Telefonica SA

Good morning. Thank you for standing by and welcome to the Telefonica January to March 2026 results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If you'd like to ask a question, please press star followed by 11 on your telephone keypad. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. We would kindly ask you to ask a maximum of two questions per participant. As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr. Thorsten Achtmann, Global Director of Investor Relations. Please go ahead, sir.

Good morning and welcome to Telefonica's conference call to discuss January to March 2026 results. I'm Thorsten Achtmann from Investor Relations. Before proceeding, let me mention that 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 at call and webcast, including the Q&A session, may contain forward-looking statements and information relating to the Telefonica 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 Telefonica's investor relations team. Now let me turn the call over to our COO, Mr. Emilio Gallo.

Good morning and thank you for joining the call. With me today are Juan Acue, CFO, Borja Ochoa, Santiago Argelitz, Alud Suler, CEO of Spain, Germany, and U.K., We are pleased to report a good start to the year. We are growing in revenue, adjusted EBITDA and adjusted operating cash flow after leases, both in constant and current terms, with an appropriate capex to sales ratio to deliver this growth. At the same time, we are reducing net financial debt, despite the usual seasonality of free cash flow in Q1. As a market, year-on-year growth rates accelerated in Spain and Brazil, with a strong commercial performance. In Spain, we recorded the best ever churn. In Brazil, we achieved a record high mobile ad view. In Germany, O2 contract churn remained at a low level. And in the UK, fixed line net ads continue to improve. Revenue growth is driven by retail, with a steady growth in B2C and B2B. This performance more than offered the loss of one-on-one revenues in Germany, and the impact from the extension of wholesale agreements in Spain, which provide a more predictable and sustainable business long-term. I'd like to highlight the steady growth in service revenue, partially offsetting weaker handset markets in some European countries. On the operating model front, we are reaping the benefits for linear operations, including the first savings from restructuring plants in Spain and our global unit. and the corporate networks have done in Brazil. We are executing consistently against our transform and growth plan, making good progress. We remain confident in achieving our financial outlook for 2026 and reiterate our 0.15 euro cent dividend pressure. On slide two, let me share our progress across the strategic pillars of our plan. First, on customer experience, hyper-personalization and network quality initiatives are leading to lower chance and a sound MPS. Second, in B2C, we are sustaining steady growth. We are fostering convergence with a solid traction of our offering in Brazil and Germany. At the same time, we are enhancing our ecosystems. In Spain, we have enriched our premium content offering with a with the FIFA World Cup rights, and we are fostering digital security. In Brazil, we have reached more than 600,000 health subscriptions. We are also expanding the customer electronic business, recording significant growth in Spain and Brazil. Third, in B2B, we have seen strong momentum, with revenue growth close to 6%. Noteworthy is the launch of Titan Connect Portfolio, and the acquisition of Altin in Spain and the San Martino partnership in Brazil in the agribusiness. Fourth, we continue to enhance our infrastructure, expanding our fiber and 5G coverage while improving network quality. Fifth, on simplification, we are capturing deficiencies from redundancy programs and legacy network switch-off. At the same time, we continue to make solid progress on our system ethic with six assets sold in the last 12 months. Overall, this action reflects strong execution, positioning us well to continue delivering sustainable growth throughout the year. On slide three, we will review our domestic business. In the first quarter of the year, Telefónica España continued to deliver strong operating and financial performance. We recorded solid commercial KPIs, reaching the lowest trend ever, 0.7%, despite the tariff update in mid-January. This figure proves the high stickiness of our customers to our excellent service and superior network quality, our differential ecosystem, and our small segmentation. Such a competitive advantage is driving a positive balance in portability ratios. We have outperformed our competitors year-on-year, surpassing the 2025 average, and three times higher year-on-year. As a result, we achieved record customer base in fixed broadband and in contract mobile, a significant milestone. In B2C, conversion RPU increased about 91 euros, It remains at leading levels in the market, both in absolute and in relative terms. Our premium digital ecosystem continues to support the highest customer lifetime value in the market while driving revenues up. In B2B, we also started the year with strong traction. We are growing both incomes and IT services. I would like to highlight the recent launch of innovative service on network resilience for business continuity, advanced service security, drones in defense, and sovereign technology. They will drive further growth in this segment. Regarding financial, Spain is delivering a solid cash generation with growth acceleration across all financial metrics. Growth in revenues accelerated to 2% year-on-year, supported by service revenue. B2B