Core Viewpoint - Telefonica (TEF) has been upgraded to a Zacks Rank 2 (Buy) due to an upward trend in earnings estimates, which is a significant factor influencing stock prices [1][3]. Earnings Estimates and Stock Price Movement - The Zacks rating system is based on the consensus measure of EPS estimates from sell-side analysts, reflecting the company's changing earnings picture [1][2]. - Changes in future earnings potential, as indicated by earnings estimate revisions, are strongly correlated with near-term stock price movements, particularly influenced by institutional investors [4]. Recent Performance of Telefonica - Telefonica is expected to earn $0.43 per share for the fiscal year ending December 2025, with no year-over-year change, but the Zacks Consensus Estimate has increased by 7.6% over the past three months [8]. - The rating upgrade signifies an improvement in Telefonica's underlying business, which is likely to lead to increased stock prices as investors respond positively to this trend [5][10]. Zacks Rank System - The Zacks Rank system classifies stocks into five groups based on earnings estimates, with a strong historical performance, particularly Zacks Rank 1 stocks generating an average annual return of +25% since 1988 [7]. - Only the top 20% of Zacks-covered stocks receive a "Strong Buy" or "Buy" rating, indicating superior earnings estimate revisions and potential for market-beating returns [9][10].

Company Restructuring - Telefonica Chile's parent company, Spain's Telefonica, is selling the local unit [1]

Core Insights - Spanish telecoms group Telefonica plans to lay off at least 6,000 employees across several units before the end of the year [1] Company Actions - The layoffs are part of a broader restructuring strategy aimed at improving operational efficiency and reducing costs [1] - The decision reflects ongoing challenges within the telecom industry, including increased competition and pressure on profit margins [1] Industry Context - The telecom sector is facing significant changes, with companies needing to adapt to evolving market conditions and consumer demands [1] - Layoffs in the industry are becoming more common as firms seek to streamline operations and enhance profitability [1]

Group 1 - Telefónica is considered one of the most undervalued telecom stocks, with a strategy focused on consolidating the European telecom market and divesting Latin American assets [1][3] - CEO Marc Murtra highlighted the fragmentation of the European telecom market, which has 41 companies serving over 500K mobile customers each, compared to only 5 in the US, 4 in China and Japan, and 3 in South Korea [2] - The company plans to sell its units in Argentina and Uruguay, exploring potential sales in Chile, Mexico, and Ecuador, which could generate up to 3.6 billion euros ($4.21 billion) for funding acquisitions [3] Group 2 - The consolidation strategy aims to enhance scale and maintain an investment-grade credit rating, with a focus on investing in related sectors like cybersecurity and data centers [2] - Potential acquisition targets for Telefónica include Vodafone Spain, a joint venture with 1&1 in Germany, assets in Brazil, or a 50% stake in Virgin Media O2 [3]

Core Points - Spain has canceled a €10 million contract for upgrading public fiber optic networks using Huawei equipment due to pressure from the US and EU [1][5] - The contract was initially approved to enhance the RedIRIS infrastructure, which connects over 500 universities and research centers in Spain [1][2] - The Spanish government cited "digital strategy and strategic autonomy" as reasons for the cancellation, indicating a shift in policy [1][5] Group 1 - The contract aimed to upgrade the IP connection service bandwidth from 100Gbps to 400Gbps to enhance network security and meet new demands [2] - The contract was awarded to Telefónica, with Huawei equipment specified due to its previous use in a 2020 upgrade contract worth €5.5 million [4] - The upgrade was planned to be completed within five months across multiple locations, including major cities like Madrid and Valencia [4] Group 2 - Huawei has denied security risk allegations and emphasized compliance with local laws and regulations [6] - Spain does not have a "high-risk supplier" list like other EU countries, allowing for the procurement of Chinese equipment [6][7] - The Spanish Interior Ministry clarified that the collaboration with Huawei posed no security risks and was independently verified [7] Group 3 - The US has criticized Spain's contracts with Huawei, alleging potential espionage, while the EU has pressured member states to exclude "high-risk suppliers" [7][8] - Chinese officials have condemned US actions as bullying and emphasized the need for fair treatment of Chinese companies in Spain [8]

