Announcing its first quarter results, Telefónica echoed many of the narratives that often build around European telcos. It is focusing on new options to monetize its infrastructure, particularly fiber, in Europe, but it struggling to make a success of its digital operations. Of two new units set up as part of its strategic plan last year, Telefónica Tech is growing, but Telefónica Digital’s revenues seem to have evaporated.
This is a common pattern. Many of the Spanish group’s peers are struggling to boost ARPU or generate revenue from digital services, despite 5G, but they are finding ways to unlock more value from their physical assets, including through carve-outs, while delivering a wider range of revenue streams on increasingly capable networks, in order to target wholesale and enterprise income.
Telefónica was hit, like Vodafone, by the coronavirus pandemic’s impact on consumer confidence and on roaming, and by falling currency valuations in Latin America. However, it did generate €9bn in cash from the sale of its towerco, Telxius.
It tried to cushion the blow of painful figures by emphasizing that this was the last quarter that would be compared with a largely lockdown-free year-ago period. Revenues fell by 9% to €10.3bn, while operating income before depreciation and amortization (OIBDA) fell by 9.1% to €3.4bn. Without currency fluctuations, especially in Latin America, however, revenues would have fallen by only 1.3% and OIBDA would have grown by 0.3%.
COO Ángel Vilá, and CFO Laura Abasolo were cautious about saying that the business had now stabilized, but the organic OIBDA figure led some analysts to predict that performance would improve through 2021, and Vilá did point to some reasons for optimism, such as economies opening up, and European Union Recovery funding for infrastructure projects. And of course, the return of foreign travel outside the EU would start to generate the all-important roaming revenues again.
Like Vodafone (see separate item), Telefónica was keen to strike a balance between inspiring confidence that it is investing in fiber and 5G, and being seen to be thrifty with resources. It preferred to refer to “smart capital” rather than capex ad said more than 50% of its spending this year would be on 5G and fiber in its core markets. Capex in the first quarter was constrained, and its O2 UK arm had spent 40% less than expected in the most recent UK 5G auction. Over the whole year, capex intensity is expected to be about 15%, which is fairly common for large European operators, though low compared to tier one players on a global basis during a time of migration to a next generation network.
In a time of price wars in Spain, Telefónica was keen to stress the further potential to monetize its market leading fiber infrastructure in that country, emphasizing the value of owning such a strategic asset, and once again reinforcing the view that heavy physical assets are what reassure investors most in these troubled times. Vilá said that analysts should “expect us to continue exploring efficient ways to deploy fiber across our footprint”.
In Brazil, Telefónica’s Vivo arm is poised to acquire Oi, and fiber roll-out is expanding, and driving adoption of over‑the‑top services such as IPTV. A new FiBrasil infrastructure venture has just been approved by regulator Anatel needed before take‑off. The operator is progressing with digitalizing its operations to reduce cost, and also launching more digital services. The latter include Vivo Money online loans, Vivo Pay m‑payments, and a loyalty program created with developer Dotz.
In this respect, Brazil looks a little different from the rest of the group, in which digital services are seriously under-performing while enterprise, cloud and infrastructure are growing. Telefónica Tech, which was set up in October 2020 with the merger of three business units, was called out as the group’s fastest growing business, with quarterly revenue up 25% year‑on‑year to €166m. Of the three units within the division, cloud and cybersecurity have now been merged; the other is IoT/big data. However, the 25% figure relates to a fairly tightly defined group of operations while many of the digital services originally included in the Tech remit are no longer mentioned at all. Including those activities, revenue in the first quarter of 2020 was €460m, and the total for the year €1.5bn, and Telefónica had indicated it would generate an additional €2bn in revenue over 2020‑2022.
Telefónica Infra is no longer posting figures as the sale of the Telxius towers business progresses, and it is also likely to sell its subsea cables. Telefónica also has minority stakes in some infrastructure ventures aiming to reduce group capex intensity – these include the upcoming FiBrasil venture, German fiber-to-the-home venture Unsere Grüne Glasfaser (a JV with Allianz), and KKR‑led fiber group Chilean InfraCo.
Telefónica had seemed set on exiting all its Latin American markets except Brazil when it announced its strategic plan last year. However, it is now less clear what will be its strategy for the region. CFO Abasolo said all options remain open, because performance improvements were giving the group more choices (the Latin American markets, outside Brazil, performed better in revenue and free cashflow terms than the core four markets). A capex-light model, reliant on partnerships, has been adopted in the Hispanoamérica division, both making the opcos more attractive to potential buyers, while also reducing Telefónica’s need to sell at any price.