digital services maintained robust growth. Adjusted Selipda grew over retail revenue, delivering a 56% margin due to revenue growth and savings from the Renunda Zip Plan. This more than offset the anticipated lower wholesale revenues. In addition, capital discipline and the more stable leases led to a 2.3% growth in adjusted operating cash flow after leases. In a nutshell, our domestic business had a strong start into the year and we are in a strong position to continue to excel. On to slide four. Telefónica Brasil's performance was once again remarkable. People recorded solid commercial momentum in the most valuable segments and grew above inflation across all key lines. We maintained a clear leadership position in the market, leveraging our strong commitment to quality and customer satisfaction, and our continued evolution in a broader digital platform. In mobile, we reached record levels both in content and ads and art view, with a sustained churn reduction. We added 850,000 new contract customers in the quarter, the highest figure of the last five quarters. Altium is the highest ever, driven by our value-driven growth in the increase in recharge frequency in preparation. In fact, we increased fiber connection to almost 8 million. This strong performance was driven by Vivo Total, resulting in a lower charge. Turning to financials, Revenue and adjusted EBITDA grew year-on-year well above inflation and accelerated versus the previous quarter. Revenue increased by 7.4%, supported by consistent growth in mobile service revenues and continued strength in the fixed business. In B2C, new digital businesses maintain strong momentum. Consumer electronics stand out. growing 56% in the last 12 months, thanks to the launch of new financing options. In B2B, digital solutions were once again the main growth engine, driven by cloud and IoT. Adjusted the data and operating cash flow after releases both grew 9%, boosted by solid revenue growth and continued improvements in OPEX. Overall, Vivo delivered another strong set of results. showing growth across key financial KPIs. Moving into slide five to discuss Germany. Telefónica's guidelines for business momentum showed resilience in a market with lower promotional activity. We have recently seen some positive price moves in the market, and since March, we have maintained or even increased prices across all promos, stopping or to mobile promos at price point below 30-20 euros. This is consistent with our strategy to prioritize profitable growth, focus on value over volume, while maintaining a low-chan level. This quality of our customer base is improving, with a growing number of customers with a second or third SIM card. This strategy impacts our view, but supports loyalty and higher net ads. Fixed round-up fixed broadband accesses grew for the third consecutive quarter, with a better mix in the base, lower chance and higher output. Notably, IoT accesses recorded another quarter of outstanding growth. Regarding financial results, the one-on-one customer migration continued to impact revenues, with the year-on-year peak of this effect in Q1. Additionally, following a record four quarters last year, handset set declined in a weak German handset market. Nevertheless, MSR trends slightly improved quarter on quarter, and fixed revenue increased 4% year on year. Adjusted EBITDA was likewise affected by the in-year peak of 1-on-1 impact. However, efficiency and cost control led to an increase in the adjusted EBITDA margin year on year. showing the solid performance of the healthier part of our business. To summarize, underlying performance remains resilient in Germany, with a high single-digit year-on-year growth in adjusted data excluding the one-on-one effect. We continue working to return to growth in 2027. Let's move to slide six. Building MediaO2 started 2026 making clear progress in the line with its strategy. During the quarter, we achieved several important milestones. O2 Satellite was launched, making us the first UK mobile network to switch on direct-to-device satellite connectivity. At the same time, we continued to advance our mobile network transformation. We signed new strategic grant update agreements and completed the second tranche of spectrum transfer from Vodafone UK. As a result, O2 now has the largest 5G standalone footprint in the UK, reaching 86% of the population. From a commercial perspective, we continue to show improvements in Q1. In fixed, we reduce losses supported by commercial initiatives, while the RPU remains impacted by the high promotional intensity in the market. Immobile contract chance decreased quarter and quarter, while ARPU remains broadly stable year on year. In wholesale, we maintain our leading position in the MD&O market and continue to strengthen our wholesale fixed credentials. Regarding financials, both service revenue and adjusted EBITDA trends are on track with our 2026 guidance. Service revenue decrease, mainly driven by consumer revenue, too, due to prior year customer losses and continued pressure on fixed output, business revenue declined, largely reflecting lower-margin products. This was partly offset by strong performance in wholesale supported by growth in MVNO revenue. Total revenues are also affected by reduced net cyber bill activity, compared with the year before, adjusted a bit that decreased mainly due to devolution of service revenues. Finally, we continue to progress as expected with the Netomi acquisition, which, together with a targeted network investment, pardoned Streffen's busy MediaO2 foundation for 2026. Now, I would like to hand it over to Juan, who will cover financial results with more detail.

