Telefónica, S.A. (NYSE:TEF) Q1 2023 Earnings Call Transcript

Telefónica, S.A. (NYSE:TEF) Q1 2023 Earnings Call Transcript May 11, 2023

Operator: Good morning. Thank you for standing by, and welcome to Telefónica’s January-March 2023 Results Conference Call. [Operator Instructions]. I would now like to turn the call over to Mr. Adrian Zunzunegui, Global Director of Investor Relations. Please go ahead, sir.

Adrian Zunzunegui: Good morning, and welcome to Telefónica’s conference call to discuss January-March 2023 results. I’m Adrian Zunzunegui from Investor Relations. Before proceeding, let me mention 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 in Madrid or London. Now let me turn the call over to our Chief Operating Officer, Mr. Angel Vila.

Angel Vila: Thank you, Adrian. Good morning, and welcome to Telefónica’s first quarter conference call. With me today are Laura Abasolo, Eduardo Navarro and Lutz Schüler. As usual, we will first walk you through the slides, and we’ll then be happy to take any questions. I would like to start highlighting how we continue to progress on our strategy and to deliver on our goals. Strong momentum continued in our core markets. In Spain, service revenue growth accelerated, and year-on-year OIBDA trend improved as we had anticipated. Brazil posted double-digit growth on both revenue and OIBDA. In Germany, 5G deployment progressed well, and financials remain robust. In the U.K., revenue stepped up another quarter. Our scaled European cloud and cyber champion, Telefónica Tech, increased revenue by 44% year-on-year, largely outgrowing its market.

And at Telefónica Infra, we continued progressing in FiberCo rollout, while Telxius again recorded very solid growth rates. Group-wise, the Open Gateway initiative, I joined the effort for leading telcos under GSMA sponsorship, was successfully presented during Mobile World Congress ’23, whilst on the ESG side, our greenabler strategy continues anticipating regulatory needs. Looking ahead, we are shaping opportunities in our core markets, such as in-market consolidation in Spain, stellar growth and lower capital intensity in Brazil, normalized levels of CapEx to sales in Germany and ongoing capture of synergies in VMO2, with more than 50% of run rate expected by year-end. Telefónica Tech, where we ambition to grow double digit this year, continues to be a source of value.

Telefónica Infra will further expand its fiber networks, whilst assessing consolidation opportunities, and optionality remains on self-sustainable Telefónica Hispam. Finally, from an industry point of view, the coming months are key for next fairer share regulation and a broad fairer regulation environment. On Slide 3, we can see that we had a strong start to 2023. Revenue growth accelerated during the quarter, both in organic and reported terms. Moreover, all business lines are growing, with a good uptake of price increases, supporting a sequential service revenue improvement to plus 4.2% year-on-year in organic terms. B2B continues to perform strongly with 9% year-on-year growth and remains one of the key and differentiating growth drivers of the group.

Commercial traction has strengthened, with fiber and mobile contract accesses growing 16% and 7% year-on-year, respectively, whilst 5G deployment is progressing well. Our focused investments in next-generation networks and quality of service allowed us to post record levels of NPS and lower churn rates in a quarter of proven pricing power. This resilient performance, coupled with proactive management of efficiencies within a streamlined operational model, resulted in the third consecutive quarter of underlying OIBDA growth year-on-year. Financially speaking, net debt and leverage declined, despite seasonality in Q1. As such, the balance sheet remains strong with a light maturity profile, strong liquidity, limited debt refinancing ahead and a high portion of that in long-term fixed rate.

Lastly, and along the lines of legacy shutdowns, we announced the Spanish full copper switch off for April 2024, the best example of our sustainability pathway in the transformation of our networks. Moving to Slide 4 to review our key financial metrics and figures. In organic terms, revenue growth accelerated 1 percentage point to 4.9%, while OIBDA maintained a steady growth of 1.1%, with CapEx increasing by just 0.7%, all that resulting a 2.1% annual growth in OIBDA minus CapEx. In reported terms, revenue growth improved sequentially by 1.3 percentage points to 6.7% year-on-year, while underlying OIBDA increased 2.4% year-on-year. FX continued to be a tailwind in the quarter. Free cash flow reached EUR 454 million, along the usual CapEx and working capital seasonality in this period of the year, while net debt declined EUR 0.2 billion in the quarter or 3.5% lower year-on-year.