Core Insights - Telefonica, S.A. reported a significant decline in net income for Q2 2025, with a net income of €155 million, down 67% year-over-year, and basic earnings per share (EPS) of €0.02, matching the consensus estimate [1][11] - Quarterly revenues decreased by 3.7% year-over-year to €8.95 billion ($10.2 billion), falling short of consensus estimates by 8.83%, but showing an organic growth of 1.5% in core markets [2][11] - The company is strategically reducing its exposure to lower-margin Latin American operations, having completed divestitures in Argentina and Peru, and is progressing with deals in Uruguay, Ecuador, and Colombia [3] Financial Performance - Adjusted EBITDA for the quarter was €2.9 billion, reflecting a year-over-year increase of 1.2%, while operating income decreased by 6.7% to €1.03 billion [12] - Cash flow from operating activities for the first half of the year was €4.5 billion, slightly down from €4.6 billion in the previous year, with free cash flow of €505 million for the quarter [13] Business Unit Performance - Telefonica Espana saw a revenue increase of 1.9% year-over-year to €3.2 billion, supported by strong customer additions and price increases [4] - Telefonica Deutschland's revenue decreased by 2.4% to €2 billion, with a quarterly adjusted EBITDA margin of 31.3% [5] - VirginMedia-O2 U.K. reported a revenue decline of 5.5% to €3 billion, with an adjusted EBITDA margin of 38.2% [6] - Telefonica Brasil's revenues increased by 7.1% to €2.3 billion, driven by strong contract and FTTH revenue growth [7] - Telefonica Hispam's revenues fell by 2.9% to €1.04 billion, primarily due to weaker results in Colombia [10] Strategic Outlook - For 2025, Telefonica expects year-on-year organic growth in revenues, EBITDA, and EBITDAaL - CapEx, aiming to keep CapEx below 12.5% of sales and maintain free cash flow at 2024 levels [14] - The company reaffirmed its commitment to shareholder returns with a confirmed dividend of €0.30 per share for 2025 [14]

Financial Performance - Total revenues for the first half of 2025 were €18,013 million, a decrease of 3.3% compared to €18,634 million in the same period of 2024[14] - Operating income for the first half of 2025 was €2,109 million, down 4.5% from €2,208 million in the first half of 2024[14] - Profit for the period was a loss of €1,286 million, compared to a profit of €1,044 million in the same period of 2024[17] - Basic and diluted earnings per share attributable to equity holders of the parent were €(0.26), down from €0.14 in the first half of 2024[14] - EBITDA for the first half of 2025 was reported at 5,895 million euros, down from 6,151 million euros in the first half of 2024[59] - EBITDAaL for the first half of 2025 was 4,611 million euros, compared to 4,889 million euros in the same period of 2024[59] - The Group reported a profit for the period of (1,286) million euros, compared to a profit of 1,044 million euros in the same period of 2024[59] - Operating income fell to €333 million, down 36% from €521 million year-over-year[92] - The result for the period attributable to equity holders of the parent was a loss of €430 million, compared to a profit of €34 million in the first half of 2024[92] Assets and Liabilities - Non-current assets decreased to €73,108 million as of June 30, 2025, from €78,133 million at the end of 2024, representing a decline of 6.4%[12] - Total assets decreased to €94,369 million as of June 30, 2025, down from €100,502 million at the end of 2024, a reduction of 6.1%[12] - Equity attributable to equity holders of the parent decreased to €17,283 million as of June 30, 2025, from €19,347 million at the end of 2024, a decline of 10.7%[12] - Current liabilities remained relatively stable at €25,125 million as of June 30, 2025, compared to €25,734 million at the end of 2024[12] - The total carrying amount of financial assets as of June 30, 2025, was €20,366 million, compared to €22,765 million on December 31, 2024, showing a decline of approximately 10%[195] Cash Flow and Investments - Cash flow from operating activities was €4,445 million, a decrease from €4,666 million in the same period of 2024[27] - Net cash used in investing activities was €3,712 million, compared to €4,115 million in the first half of 2024[27] - The net increase in cash and cash equivalents during the period was a decrease of €1,557 million, compared to a decrease of €1,847 million in the first half of 2024[27] - The free cash flow from continuing operations for the first half of 2025 was €291 million, a decrease of 42.5% compared to €506 million in the same period of 2024[74] - As of June 30, 2025, cash and cash equivalents stood at €6,505 million, reflecting a decrease from €8,062 million at the end of 2024[195] Discontinued Operations and Sales - The company reported a significant loss from discontinued operations amounting to €1,913 million in the first half of 2025[14] - The sale of Telefónica Móviles Argentina generated €1,189 million, with a resulting loss of €79 million from the transaction[39] - The sale of Telefónica del Perú was completed for approximately €900,000, recycling negative translation differences of €222 million into 2025 results[44] - As of June 30, 2025, the results of Telefónica del Perú are classified as discontinued operations, impacting the overall financial results[49] Shareholder Equity and Dividends - Dividends paid amounted to €931 million, slightly down from €972 million in the previous year[27] - The share capital was reduced by €80,296,591 through the cancellation of own shares, resulting in a new share capital of €5,670,161,554[200] - The share premium was reduced by €230 million in relation to the capital reduction[200] Financial Ratios and Metrics - The average exchange rate for the Brazilian real decreased by 12.7% compared to the first half of 2024[38] - The Group's equity attributable to shareholders was negatively impacted by €529 million due to translation differences in the first half of 2025[38] - The net financial debt as of June 30, 2025, is calculated based on current and non-current financial liabilities, excluding cash and cash equivalents[63][68] - As of June 30, 2025, the net financial debt stood at €27,609 million, an increase from €27,161 million at the end of 2024, reflecting a rise of 1.65%[70] Impairments and Write-offs - The impairment of trade receivables increased from €106 million in December 2024 to €122 million in June 2025, reflecting a rise of 15.1%[189] - The company reported an impact of impairment of trade receivables in the consolidated income statement of €271 million for the first half of 2025, down from €302 million in the same period of 2024[191] - The Group recorded impairments in goodwill for cash-generating units in Peru, Chile, Telefónica Tech UK & Ireland, and BE-terna as of December 31, 2024[113] Strategic Initiatives - The Group's strategy includes gradually reducing exposure in Hispanoamerica, as evidenced by the classification of several subsidiaries as disposal groups held for sale[49] - VMO2 entered into a joint venture with Daisy Group to merge their B2B businesses, with VMO2 expected to own 70% of the new entity[135][136] - Telefónica Brasil signed an agreement to acquire the remaining 50% of Fibrasil for €133 million, increasing its stake to 75.01%[140]