Thank you, Emilio, and good morning to all. Moving to security. we show how the strong underlying momentum that Emilio explained translate into tangible financial results, with growth both in constant and current effects terms for the second quarter in a row. Our growth in current is supported by the strengthening and well-performing Brazilian REACH. Revenue reached 8.1 billion euro, growing 0.8% year-on-year in constant terms, underpinned by a 1.0% increase in service revenue. B2B continues to be the growth driver, with an outstanding growth of 5.7%, alongside a consistent B2C increase of 1.5%. Adjusted EBITDA and adjusted operating cash flow after leases came in at 2.8 and 1.4 billion euros respectively, 1.8% and 2.4% higher than a year ago. Assets. Operating leverage in the business is the main driver behind the higher adjusted operating cash flow after leases margin, 0.3 percentage points more year-on-year. CapEx to sales stood at 10.7%, declining by 0.2 percentage points year-on-year. Current free cash flow is €333 million, affected by the usual seasonality. Net financial debt decreased to €25.3 billion, primarily due to the receipt of proceeds from Colombia and Chile this quarter. After the sale of Chile in February 2026 and the agreement to sell Mexico in April 2026, both companies are classified as discontinued operations in the first quarter. Slide 8 shows free cash flow performance in the first quarter of the year. Our performance remains solid and fully on track. We are committed to our free cash flow trajectory and our ability to meet our full-year free cash flow guidance of around €3 billion. Consistent with prior years, our free cash flow generation of €333 million reflected the usual seasonality of the quarter, mainly due to working capital and its back-ended loaded profile. As such, we anticipate acceleration through the year. With this behind us, we are delivering a constant execution towards a de-risked free cash flow, as operational efficiency drives us to our target of over a year. As such, we are progressing in a stronger position due to, first, a more predictable free cash flow following the successful execution of the sale of six ISPAM countries over the last 12 months, with a total firm value of about €4 billion. Second, a solid free cash flow thanks to the execution of our efficiency plan. With the workforce restructuring in Spain and global units already in place, among other initiatives. Third, a growing free cash flow with upgraded guidance for 2026 after exceeding it in 2025. On slide nine, you can see that net financial debt has decreased by 1.5 billion euros in the first three months of the year, mainly due to the disposal of our subsidiaries in Colombia and Chile. Our net debt to EBITDA ratio has decreased to 2.72 times. from the 2.78 times in December last year. The leveraging is on track towards our 2.5 target in 2028. Telefonica has demonstrated an excellent refinancing execution this year, which has been active in the capital markets, raising €3 billion long-term financing at the Group ahead of recent market volatility while maintaining an ample liquidity position. Finally, The average cost of debt has been reduced year on year from 3.30% in March 25 to 2.81% in March 26. Turning to slide 10. In Telefonica, sustainability is a driver of competitiveness and resilience. On the environmental side, we continue to enhance operational efficiency by decoupling traffic growth from energy consumption and supporting our customers in meeting their environmental goals. On the social front, we keep bridging the digital divide and promoting steam balance. Moving to governance, we have a balanced and diverse board. We also uphold the highest standards of fiscal transparency. Lastly, we are proud to report positions across prestigious markets. Now I hand over to Emilio for the final remarks.

