Executive Summary / Key Takeaways

• Telefónica ($TEFOF) is undergoing a significant strategic reorientation, divesting non-core Hispam assets to focus on its strong European and Brazilian markets, aiming to enhance financial flexibility and drive shareholder value.
• The company demonstrated solid operational and financial performance in H1 2025, with accelerating revenue and robust EBITDAaL-CapEx growth, driven by strong customer additions and efficiency gains across its core segments.
• Telefónica's technological leadership in fiber and 5G, coupled with aggressive copper network decommissioning and AI-driven automation, forms a critical competitive moat, enabling superior service delivery and cost efficiencies.
• Management has reiterated its 2025 guidance for organic growth in key financial metrics and stable free cash flow, supported by disciplined capital allocation and a strategic review expected to conclude before the end of 2025.
• Despite intense competition and FX volatility, Telefónica's strategic partnerships, network optimization, and focus on high-value B2B services position it for sustained profitability and deleveraging.

A Century of Connectivity: Telefónica's Evolution and Strategic Imperative

Telefónica, S.A., incorporated in 1924, has a long history as a telecommunications powerhouse, providing mobile and fixed-line communications, broadband internet, and digital television across Europe and Latin America. The company's journey has been marked by continuous adaptation, from the automation of manual exchanges in 1926 to pioneering mobile telephony services in the 1970s, culminating in today's advanced 5G networks. This enduring foundation has shaped its current strategic imperative: a decisive pivot towards core markets and operational excellence to unlock value in a rapidly evolving digital landscape.

The telecommunications industry is undergoing profound shifts, characterized by technological disruption, increasing demand for high-speed connectivity, and a growing consensus for in-market consolidation in Europe to foster stronger, more efficient players. Telefónica's strategy is firmly aligned with these trends, prioritizing its leadership in Europe and Brazil while systematically optimizing its portfolio in Hispam. This reorientation is not merely a divestment strategy but a focused effort to reallocate capital to higher-return opportunities, enhance financial flexibility, and drive corporate valuation.

Technological Edge: The Backbone of Connectivity and Digital Transformation

Telefónica's competitive strength is deeply rooted in its advanced network infrastructure and commitment to technological innovation. The company has aggressively invested in next-generation networks, expanding its fiber-to-the-home (FTTH) footprint to 81.4 million premises passed by Q2 2025, an increase of 1.5 million quarter-over-quarter. This extensive fiber deployment, particularly in Spain, which boasts one of Europe's most extensive FTTH networks, offers superior speed, reliability, and capacity compared to legacy copper networks. The tangible benefit for Telefónica is a leading position in broadband, enabling high-value convergent offerings and superior customer lifetime value.

Complementing its fiber dominance, Telefónica has achieved 5G coverage of 77% across its core markets by Q2 2025, with Spain and Germany exceeding 90%. This advanced mobile network provides faster speeds and lower latency, crucial for emerging applications like IoT and AI. A significant operational achievement is the near-complete copper switch-off in Spain by Q2 2025, with over 4,000 central offices closed since 2014. This decommissioning, along with 3G shutdown in Germany and 2G in Uruguay by Q1 2025, significantly reduces maintenance CapEx and energy consumption, freeing up resources for further investment in fiber and 5G.

Beyond core connectivity, Telefónica Tech, the company's B2B technology unit, is a key differentiator. It leverages expertise in Cybersecurity, Cloud, IoT, Big Data, Artificial Intelligence, and Blockchain to drive digital transformation for businesses and public administrations. Telefónica Tech's revenue reached €2.2 billion in the last twelve months ending Q2 2025, with commercial activity led by the financial, healthcare, and public sectors. The unit's focus on AI and data is a key driver for customer totalization, triggering projects in Cloud, IoT, Data Protection, and Cybersecurity. This segment's growth, with bookings up 7% and a 15% expansion in the commercial funnel, underscores its role in providing higher-value, more recurrent, and profitable revenue streams. Telefónica's pioneering AI code of ethics, first published in 2018, also highlights its commitment to responsible technology.

Telefónica Infra further strengthens the company's infrastructure advantage, with its FibreCos reaching 29.1 million FTTH premises passed by June 2025, representing 35% of Telefónica's total FTTH footprint. Telxius, the submarine cable company, maintains high profitability, around 49% in H1 2025, and is expanding its international network, including a new subsea cable connecting Puerto Rico and the U.S. by Q3 2027. These infrastructure assets and technological capabilities provide Telefónica with a robust competitive moat, enabling it to deliver superior services, optimize costs, and capture growth in the evolving digital economy.

Operational Momentum Across Core Markets

Telefónica's strategic focus on its core markets—Spain, Brazil, Germany, and the UK (through VMO2)—is yielding tangible results, demonstrating solid operational momentum and financial resilience.

