UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
____________________________________
Washington, D.C. 20549
____________________________________
FORM 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
under the Securities Exchange Act of 1934
For the month of September 2022
Commission file number: 001-09531
TELEFÓNICA, S.A.
(Translation of registrant's name into English)
Distrito Telefónica, Ronda de la Comunicación, s/n
28050 Madrid, Spain
+34 91 482 87 00
(Address of principal executive offices)
____________________________________
Indicate by check mark whether the registrant files or will file
annual reports under cover of Form 20-F or Form 40-F:
Indicate by check mark if the registrant is submitting the Form 6-K
in paper as permitted by Regulations S-T Rule 101(b)(1):
Indicate by check mark whether the registrant is submitting the
From 6-K in paper as permitted by Regulation S-T Rule
101(b)(7):
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
STATEMENTS
This Report contains statements that constitute forward-looking
statements within the meaning of Section 27A of the Securities Act
of 1933, as amended (the “Securities Act”), Section 21E of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”),
and the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. The forward-looking statements in this Report
can be identified, in some instances, by the use of words such as
“will,” “shall,” “target,” “expect,” “aim,” “hope,” “anticipate,”
“should,” “may,” “might,” “assume,” “estimate,” “plan,” “intend,”
“believe” and similar language or other formulations of a similar
meaning or, in each case, the negative formulations thereof. Other
forward-looking statements can be identified in the context in
which the statements are made or by the forward-looking nature of
discussions of strategy, plans or intentions. These statements
appear in a number of places in this Report including, without
limitation, certain statements made in “Item 4. Information on the
Company”and “Item 5. Operating and Financial Review and Prospects”
and include statements regarding our intent, belief or current
expectations with respect to, among other things:
•the
effect on our results of operations of competition in
telecommunications markets;
•trends
affecting our business, financial condition, results of operations
or cash flows;
•ongoing
or future acquisitions, investments or divestments;
•our
capital expenditures plan;
•our
estimated availability of funds;
•our
ability to repay debt with estimated future cash
flows;
•our
shareholder remuneration policies;
•supervision
and regulation of the telecommunications sectors where we have
significant operations;
•our
environmental, social and governance commitments and
targets;
•our
existing or future strategic partnerships or joint
ventures;
•the
potential for growth and competition in current and anticipated
areas of our business; and
•the
outcome of pending or future litigation or other legal
proceedings.
Such forward-looking statements are not guarantees of future
performance and involve numerous risks and uncertainties, and
actual results may differ materially from those anticipated in the
forward-looking statements as a result of various factors. The
risks and uncertainties involved in our businesses that could
affect the matters referred to in such forward-looking statements
include but are not limited to:
•changes
in general economic, business or political conditions in the
domestic or international markets in which we operate or have
material investments that may affect our business, financial
condition, results of operations, cash flows and/or the performance
of some or all of our financial indicators, including as a result
of the evolution of increasing trade or geopolitical tensions in
certain parts of the world, including as a result of the armed
conflict in Ukraine, stagflation, the pace of monetary stimulus
withdrawal and interest rate hikes, the worsening of the fiscal
sustainability in some European countries, economic and political
uncertainties in Spain, the impact of Brexit or the COVID-19
pandemic;
•compliance
with data privacy regulations and the impact of our inability to
comply with any such regulations, including liability for any loss,
transfer or inappropriate modification of customer data or general
public data stored on our servers or transmitted through our
networks;
•exposure
to currency exchange rates, interest rates or credit risk,
including in relation to our investments or in some of our
financial transactions;
•existing
or worsening conditions in the international financial
markets;
•the
impact of current, pending or future legislation and regulation in
countries where we operate, as well as any failure to renew or
obtain the necessary licenses, authorizations and concessions to
carry out our operations and the impact of limitations in spectrum
capacity;
•compliance
with anti-corruption laws and regulations and economic sanctions
programs and the impact of any breach of any such laws, regulations
and programs;
•our
inability to anticipate or adapt in a timely manner to changing
customer demands and/or new ethical or social
standards;
•changes
in our competitive position, including as a result of the evolution
of competition and market consolidation in the markets where we
operate, as well as the impact of any failure to comply with any
antitrust regulations or any regulatory actions imposed by
antitrust authorities;
•our
inability to anticipate and adapt to the rapid technological
changes that characterize the sector in which we operate, or to
select the right investments to make;
•our
dependence on suppliers and their failure to provide necessary
equipment and services on a timely basis or otherwise meet our
performance expectations;
•the
impact of unanticipated network interruptions, including as a
result of sabotage;
•the
impact of cyber-threats and cyber-security actions;
•the
impact of impairment charges on our goodwill, property, plant and
equipment, intangible assets, investments accounted for the equity
method, deferred taxes or other assets as a result of changes in
the regulatory, business, economic or political environment or
other factors;
•the
impact of a decrease in our liquidity or difficulties in our
ability to finance ourselves;
•the
outcome of pending or future litigation or other legal proceedings,
and
•our
ability to complete any pending acquisition, divestment or other
significant transaction as planned or to achieve the expected
outcome from any completed acquisition, divestment or other
significant transaction (including our 50:50 joint venture with
Liberty Global in the United Kingdom VMED O2 UK
Limited).
Readers are cautioned not to place undue reliance on those
forward-looking statements, which speak only as of the date of this
Report. We do not undertake any obligation to update any
forward-looking statements that may be made to reflect events or
circumstances after the date of this Report including, without
limitation, changes in our business or acquisition strategy or
planned capital expenditures, or to reflect the occurrence of
unanticipated events.