Thank you, Juan. To summarize, let me share with you some key takeaways. Telefónica's performance in the first quarter of 2026 demonstrated consistent execution as we continue to deliver against our transform and grow plan. We reported a good set of results to start the year, with key tests firmly on track to achieve our full year 2026 guidance across all key metrics, including free cash flow. We are building a company that is more focused, more efficient, and more profitable. Thank you very much for your time.

Now, we are ready to take your questions. we would kindly ask you to ask a maximum of two questions per participant. There will be a short silence while questions are being registered. Thank you. We will now go to our first question. One moment, please. And the third question today comes from the line of Andrew Lee from Goldman Sachs. Please go ahead.

Yeah, good morning, everyone. I have two questions. One was on the sustainability or outlook for Spanish growth through the year, and then, secondly, just on Germany cost-cutting. On Spain, I think your remarks suggested you think that the growth delivered in the first quarter is at least sustainable, but I'm also conscious that there's obviously some lumpiness in the wholesale revenue trends. What is it that gives you the confidence that you can sustain or improve the Spanish growth through the year? Are you seeing an increasing market? Is the teaching going as expected as we ran into Q2? Any help on that would be really useful. And then just secondly on Germany, cross-cutting, it looked like the cross-cutting accelerated in the first quarter. I wonder if you could just talk through that a little bit. That would be helpful. Thanks.

Andrew, thank you very much for your question.

For having a telephonic experience, first of all, I would say that we are very happy with the results of the first queue. These results, I have to say, are slightly above our expectation. We are happy for that. These results are based on fundamentals in our commercial strategy, in our efficiency programs, in our ecosystem, in our B2B revenues growth. For the next quarter, we are seeing similar trends, and I would say that for the rest of the year, we are seeing an H2 even better than H1. Then our result is that we can compare our outlook, that is to grow above 2021. Regarding Germany, I have to say that in Germany we are a best-in-class company managing the efficiencies. We have launched several cost efficiency programs that result in an underlying EBITDA growing. And it is based in different elements of the company. Everything around channels, cost channels, everything around energy, everything around the operating model. All the aspects are reviewed and as a result of everything, it is a good performance in this kind of efficiency programs.

Thank you. Can I just follow up on the Spanish side of things? Are you seeing any improvement in market dynamics? You've done the price rises this January, are they holding better than last year, or is it more company-specific efforts that's driving that improvement?

I would say that we're still more comfortable than other years in our commercial trends. Again, the fundamentals that we are Managing in Spain are key fundamentals. Our offer, our semantic offer, demonstrates that this is the right approach in this market. The management of the ecosystem really is performing very well with a very strong position in everything around the consumer electronics or the financial options. in the alarm market. We have raised more than $600,000 at this moment. And everything demonstrates that the main elements of the offer and the main effects that we need that's happening in the market is on the table. In the case of B2B, we are growing at the same level that we were doing during the last years and demonstrated that Telefónica Spain is the best in terms of IT services in Azatelco in Spain, or I would say in Europe.

Thank you.

Thank you. As a reminder, we kindly ask you to ask a maximum of two questions per participant. We will now go to the next question. And your next question today comes from the line of Mathieu Ravillard from Barclays. Please go ahead.

Good morning. Thank you for the presentation. I had a question on Germany. We see that there's a step down in the mobile ARP trends in Q1, and I wanted to understand what is behind that. and what we could expect for the rest of the year, and whether that reflects more competition, or you see a similar competition. And then coming back to the question from Andrew, so you're saying that you didn't really comment, I think, or at least I didn't get that, about the competitive environment in Spain, and so if you could clarify if you think it has improved a bit since the beginning of the year, or it's pretty stable. Thank you.

Thank you for your questions. First of all, about the AltView in Germany. Let me say, first of all, that the AltView is the result of different effects. And one of these effects, for example, is the change in our strategy. We think that we are launching a more successful strategy in terms of two and third since bundles. This is an example of how to move from volume to value and what kind of impacts in the ARPU in this case, but we think it's the right way. Anyway, I'm going to hand over to Santiago Argelis in order to give you more color about this.