Financial Data and Key Metrics Changes - Revenue reached almost EUR 9 billion in the quarter, growing 1.5% organically [14] - EBITDA was nearly EUR 3 billion, up 1.2% [14] - Free cash flow turned positive to EUR 5 million in the second quarter, an improvement of EUR 718 million versus Q1 [14] - Net financial debt decreased 5.5% year on year to EUR 27.6 billion as of June [15] - Earnings per share from continued operations amounted to EUR 0.07 in the second quarter [15] Business Line Data and Key Metrics Changes - In Spain, the company achieved its best Q2 net adds since Q3 2018, with a convergence churn rate of 0.8%, the lowest in over 11 years [23][24] - Brazil saw a 6% increase in contract accesses and a 42% increase in revenue from cloud services [30] - Telefonica Deutschland reported a decline in EBITDA by 6% year on year, primarily due to the migration of the one on one customer base [34] Market Data and Key Metrics Changes - Spain and Brazil together represent 70% of group EBITDA, showing improving trends this quarter [15] - The UK market remained competitive, with Virgin Media O2 focusing on customer loyalty and protecting value [36] - In Germany, the mobile service revenue declined year on year, reflecting the impact of the one on one customer migration [34] Company Strategy and Development Direction - The company is focused on customer-centric strategies, operational excellence, and creating value under strict financial discipline [8] - Strategic choices are aimed at strengthening the competitive position in the European telecom industry [8] - The company is concentrating resources in select markets where it has competitive advantages, as evidenced by the sales of operations in Argentina, Peru, and other Latin American countries [12] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the ongoing transformation at Telefonica, which is expected to create value for shareholders [8] - The company reiterated its full-year 2025 guidance across metrics, expecting revenue and EBITDA to continue growing [17] - Management acknowledged the variable macro environment but emphasized the focus on managing controllable factors [8] Other Important Information - The completion of the copper shutdown in Spain marks a significant milestone, freeing up resources for other endeavors [10] - The company aims to achieve a simplified organization that can move faster and compete more effectively [13] - Telefonica has been recognized for its sustainability efforts, being named the second most sustainable company in the world by Time Magazine [46] Q&A Session Summary Question: Expectations for growth in Spain and the UK - Management aims for revenue growth in Spain to exceed 2024 levels, driven by improved customer experience and B2B momentum [53] - In the UK, management acknowledged the competitive market and emphasized ongoing efforts to manage retention and prevent churn [68] Question: Strategic review and balance sheet considerations - Management stated that leverage is relevant but not strategically limiting, emphasizing the importance of maintaining investment-grade ratings [79] - The company is looking to take calculated risks to achieve larger economies of scale [81] Question: Cybersecurity and technology investments - Management highlighted the changing conditions in the cybersecurity market driven by European political will and defense investments [65] - The company is exploring opportunities in technology but does not see a need for significant CapEx in cybersecurity at this time [106] Question: Updates on fiber path stake sale and infrastructure ownership - The fiber path sale process is ongoing and not part of the strategic review [106] - Management believes that owning core infrastructure is essential for operational efficiency and service offerings [115]

