 1&1 migration in Germany and revenue impacts from price phasing and handset softness in VMO2 present specific operational headwinds. The historical Peruvian tax dispute, for which a €0.9 billion provision was made and €279 million paid in Q2 2024, has been factored into guidance, but the timing of remaining payments will extend beyond 2025.

Conclusion

Telefónica is executing a profound strategic transformation, shedding non-core assets to fortify its balance sheet and sharpen its focus on high-growth, high-return markets in Europe and Brazil. The company's leadership in fiber and 5G infrastructure, coupled with its commitment to technological innovation and operational excellence, forms a robust competitive foundation. This strategic pivot, evidenced by significant Hispam divestitures and a disciplined approach to capital allocation, is designed to enhance financial resilience and drive sustainable value creation.

With confirmed 2025 guidance projecting organic growth across key financial metrics and stable free cash flow sufficient to cover its dividend, Telefónica presents a compelling investment thesis centered on deleveraging, core market strength, and technological leadership. While competitive pressures and foreign exchange fluctuations remain ongoing considerations, the company's proactive management, strategic partnerships, and clear technological roadmap position it to capitalize on the evolving telecommunications landscape. Investors should monitor the successful execution of the strategic review and the continued realization of efficiencies from its advanced network infrastructure as key indicators of its long-term potential.