Telefónica Spain

The domestic market is showing accelerating growth in customers and financials. In Q2 2025, revenue grew by 1.90% organically year-on-year to €3,186 million, with EBITDAaL-CapEx increasing by 2.80% organically year-on-year to €591 million. The segment recorded 152,000 net additions in Q2 2025, the best since Q3 2018, and maintained a low churn rate of 0.80%. Average Revenue Per User (ARPU) stood at 91.10. B2C growth is balanced with higher customer lifetime value (CLV), while B2B IT sales are growing at double-digit rates. The completion of the copper switch-off in Spain by Q2 2025 is a significant efficiency driver. Strategic agreements, such as the 16-year national roaming and range sharing contract with Digi and the non-binding MOU with Vodafone for a FiberCo covering 3.5 million premises, are value-accretive, monetizing networks and enhancing wholesale revenue visibility.

Telefónica Brasil

Brazil remains a growth engine, with Vivo maintaining its leadership in mobile contract and FTTH. Q2 2025 revenue reached €2,279 million, growing 7.10% organically year-on-year, and EBITDA saw robust growth of 8.60% organically year-on-year to €960 million, the strongest since Q4 2023. Revenue growth in local currency is well above inflation, driven by double-digit growth in flagship services like MSR (+7.30%), Fixed (+7.90%), FTTH (+10.90%), and Contract (+9.20%). Digital services penetration has accelerated, contributing over 11% of total revenue. The formalization of agreements with Anatel in April 2025 to migrate to the authorization regime is expected to enable greater business transformation and deliver positive commercial and financial impacts.

Telefónica Deutschland (Germany)

Telefónica Deutschland continues to demonstrate robust mobile trading, with contract net additions increasing 12.10% quarter-over-quarter in Q2 2025. Revenue for Q2 2025 was €2,040 million, up 2.40% organically year-on-year. The O2 network boasts 98% 5G coverage and stable, low churn at 0.90%. While the partner business and customer migration to 1&1 (1U1) have impacted revenue, efficiency gains and growth initiatives have supported EBITDA. German regulators confirmed a five-year spectrum prolongation until 2030, providing long-term stability. The renewal of a 10-year agreement with Freenet is expected to significantly increase customer numbers on Telefónica's network by 2026.

VMO2 (UK)

The UK joint venture, VMO2, is focused on value over volume. In Q2 2025, revenue grew 5.50% organically year-on-year to €2,976 million, and EBITDAaL-CapEx increased by 10.80% organically year-on-year to €438 million. Contract churn improved to 1.10%, and consumer fixed ARPU grew 1.50% quarter-over-quarter. The fixed network footprint reached 18.5 million UBB premises passed. While revenue was impacted by price rise phasing, handset softness, and lower nexfibre construction, cost efficiencies are improving the EBITDA trend. The mobile network sharing agreement with Vodafone UK has been extended to 2030, and nexfibre aims for 2.5 million homes by 2025. The NetCo sale process has been paused, but fiber expansion continues.

Hispam Reorientation: Unlocking Value and Deleveraging

Telefónica is accelerating its portfolio transformation in Hispam, strategically reducing its exposure to the region to enhance financial flexibility and focus on core markets. In H1 2025, the company executed the sales of Telefónica Argentina (€1.2 billion) and Telefónica Peru, and signed binding agreements for the sale of Telefónica Colombia (€368 million), Telefónica Uruguay (€389 million), and Telefónica Ecuador (€330 million). These five transactions represent a total firm value of €3 billion.

These disposals have a direct positive impact on Telefónica's balance sheet. The sale of Argentina reduced leverage by 0.02 times, and Peru's sale is expected to reduce leverage by approximately 0.01 times in Q2 2025, while also eliminating negative operative cash flow and future debt consolidation. Management expects net debt to be reduced to €25.8 billion after these post-closing events. This strategic simplification allows Telefónica to reallocate capital to core markets and businesses, thereby reducing overall group leverage and improving the quality of its free cash flow and leverage ratios.

Financial Strength and Disciplined Capital Allocation

Telefónica's financial performance in H1 2025 demonstrates solid execution and a clear path towards its strategic objectives. Consolidated revenue for H1 2025 was €18,013 million, growing 1.50% organically year-on-year, with Q2 2025 revenue at €8,953 million, up 1.50% organically year-on-year. EBITDA for H1 2025 stood at €5,867 million, growing 0.80% organically year-on-year, while Q2 2025 EBITDA was €2,921 million, up 1.20% organically year-on-year. Operating cash flow (EBITDAaL-CapEx) for H1 2025 was €2,528 million, growing 0.20% organically year-on-year, with Q2 2025 at €1,212 million, up 0.10% organically year-on-year.