Financial Data and Key Metrics Changes - Revenue reached almost EUR 9 billion in Q2 2025, growing 1.5% organically, while EBITDA was nearly EUR 3 billion, up 1.2% [14][15] - Free cash flow turned positive at EUR 5 million in Q2, an improvement of EUR 718 million compared to Q1, with a total of EUR 291 million in the first half [14][44] - Net financial debt decreased by 5.5% year on year to EUR 27.6 billion as of June [15] Business Line Data and Key Metrics Changes - In Spain, the company achieved its best Q2 net adds since Q3 2018, with a convergence churn rate of 0.8%, the lowest in over eleven years [16][23] - Brazil reported a 6% increase in contract accesses and a 42% increase in revenue from cloud services, with overall revenue growth of 7% [28][29] - Germany faced challenges due to the B2B transformation, but maintained solid consumer momentum with stable contract churn at 0.9% [32] Market Data and Key Metrics Changes - Spain and Brazil together represent 70% of group EBITDA, showing improving trends in Q2 [15] - The UK market remained competitive, with O2 contract churn improving to 1% [35] - The Hispan region posted positive contract net adds for the second consecutive quarter, driven by improved network quality in Colombia [39] Company Strategy and Development Direction - The company is focused on customer-centric strategies, operational excellence, and creating value through disciplined financial management, prioritizing Europe and Brazil [8][10] - A strategic review is underway, with plans to unveil conclusions in the second half of the year [8][48] - The company aims to simplify its organization and concentrate resources in select markets where it has competitive advantages [12][13] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the ongoing transformation at Telefonica, which is expected to create shareholder value and strengthen competitive positioning [8][10] - The company reiterated its full-year 2025 guidance across metrics, expecting revenue and EBITDA to continue growing [17][18] - Management acknowledged foreign exchange headwinds but remains optimistic about free cash flow improvement in the second half of the year [14][18] Other Important Information - The completion of the copper shutdown in Spain marks a significant milestone, allowing for resource reallocation [10][11] - The company has been recognized for its sustainability efforts, being named the second most sustainable company in the world by Time Magazine [46][47] Q&A Session Summary Question: Expectations for growth in Spain and the UK - Management aims for revenue growth in Spain to exceed 2024 levels, driven by improved customer experience and B2B momentum [51][53] - In the UK, management noted various opportunities but could not disclose specifics regarding M&A plans [55] Question: Cybersecurity and tech investments - Management highlighted the changing landscape for cybersecurity in Europe, driven by political will and defense investments [60][64] - The company sees potential in capturing opportunities in cybersecurity due to its experience in integrating and managing such products [66] Question: EBITDA outlook for Germany - Management indicated that the migration of the one on one customer base is a two-year journey, with expectations for EBITDA stabilization and growth thereafter [112][117] Question: Infrastructure ownership - Management emphasized the importance of owning core infrastructure for operational efficiency and service offerings [118]

Financial Performance - Telefónica Group reported H1 2025 revenue of €18013 million, a decrease of 3.3% year-over-year, but an organic growth of 1.5%[20] - Service revenue reached €16263 million, down 3.3% year-over-year, with an organic increase of 1.6%[20] - The company's H1 2025 EBITDA was €5867 million, a 4.6% decrease year-over-year, but an organic growth of 0.8%[20] - Net Financial Debt stood at €27609 million, a decrease of 5.5%[20] - Free Cash Flow (FCF) from continuing operations was €291 million, a decrease of 42.4%[20] Strategic Initiatives - Telefónica is on track with its strategic review for H2 2025, focusing on customers, infrastructure advantages, industrial rationalization, and financial flexibility[13, 97] - The company is accelerating portfolio transformation in Hispam, with the sale of T Argentina for €12 billion and binding agreements for T Colombia (~€368 million), T Uruguay (FV ~€389 million), and T Ecuador (FV ~€330 million)[16, 17, 19] Operational Highlights - Spain experienced improved EBITDAaL-CapEx (+2.8%, +0.8% quarter-over-quarter) and consistent service revenue growth (+1.0%) and EBITDA growth (+1.0%)[22] - Brazil showed record EBITDA growth (+8.6%) since Q4 2023 and a robust EBITDAaL-CapEx margin (16.3%, +1.0 percentage points)[22] - Germany is focused on mitigating the impact of 1&1 migration, with commercial momentum and B2P transformation, achieving an H1 EBITDAaL-CapEx margin of 12.0% (+0.1 percentage points)[22] Guidance and Sustainability - The company reaffirmed its 2025 guidance, expecting organic revenue growth, organic EBITDA growth, organic EBITDAaL-CapEx growth, CapEx/Sales less than 12.5% organic, and FCF similar to 2024[25] - Telefónica Tech's revenue for H1 2025 was €1074 million, with an organic growth of 9.6%[78] - Telefónica Infra has 29.1 million FTTH JV premises passed, representing 35% of Telefónica's FTTH footprint[81]