• Telefónica grew its full year sales and its customer base in 2023 
• But restructuring and asset impairment charges hit its margins
• The operator’s business is solid, its embracing automation and its ramping up its digital services operations
• But the coming years look challenging so, as it celebrates its centenary, it’s cutting costs

Telefónica’s fourth-quarter and full year financial results are a reminder of not only the company’s scale but also its challenges, as while group revenues and subscriber numbers grew in 2023, the value of its UK operation and an ongoing restructuring programme in its domestic market of Spain ate away at its profit margins.

The telco, which has operations across Europe and Latin America, reported full year revenues of €40.65bn, an increase of 1.6% compared with 2022. Its operating income before depreciation and amortisation, though, dipped by 11.4% to €11.4bn, and the company reported a full year net loss of €892m because of one-time charges of more than €2bn (most of which relates to an asset impairment writedown in the UK against the value of its 50% stake in Virgin Media O2) and one-time costs of almost €1.2bn in Spain associated with job cuts. 

Excluding those one-time charges, the telco’s numbers are generally positive and within its expectations, and it continues to attract customers: It ended 2023 with total customer connections of almost 388 million, up by 1.2% compared with a year earlier. Of that total, just over 130 million are mobile contract customers (up by 3.1% year on year) and 16.1 million are fibre-to-the-premises customers (up 13%), though across the whole group the number of pay-TV customers dipped by 3.1% to 10.3 million.

Telefónica, though, has already signalled that the coming years are not going to be easy (but nor will they be disastrous). In unveiling the company’s new Growth, Profitability and Sustainability (GPS) strategy last November, Telefónica chairman and CEO José María Álvarez-Pallete signalled that revenues are expected to creep up by just 1% per year during the 2023-26 period, while earnings before costs and tax are likely to increase by an average of just 2%. At the same time, Telefónica plans to reduce its capital investments from around 14% of sales to about 12% and “drive efficiencies to reduce opex [operating expenditure].” 

In 2023, the company’s capex budget was €5.6bn, about 14% of total revenues, while this year that capex-to-revenues ratio is set to slide to 13%.

Much of its heavy lifting in terms of access network investments is already done, though. It noted that it “maintains its position as global leader in fibre with coverage of 173.1 million premises passed with ultrafast broadband networks (+3%), of which a total of 74.3 million are fibre (+14%). As for 5G, coverage continued to grow to reach 87% of the population in Spain, 94% in Germany, 48% in Brazil and 51% in the UK. In addition, the company has already launched 5G+ in Spain, Germany and Brazil, and is set to do so in the UK in the coming months.”

There’s still more to be done in terms of fibre and 5G rollout, of course, while, in order for the operator to remain relevant in the digital services era, investments in digital infrastructure and AI technology will be needed. 

As ever, Álvarez-Pallete is upbeat at the telco’s current position and its prospects. “In 2023, Telefónica met all its financial targets and is resolutely facing the commitments set out in our GPS strategic plan to continue building a new Telefónica and lead the new digital era,” he stated in comments prepared for the telco’s earnings report.

Key to the company’s digital services future is its Telefónica Tech division, which delivers cybersecurity, cloud, internet of things (IoT), big data, AI and blockchain-enabled services to enterprise customers: Its 2023 revenues increased by more than 23% to €1.88bn.  

Telefónica also highlighted its efforts to embrace automated processes using AI tools. It noted: “During the past year, the company continued to actively advance in the transformation of its next-generation intelligent networks. With the application of technologies, such as artificial intelligence and machine learning, Telefónica continues to explore and implement solutions that enable it to make decisions faster and more efficiently, ultimately improving its competitive position, capex allocation and cost savings.”

It added: “We are actively advancing towards the hyper-automation of the company through the Autonomous Network Journey (ANJ) programme across all operations, benefitting from the application of artificial intelligence (AI), machine learning (ML) and the management of valuable network data. Our focus is on exploring and implementing solutions to make decisions more efficiently and rapidly, which ultimately enhance our competitive position, capex allocation and cost savings.”

Overall, investor sentiment is with Telefónica, at least for today, as the company’s share price edged up by 2.6% to €3.78 on the Madrid exchange. That’s pretty much the same as a year ago, though, and it gives the company a market valuation of just €21.75bn, while its net debt stands at €27.3bn.

With its full year financials now reported, the company can talk more freely and openly about its plans and aspirations, much of which will be on show at MWC24 in Barcelona, where Telefónica will have a sizeable booth and will be celebrating its centenary – the company will be 100 years old this coming April.  

Álvarez-Pallete stated: “Telefónica is celebrating its first hundred years of life and is moving resolutely towards the new company it aspires to be, without forgetting the operator it proudly was. We have prepared ourselves thoroughly to reach the centenary, a journey that has not been easy but which has been necessary and worthwhile. This exciting anniversary is an invitation to our people, our customers, our shareholders and society in general, because Telefónica is above all a company of people at the service of people. The centenary is a thank you and an offer to approach a new company that feels younger than ever and is already imagining the next 100 years.” 

Behind the balloons and cava, though, is a company that knows it needs to tighten its belt, strive for greater innovation (it is one of the major telcos pushing the development of network API exposure for application developers) and find multiple ways to get a better return on its significant investments in fibre, 5G and spectrum. And that much is true not only for the Spanish giant but for all of its peers too. 

- Ray Le Maistre, Editorial Director, TelecomTV