Free cash flow (FCF) from continuing operations for H1 2025 was €291 million, a significant improvement of €718 million quarter-over-quarter, demonstrating momentum building. While Q1 2025 FCF was affected by seasonality, management anticipates acceleration throughout H2 2025, serving as the main lever for deleveraging. Net Financial Debt decreased by 5.5% year-on-year to €27.6 billion as of June 2025, with a net debt to EBITDAaL ratio of 2.78x. The company maintains ample liquidity of €18.7 billion, an average debt life of 10.9 years, and an interest cost of 3.30% as of June 2025. This disciplined capital allocation, coupled with the Hispam disposals, is expected to further reduce leverage and support the confirmed 2025 cash dividend of €0.30 per share.

Competitive Positioning: A Differentiated Approach

Telefónica operates in a highly competitive global telecommunications landscape, facing direct rivals such as Vodafone Group Plc , Deutsche Telekom AG , Orange S.A. (ORAN), and América Móvil S.A.B. de C.V. . Telefónica's market positioning is strong in its core regions of Europe and Latin America, where it leverages its established brand, extensive network infrastructure, and regulatory expertise.

In Spain, Telefónica maintains a leading position, characterized by strong brands, superior customer care, and best-in-class networks. Its ability to offer bundled services and achieve low churn rates provides a qualitative edge in customer loyalty and retention. The strategic agreements with Digi (DGIC) and Vodafone for network sharing and FiberCo creation demonstrate Telefónica's proactive approach to optimizing infrastructure and fostering market rationality, which can enhance returns on capital employed and increase wholesale revenue visibility.

In Brazil, Vivo's market leadership in mobile contract and FTTH, coupled with revenue growth above inflation, highlights Telefónica's strong competitive standing. The acceleration in digital services penetration further differentiates its offerings. While América Móvil S.A.B. de C.V. (AMX) holds a dominant presence in Latin America, Telefónica's focus on high-value accesses and its digital ecosystem provide a strong competitive response.

In Germany, Telefónica Deutschland's O2 network is recognized for its quality, and the company's strategy of profitable growth across segmented markets, including new wholesale agreements with Freenet (FNTN), helps it compete effectively despite promotional activity. Compared to Deutsche Telekom AG (DTEGY), which excels in cutting-edge 5G infrastructure, Telefónica Germany focuses on value-for-money and network densification.

VMO2 in the UK, a joint venture, emphasizes value over volume, maintaining the highest fixed ARPU in the market and stable mobile contract churn. The extension of the mobile network sharing agreement with Vodafone (VOD) UK strategically positions VMO2 for future opportunities.

Telefónica's technological advantages, particularly in fiber and 5G deployment, provide a significant competitive moat. Its aggressive copper shutdown program and AI-driven automation contribute to operational efficiencies that rivals may struggle to match. Telefónica Tech's expertise in cybersecurity, cloud, and IoT also positions the company favorably in the growing B2B digital transformation market, offering integrated solutions that differentiate it from pure connectivity providers. While some competitors may exhibit greater innovation speed in specific digital tools or stronger financial health in terms of cash flow, Telefónica's diversified operations, strategic adaptability, and commitment to an integrated service ecosystem provide a resilient competitive posture.

Outlook and Strategic Vision

Telefónica has confirmed its 2025 guidance, projecting organic growth in revenue, EBITDA, and EBITDAaL minus CapEx. The company anticipates CapEx intensity to continue declining to less than 12.5% over sales by year-end, with free cash flow generation expected to be similar to 2024. This FCF is deemed sufficient to cover the €0.30 cash dividend per share and support continued deleveraging. Management expects performance to improve as the year progresses, with Q1 2025 results aligning with internal expectations and operational trends continuing their progress.

The strategic review, initiated in Q4 2024, is progressing on schedule for unveiling in H2 2025. This review is guided by four core principles: customers at the core, technology and operational excellence, disciplined industrial rationale, and value creation for all stakeholders. Telefónica's priorities remain Europe and leadership in Brazil, with a commitment to exploring further options for Hispam portfolio optimization. The company's focus on business evolution towards low CapEx businesses, network optimization through open and disaggregated networks, and strategic investments in tech cycle optimization are expected to drive capital efficiency and FCF growth towards its 2026 targets.

Conclusion

Telefónica is executing a bold strategic reorientation, shedding non-core assets in Hispam to sharpen its focus on high-growth, high-return opportunities in its core European and Brazilian markets. The company's H1 2025 results underscore the effectiveness of this strategy, demonstrating accelerating revenue, robust operating cash flow, and a clear path to deleveraging. Telefónica's enduring technological leadership in fiber and 5G, coupled with its aggressive network modernization and advanced digital services through Telefónica Tech, forms a powerful competitive advantage in an increasingly digital world.

While the telecommunications sector remains intensely competitive and subject to macroeconomic and foreign exchange volatility, Telefónica's disciplined capital allocation, strategic partnerships, and unwavering commitment to operational excellence position it for sustained profitability. The ongoing strategic review and the confirmed 2025 guidance signal a confident outlook, with management actively shaping the company's future to capitalize on industry consolidation trends and technological advancements. For discerning investors, Telefónica presents a compelling narrative of transformation, leveraging its foundational strengths and strategic agility to unlock significant long-term value.