Yes, Matthew. So when looking at the ARPU, it is impacted by the success of family plans. which naturally result in a dilution of ARPU. We have a higher share today on second and third SIMs with consolidate our household and conversion strategy. The market overall has largely embraced the family plans. The O2ARPU performance is in line and even slightly better than the competitor's ARPU in this sense. What's more important is that our household ARPU is growing year on year.

Okay. I guess the follow-up to that is we don't really see the net ads accelerating into Q1, so I wonder how we can reconcile better think cards, which obviously has to be the case with the fact that net ads are not really moving up

The NetApp results is again a mix of different strategies. One is the SIM card bundling, but other strategies to move from volume to value or even to reduce promotion activity. And then the results in KPAs is a set of different aspects, but at the end, we believe that this permits us to have a more profitable way to grow in Germany. And secondly, regarding, again, about Spain's competitive environment, we don't see important change in front of us. We are seeing a rational market in the high-value market and our expectation that everything follows in the same way. And in the case of the low end, It's a more competitive market, but we think that we are not expecting a special change in this market, too. But anyway, we think in our O2 strategy, our cemented strategy, that means us to be very resilient in most of the movements that can happen in the market. Remember, for example, that in the first quarter we have increased the prices. but we have reached the lowest term ever.

Thank you very much.

Thank you. Your next question today comes from the line of Carl Murdoch Smith from Citi. Please go ahead.

That's great. Thanks very much. I wanted to ask firstly on expectations for other EBITDA going forward. Other was the biggest absolute beat versus consensus in today's results at EBITDA. If I go back a few years before HISPAM was included in an other, other EBITDA used to be broadly flat to slightly negative. Obviously other now includes HISPAM but then you sold most of those assets. I was just wondering if you could help us with what we should be expecting for other going forward. Should we expect it to revert to the broadly flat? even though we had seen a few years ago, but had something structurally changed, meaning that today's kind of circa 50 million positive a quarter results is sustainable going forwards. And then secondly, I just wanted to ask a bit about why we're seeing such differences in mobile handset trends in different markets. In Germany, you've seen 15% handset decline, and you're citing launch cycles and availability of devices as well as large amounts. But then in Spain, hands-out revenues are up 7%. So why have launch cycles impacted Germany but not Spain? Thank you.

Okay. I will take the first one or another. As you know, other is a group of bits and pieces. In the last quarter, we included here the ISPAM units, but as we have kept on selling and discontinuing them, there's been quite a lot of movement. Right now, the only ISPAM assets here are Venezuela and the holding company and some other minor assets there. You also, what we've seen this quarter is a positive performance from Telefonica Tech, offsetting the weakness of other global units. By being more specific on that, as a result of the sales in e-spam, these are affecting, for instance, our procurement units, and those are the ones having a small negative. So all in, we expect this to be rather stable during the year, but as you know, we don't

Regarding the handset revenues, I have to say that the market has a different situation. In some markets, in Spain and Brazil, we have a range of consumer electronics that we are selling in the market, wider than in other countries, and it permits us to be more resilient in the change that the market can have. due to the different spacing of the lines or due to the sand shortage in the supply chain. In the case specifically of Germany, we have less revenues, enhanced revenues, due to this less range of product that we sell and the result of the Q4. Q4 in the United States was very strong. And then the comparison with Q1 is worth Q1. And even in the case of Germany, we have reduced sales in some specific channels due to the supply chain situation. But anyway, these kind of sales are at a very low margin sales.

That's great. And can I just ask a clarification? On other, when you said stable... Does that mean zero or does it mean the same as Q1, 3D, the rest of the quarters appear?

Stable versus what you've seen in this quarter. That's right.

Thank you.

Thank you. Your next question for today comes from the line of David Wright from Bank of America. Please go ahead.

