Telefonica inks mobile deal with Digi after strong Q1

The Spanish incumbent reported small increases in revenues and earnings, including in its home market, and a big hike in net profit, which came in ahead of expectations. And, understandably, the telco is pitching this as a sign that its recently begun three-year strategic plan is working.

"We have started the year with a solid strengthening of our business, supported by the deployment of our new roadmap, the GPS strategic plan which will guide Telefónica until 2026," said Telefónica chief executive José María Álvarez-Pallete in a statement accompanying the numbers.

"Revenue is improving, commercial activity is improving and the quality of the service we provide to our customers and their satisfaction is also improving," Álvarez-Pallete added. On that last point, the telco shared that its Spain and Brazil units recorded the best churn rates in their history at 0.9% and 0.97%, respectively.

"Telefónica is making steady progress in the year of its Centenary with our principles of integrity, commitment and transparency generating shareholder value," the CEO concluded.

Shareholder returns were front and centre when Telefonica presented its numbers. The firm will pay a €0.30 per share cash dividend in two tranches this year, and also reduced share capital by cancelling more than 80 million of its own shares last month.

It also reiterated its full-year guidance, with revenue growth of 1%, and EBITDA and operating cash flow growth of 1%-2%. It is also earmarking a capex/revenue ratio of up to 13% and free cash flow growth in excess of 10%.

And it's so far, so good, where Q1 is concerned. Revenues grew by 0.9% to €10.14 billion, driven by a 2.3% increase in service revenues. EBITDA was up by 1.9% to €3.21 billion and capex/sales came in at 10.4%. FCF was a negative €41 million, but Álvarez-Pallete attributed that to "usual seasonality" in the first quarter.

The headline figure in Telefonica's numbers was a 79% increase in net profit to €532 million, which should help keep shareholders happy. The figure exceeded analysts' expectations, which, according to Reuters, were the best part of €150 million lower.

Spain, which accounts for around a third of Telefonica's revenues and has been a tricky market of late, turned in a decent performance in Q1 too. Revenue was up by 1% to €3.1 billion, but EBITDA was virtually flat at €1.1 billion.

But the highlight of the quarter from the domestic market was the signing of an MoU with the market's new fourth player, Digi. It's non-binding at this stage, but Telefonica shared that once fully finalised – likely in the next few weeks; Ts and Cs are already in place, – it will constitute a long-term deal for the newcomer to use its mobile network.

Telefonica was a fairly vocal proponent of the merger between Orange and MasMovil in Spain, which came to fruition earlier this year with the creation of MasOrange and set up Digi as the country's fourth MNO on the back of competition remedies agreed with the European Commission. Now it is starting to reap the benefits of the deal with what could well be a big wholesale contract; naturally we are not privy to the financial implications of the MoU.

Telefonica's wholesale business, which accounts for 17% of its top line, witnessed a 0.9% revenue decline in Q1 and it is expecting an overall decline for the full year. But it describes the Digi deal as part of an effort to future-proof wholesale revenues, and it will be an interesting segment to watch in future years.