Moving to Slide 5. Let me tell you that we are well on track to fulfill our 2023 guidance of low single-digit growth in both revenue and OIBDA, and around 14% CapEx to sales, despite inflationary pressures. We expect the strong momentum and the current positive trends to continue further, supported by some price actions taking place in Q2. Energy cost pressure and overall inflation continues easing, further supporting our OIBDA evolution. As part of our shareholder remuneration, we canceled 25 million own shares, and we will be paying EUR 0.15 per share in cash, the second tranche of the 2022 dividend on the 15th of June. As for the 2023 dividend, EUR 0.15 per share will be payable on the 14th of December and another EUR 0.15 per share in June 2023, both in cash.

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Turning to Page 6. We continue working quarter after quarter to achieve our ambitious ESG targets. On the environmental side, our efforts in reducing Scope 3 emissions were once again recognized, as we have nominated CDP supplier engagement leader for the fourth consecutive year. Within the social pillar, we are pushing ahead with network rollouts to connect more people as well as promoting affordability with social tariffs. We’re immensely proud that the World Benchmarking Alliance has, for the second year running, ranked Telefónica in top position within its Digital Inclusion Benchmark. And on the government side, we highlight the renewal of ESG certifications across Telefónica Hispam, where we continue to lead the sector in sustainable financing.

Moving to Slide 7. We can see that Telefónica España successfully started into the year with supportive commercial momentum and better financials. Fixed broadband and contract accesses posted our best quarterly performance since the end of the pandemic in Q3 ’20. A new record low churn of 0.9% helped to deliver contract net adds for the third consecutive quarter and returned to year-on-year growth in fixed broadband for the first time since second quarter ’19. We achieved this better commercial momentum, despite the tariff revision that took place in mid-January, a proof point of our pricing power and meets an increasingly rational market. Service revenue growth accelerated to plus 1.0% in Q1 ’23 driven by retail revenue growth, which accelerated by 0.8 percentage points versus the fourth quarter last year to 1.7% year-on-year.

This acceleration is driven by a growing ARPU, better trading and double-digit growth of IT revenues. Likewise, OIBDA continued its recovery path, limited its declined to 1.7% year-on-year as a result of the mentioned better revenue trends and despite higher personnel costs. OIBDA minus CapEx margin remained at benchmark organic levels of 26%. Moving to Germany on Slide 8. It delivered a robust start to the year with another quarter of good commercial traction and sustained financial performance. The company implemented its More for More strategy across all brands and portfolios backed by its widely acknowledged network, products and services quality and extended ESG leadership. Telefónica Deutschland’s 5G network is well on track to deliver around 90% population coverage by year-end 2023.

Revenue posted strong organic growth at 8% year-on-year in the first quarter. OIBDA grew 1.7% year-on-year, supported by operational leverage mainly mobile, which was partially offset by anticipated inflationary cost pressures. Post the successful completion of the 3-year investment for growth program, Telefónica Deutschland returned to a normalized CapEx envelope, which declined 7.2% year-on-year to an 11.7% CapEx to sales, resulting in operating cash flow growth of 8.6% organic. We now move on to Slide 9 to the U.K. and our joint venture, Virgin Media O2, which focused on operational progress and accelerating long-term growth drivers. VMO2 delivered resilient trading performance with a stable customer base of 58 million, while keeping churn steady and — at low levels of just 1%.

Broadband adds remained healthy during the quarter. Network investment continued, with 108,000 premises deployed during the quarter and with 5G connectivity now available in over 2,100 cities. Q1 was the first full quarter of network rollout on behalf of nexfibre, and delivery is being prepared to ramp up through the year. In the first quarter, revenue growth accelerated to plus 3.9% year-on-year organically, underpinned by the increase in mobile and nexfibre revenue. At the same time, OIBDA grew plus 1.4%, impacted by phasing of both fixed price increase and synergies and higher costs, mainly energy. Moving to Brazil on Slide 10. Vivo started 2023, posting once again a very strong set of results, both commercially and financially. Mobile market share reached 39% in February, increasing by 1 percentage point since Oi Mobile asset acquisition and by 2 percentage points in the contract segment to 43.7%.

Vivo continues to be the clear market leader in a more rational environment. Vivo connected 813,000 new accesses to our FTTH network in the last 12 months, twice the performance of the second player in the market, thanks to our leading footprint and differential value proposition. Revenue growth accelerated to plus 12.1% year-on-year in Q1 ’23, the highest revenue growth seen in 10 years, thanks to growing accesses, price increases and the good performance of digital services. In terms of operational leverage, OIBDA minus CapEx grew 22.7% year-on-year as a result of growing OIBDA close to 10% and lower CapEx intensity, in line with the target of bringing it down below BRL 9 billion by 2023. Slide 11 reviews the performance of Telefónica Tech, a global next-generation IT provider with a distinctive growth profile.