Hi, guys. Thank you for taking the questions today. Just a couple of Well, essentially a higher level question. There was a lot of discussion last year following the change in management around scale in the business across Telefonica Group. Now, obviously, we've seen where there is lack of scale, perhaps in my town, we've seen the rapid divestment there. But apart from that, not really too much change. And I guess when I now look at Germany, you know, there is a There is a clearer strategy. There is an accelerated cost-cutting. Is Germany okay here, or does Germany need either more customer scale or perhaps less capital allocation? Could you look to change that business at all, or are you very happy with where it is right now? And if I might also ask the same question in Spain, you have a very strong position in the premium market. But I think, how can I say this? It's sort of half a toe in the water in the lower end with O2. Do you need more scale in the low end of Spain? Do you have an ambition to have more scale in the low end of Spain? Or again, are you happy where you are? The reason I ask the questions is there was a lot of talk from your chairman about scale. But so far, we haven't seen too much action. Thank you.

And let me say that we are happy, of course, with the scale that we have. We have developed a transformable plan based in the asset that we have. And we are very sure and we feel comfortable, confident that we are able to reach our targets, our guidance in the plan with the scale and with the operation that we have. Of course, we have talked a lot during the last month about the opportunity for more scale related to create or to invest in technology in Europe and related to be more profitable. Of course, scale in telco businesses provides better profits. But we feel that with the operation that we have, with the site operation that we have, we are able to compete in the markets in the right way in a profitable way.

Let me answer your second subdued question, which is asking about M&A without mentioning M&A. So we don't comment on specific transactions or rumors. In this case, what I would say is our business plan is organically based We have a plan to organically grow in Germany and Spain and grow scale organically. That doesn't mean that we will not consider opportunities where it makes sense, as we have seen done, for instance, in the UK and Latomia. And opportunities may happen in Germany, if that's the case, or even in Spain. So we will consider them as long as they fit on our M&A criteria, which was poor markets, poor business, peer and measurable synergies and right turns.

I appreciate that. Thank you, guys.

Thank you. Your next question today comes from the line of Nick Lyle from Bamberg. Please go ahead.

Hi, morning, champs. I hope you can hear me. It was a couple of questions, please. The first on German ARPU, to come back to Matthew's question, please. How much more can ARPU benefit from the removal of promotions and the price rises that you talked about towards the end of the quarter. And with the value strategies, it's sensible to assume that you're going to at least maintain ARPU at this level from here through the year, even with the family SIM cards added in. And the second one was, funnily enough, going back to David's point just there on M&A, is that you've seen the draft merger guidelines now. Is there anything in there that slows you down on this gaining of scale if you want to do it? Is there anything that you object to or the concern wasn't addressed, please. Thank you.

Okay, thank you for the question. For the first one, I'm going to hand over to Santiago, just only to remember that RPU is not the only KPI related value. But anyway, I'm going to hand over to Santiago to give you more color about that.

So, We are seeing an increasing mature market with lower activity, commercial activity. The core business momentum in Germany remained resilient, and the customer postpaid mobile service revenue was sluggish. So that creates an outlook in Germany of a potential stability, and that would create a base of a, let's say, positive outlook on the ARPU evolution in the next period. The quality of the citizen customer base is steadily improving. For us, we are constantly growing the number of customers with multi-themed and converged contracts supported by customer loyalty and the overall mobile service revenue trends. So we are looking to an ARPU that will be impacted by the success of family plants, which naturally result in higher share of second and third SIM cards in the base. In a market that has largely embraced family plants, the O2 consumer ARPU performance is in line, or even slightly better than the competitor's ARPU.

Okay, and I like Okay, related to the second question about the merger guidelines, I will say that from the point of view of theoretical analysis of the new guidelines, we think that these guidelines are more close to our vision. I think these guidelines are opening the option to consider other reasons in order to evaluate the mergers. and talking about investment and talking about creating technology and so on. And then, again, from the theoretical point of view, we are happy with the evolution in the reasons that are behind these guidelines. Anyway, again, it's theoretical. We have to see if really the change is a real change. when we see any operation that can be analyzed under this new umbrella.

Understood. Thanks very much.

Thank you. Your next question comes from the line of James Raptor from Newsy Research. Please go ahead.

Yes, thank you very much indeed. Yeah, good morning. Thanks for taking the question. So I've got two questions, please. The first one, if we can, let's just stick with Germany again for a moment. And maybe you can help us to be a bit more kind of specific on the numbers. Because I think in Q1, mobile service revenues were down 8.5%. Obviously, that's very influenced by the one-on-one migration, that you don't disclose the underlying revenues excluding... Now, I estimate that might be around minus 2% year-on-year. So, really, I suppose the first question is, do you think that's a fair estimate? It looks to me like that trend's been stable for the last few quarters. So, you know, as we go through the year, do we see service revenues kind of improve, but we're exiting the year at a kind of minus 2% run rate? I'd just love to kind of hear a bit more about where you see the underlying overall revenue growth and how that might develop through the year. And then secondly, it's, you know, widely reported that you are leading a consortium to bid for one of the AI gigafactories, and in particular the kind of Spanish government-backed project in Spain. So... If you were to win that contract, could you kind of give us an order of magnitude of how much capital you think Telefonica might have to deploy into this AI Gigafactory project? And can you then talk us through how you'd expect to make a return on that capital as well and what kind of IRR you think is feasible? Thank you.

Okay, thank you for your questions.

Okay, it's right, we don't discuss the underlying revenues, but we can say that we are really stable as other quarters. We don't see a critical change in this evolution. The whole service revenue, the total service revenues of these quarters is very impacted, as I mentioned during the conference call, due to the one-on-one effect take. And then, answering without figures, because we don't give the figures, answering you again, we see the writing being very resilient in revenues and be very positive even in any bid-up. This is the first. Regarding the second question, just to clarify any... We are at the beginning of the process. I'm going to hand over now to Borja to explain a little bit more the process. But anyway, the investment that Telefonia can do here is always limited. And of course, in the parameters that we consider that are valuable for the group. I'm going to hand over to Borja in order to give you more color.

Okay, thank you, James. Yeah, exactly. We are participating in the process of building a gigafactory network all around Europe. We are leading the Spanish consortium, and right now we are concentrated in all the works behind the preparation of the offer, the final offer. In terms of time frame, the offer has to be presented between June and July, and we are expecting outcome by the end of the year. We cannot give any further information apart from that.

Okay. It sounds like the kind of potential capital size would be limited, i.e., kind of like only a few hundred million euros, or is that even too much?

Let me take that one. leaving from an operational level, but as Borja said, from an investment level, we're talking about a minority. And when I talk minority, I'm talking about between 10% and 15% or something around that. So it's below, it's definitely below the amount you're saying, because you have to remember that around two-thirds of that, if not more, is financed via debt. The rest is equity, and it's a consortium with the state, and we're only taking an amount of that size. Therefore, the amount is way lower than the figures you put, and the returns that you've mentioned will be consistent with returns in the infradigital world. Thank you very much.

Thank you. Your next question today comes from the line of Joshua Mills from BNP Paribas. Please go ahead.

Hi, guys. Thank you for taking the question. There were reports in the press earlier in the year around potential German consolidation and some suggestion that the telephonica perspective one and one's network quality might be an issue in any negotiations i'm not expecting to comment on that specifically because you maybe give us a high level view of how you think about the value in any potential consolidation bills be that germany spain uk and then perhaps more specifically how you view the importance of the network quality of competitors. The reason I'm asking is I think a lot of people view consolidation upside as really a base around market repair, potential cost synergies rather than network complementarity. So I'd love to hear your view on that. Thanks very much.

Let me start answering you about the network and I'm going to hand over to Juan to talk about the money options. We are very happy with the evolution of the network in Germany. We have reached a second position in terms of quality in the market. And this perhaps or not can be important in any potential market in the future or not. But it's sure that it's critical in the performing of Telefonica Germany in the next coming years. Then, I think this is not the key reason to develop a very high-quality network. It's not measures or acquisition. It's the quality of the services. And now I hand over to Juan in order to give you more color about the money process.