Telefónica Tech continued to outperform the market in Q1 ’23 with a 43% year-on-year revenue growth or plus 27% in constant perimeter, proving the benefits of its transformation into a leading scale provider of advanced IT solutions. The growing partner ecosystems and its diversified team of around 6,000 professionals, with close to 4,000 certifications in strategic partners technologies, are key for Telefónica Tech to become a reference player in delivering differentiated digitalization journey with higher relevance of managed services. Bookings increased by 40% over the last 12 months, which supports future revenue flows, leveraging Telefónica Tech’s success, Telefónica’s position in the B2B large global deals category clearly improved.

According to industry analysts, Telefónica gained fourth place and entered the first division of telcos providing global IT services after years of steady progress from a regional player to a supra regional operator. Turning to Slide 12. Telefónica Infra continued to consolidate its leading portfolio of FiberCos, which already cover 15 million premises as of March ’23. Bluevia’s deployment in Spain is progressing as planned and has already met more than 80% of its deployment target. UGG in Germany continued to promote MOUs sign-ins, with more than 870,000 households as of the end of March. nexfibre in the U.K. is scaling up the team, processes and interaction with VMO2. FiBrasil is already present in 151 cities in Brazilian states, with 4.3 million premises passed.

ON*NET Fibra Chile and ON*NET Fibra Colombia are both leading their markets with 3.7 million and 2.6 million premises passed, respectively. Moreover, Telxius posted again healthy financials with rising revenue and OIBDA growing for the fifth quarter in a row. Thanks to continuous cost management, Telxius achieved an impressive OIBDA margin of 54.2%. I will now hand it over to Laura, who will review Hispam’s operations and the group’s financial results.

Laura Abasolo: Thank you, Angel. Moving to Telefónica Hispam, we continue to focus on value growth, improving returns, while reducing investment — invested capital in the region. Contract accesses grew plus 4% year-on-year, especially in Mexico and Colombia, with plus 13% and plus 7%, respectively. The transformation to fiber continues, supported by the InfraCos. Fiber uptake remained high at 30%, despite the fast FTTH deployment. Revenue continued to grow and was up 1.6% year-on-year, thanks to the good performance in both contract and FTTH. OIBDA declined by 3.9%, mainly impacted by high commercial activity and the InfraCo model in Chile. Turning to Slide 14. Telefónica maintains about 80% of its debt linked to fixed rates, mainly in euro, with an average life of 13.2 years, which places us in a comfortable position to face any market environment.

We maintained a solid liquidity position of EUR 21.4 billion that, together with a live maturity profile, allows us to cover debt maturities over the next 3 years. Meanwhile, net financial debt and leverage ratio continued their downward trends. Net financial debt declined from EUR 26.7 billion in December to EUR 26.4 billion in March. Net debt to EBITDA ratio improved from 2.54x in December to 2.51x in March. As of March 2023, we have contained our debt-related interest cost at 3.87%, thanks to the solid position of fixed interest rates in strong currencies, which allow us to navigate the rising rates. I will now hand back to Angel, who will wrap up.

Angel Vila: To wrap up, on Slide 15, Q1 delivered again positive momentum, continuing with resilient performance, whilst further executing our strategy. First, our differentiated and premium infrastructure is clearly taking off in terms of churn and NPS, which helped Q1 revenue growth to accelerate on the back of our proven pricing power. Furthermore, OIBDA maintained a steady performance, thanks to efficiencies that allow us to mitigate inflationary pressures. Second, our balance sheet was further strengthened, thanks to our proactive debt management. Third, Q1 performance, coupled with maintained positive momentum, allow us to reiterate full year guidance and dividend. Fourth, our sustainability pathway is demonstrated with the transformation of our networks.

On ESG, we are progressing well and anticipating regulatory needs. And finally, we continue to shape opportunities that should create value for our shareholders. Thank you very much for listening. We are now ready to take your questions.

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Q&A Session

Operator: [Operator Instructions]. We will now take the first question. It comes from the line of David Wright from Bank of America.

Operator: We will now take the next question from the line of Georgios Ierodiaconou from Citi.

Operator: We will now take the next question from the line of Joshua Mills from BNPP Exane.

Operator: We will now take the next question. It’s from Mathieu Robilliard from Barclays.

Operator: We will now take the next question from the line of Yemi Falana from Goldman Sachs.

Operator: We will now take the next question. It’s from the line of Carl Murdock-Smith from Berenberg.

Operator: Our last question comes from the line of Pilar Vico from Credit Suisse.

Operator: Telefónica’s January-March 2023 results conference call is over. You may now disconnect your lines. Thank you.