Just one. Not sure how much color I'm going to give you because in real terms, as I said, we will pursue transactions that are value-accretive and therefore that have key immerseable synergies and that's quite plain vanilla intake. That's mostly cost and network. That's what you can quantify. Yes, there's always... revenue synergies, but then you have to believe in them. So it's cost and network synergies, and these changes between market to market, different deals and different structures. So Netomia, there is some revenue synergies, but it's mostly CapEx synergy of us having access in Fiverr, but that can be different depending on the transaction.

Great, thank you.

Thank you. Our next question today comes from the line of Fernando Cordero Barrera from Banco Santander. Please go ahead.

Hello, good morning, and thanks for taking my two questions. The first one is in Spain, and I would like to assume a little bit more in the wholesale revenue line performance. After falling recently last year, in year-to-year basis and we have seen a material desolation on that fall pace and I would like to understand what has been the driver and what should we expect for coming quarters from wholesale in Spain. And the second question is coming back to Germany but now on an organic point of view. One of the key messages that you have shared in your Capital Market Day was your push for convergence in Germany. I would like to understand which kind of steps are you pushing on that front.

Thank you. Thank you for your question. In the case of the wholesale revenues in Spain, you have to know that the line is wholesale and others. In this case, there are some non-linear effects that improve this line. We have seen the impact of the wholesale new agreements for the next quarter and probably the peak of this effect will be in the second quarter of the year. But again, the first quarter is impacted by some non-linear impact and some comparison with the last year. Anyway, the evolution of the wholesale is an absolutely expected evolution. It was included in our expectation, and then it's included in the outlook that we are giving to you, that we are expecting to improve H2 compared with H1. Related to the German question, We said that this is our strategy to develop the convergence in Germany. And we are working hard in order to develop our fixed business. That is the part of the convergence that we have to do more effort. In this case, we don't. We can't explain so much about the negotiation that we have, but we are working in order to have better access to the infra-networks of our competitors, of our providers, in this case, in Germany.

If you allow me to complement, please. Yeah, this is Santiago. Just to complement the answer from Emilio, we are working on realignment in our offer portfolio to increase our attractiveness in multi-lines at the household level. You have seen the accelerated traction in the fixed in Q1, which will also help us to combine better mobile and fixed. And additionally, we are planning to sell and combine digital services for the home, be it TV or other services that we already commercialize in other markets.

Okay. Operator, sign me for one last question.

Thank you. We will now take the final question. And your final question comes from the line of Fernando Abreu-Morterel from Alantra. Please go ahead.

Hello, thank you for taking my questions. In Spain, just to confirm, Emilio, when referring to improving momentum in H2, were you referring mainly to top-line trends rather than EVDA? And also, linked to this, how much of the restructuring savings were already captured in Q1, and how much remains to come through over the rest of the year? And second question on guidance, so Q1 performance was already within the guidance range. However, Germany appears to have bottom out. Brazil remains quite strong. And Spain should, you know, you also mentioned this, but should also have a greater impact through the year, no? So, my question is, am I using any relevant headwinds for the remaining of the year, or is just simply conservative guidance? Thank you.

Fernando, thank you for your question. Regarding the first question about the remuneration program in Spain, it's true that the impact in the Q1 is limited because we started the last month of the quarter. It's around 20 million euros and around 250 million euros in the whole year. that we are seeing for H2, the same improvement that I mentioned for the rest of the financial KPIs, is the result of several impacts. The pregnancy program is one, the prices increase is other, the cost increase is other, the salary increase is other, the wholesale agreement is other, the ecosystem is over, the B2B development is over. The result of everything is that we are seeing a better H2 compared with H1 in the financial metrics. In the case of Germany... In the case of Germany, we are seeing better results in H2 compared with H1. This is our expectation for Germany for the rest of the year. And regarding the guidance of the group, we are pretty confident to reach our targets. and the headwinds and the tailwinds are based on improvement in Germany, improvement in Spain, and the solid performance in Brazil.

Okay. Thank you, Emilio.

Thank you. At this time, no further questions will be taken.

Thank you very much for your participation and we certainly hope that we have provided some useful insight for you. Should you still have further questions, we kindly ask you to contact our investor relations department. Good morning and thank you.

Telefonica's January to March 2026 results conference call is over. You may now disconnect your line. Thank you.