CERTAIN TERMS AND CONVENTIONS
Our ordinary shares, nominal value 1.00 euro per share, are
currently listed on each of the Spanish stock exchanges, which
include the Madrid, Barcelona, Bilbao and Valencia stock exchanges
and are quoted through the Automated Quotation System under the
symbol “TEF”. American Depositary Shares (“ADSs”),
each representing the right to receive one ordinary share, are
listed on the New York Stock Exchange and on the Lima Stock
Exchange. ADSs are evidenced by American Depositary Receipts
(“ADRs”)
issued under a Deposit Agreement with Citibank, N.A., as
Depositary.
As used herein, “Telefónica,”
the “Telefónica
Group,”
the “Group”,
the “Company”
and terms such as “we,”
“us”
and “our”
mean Telefónica, S.A. and its consolidated subsidiaries, unless the
context requires otherwise. In particular, certain references to
such terms also include Telefonica’s interest in VMED O2 UK
Limited.
"p.p."
means percentage points.
"YoY"
or
"y-o-y"
means year-on-year or period-on-period, as the case may
be.
For a definition of “operating
income before depreciation and amortization”
(OIBDA), “OIBDA-CapEx”,
“OIBDA-CapEx
excluding spectrum acquisitions”,
“net
financial debt”,
“net
financial debt plus leases”,
“net
financial debt plus commitments”,
“net
financial debt plus leases plus commitments”
and “free
cash flow”
see “Item 5. Operating and Financial Review and Prospects-
Non-GAAP Financial Information”.
Below are definitions of certain terms used in this
Report:
"2021
Form 20-F"
refers to Telefónica, S.A.’s Annual Report on Form 20-F for the
year ended December 31, 2021 filed with the SEC on February 25,
2022.
"5G",
is a technology succeeding the mobile technology called 4G. The aim
is to make the navigation experience and Internet downloads more
agile.
"Access"
refers to a connection to any of the telecommunications services
offered by Telefónica. A single fixed customer may contract for
multiple services, and Telefónica believes that it is more useful
to count the number of accesses a customer has contracted for,
rather than to merely count the number of its customers. For
example, a customer that has fixed line telephony service and
broadband service is counted as two accesses rather than as one
customer.
"ARPU"
is total mobile service revenues during the relevant period divided
by the average number of retail accesses (based on the beginning
and the month-end number of retail accesses during such period),
divided by the number of months in such period.
"Artificial Intelligence"
is intelligent tasks carried out by machines.
"AWS"
or Amazon Web Services refers to Amazon's service platform offering
data base storage, content delivery and other functionalities that
can help a business to grow. It is also more secure than a physical
server.
"B2B"
or business to business is the business segment.
"B2C"
or business to customer is the residential segment.
"Bundle"
refers to a combination of products that combine fixed services
(wirelines, broadband and television) and mobile
services.
"CATV"
or community antenna television is a system of delivering
television programming to consumers via radio frequency (RF)
signals transmitted through coaxial cables, or in more recent
systems, via light pulses through fiber-optic cables.
"Churn"
is the percentage of disconnections over the average customer base
in a given period.
"Cloud computing"
is a service, whereby shared resources, software and information
are provided to computers and other devices as a utility over a
network (typically, the Internet).
"Cloud Phone"
is an application that allows the transfer of files between two
smartphones in a simple way.
"Commercial activity"
includes the addition of new lines, replacement of handsets,
migrations and disconnections.
"Condensed Consolidated Interim Financial Statements"
refers to Telefónica, S.A.’s unaudited condensed consolidated
interim financial statements as of September 30, 2022 and for the
nine-month periods ended September 30, 2021 and 2022, including the
notes thereto, which have been prepared in accordance with
International Accounting Standard (IAS) 34 Interim Financial
Reporting.
"Connected car"
is a vehicle equipped with Internet access and generally through a
local wireless network or satellite.
"Consolidated Financial Statements"
refers to Telefónica, S.A.’s audited consolidated financial
statements as of December 31, 2021 and 2020, and for the years
ended December 31, 2021, 2020 and 2019 included in the 2021 Form
20-F, including the notes thereto, which were prepared in
conformity with International Financial Reporting Standards
(“IFRS”) as issued by the International Accounting Standards Board
(“IASB”).
"Convergent"
refers to the offer of a fixed service together with a mobile
service.
"Data ARPU"
is data revenues during the relevant period divided by the average
number of retail accesses (based on the beginning and the month-end
number of retail accesses during such period), divided by the
number of months in such period.
"Data revenues"
include revenues from mobile data services such as mobile
connectivity and mobile Internet, premium messaging, downloading
ringtones and logos, mobile mail and SMS/MMS.
"Data traffic"
includes all traffic from Internet access, messaging (SMS, MMS) and
connectivity services over Telefónica's network.
"DTH (Direct-To-Home)"
is a technology used for the provision of TV services.
"Fixed telephony accesses"
includes public switched telephone network (PSTN) lines (including
public use telephony), integrated services digital network (ISDN)
lines and circuits, "fixed wireless" and Voice over IP
accesses.
"FTRs"
or Fixed termination rates is an established fixed network tariff
that applies when a customer makes a call to someone in a network
operated by another operator.
"FTTH"
or Fiber to Home is the installation and use of optical fiber from
a central point directly to individual buildings such as apartment
buildings and businesses to provide high-speed Internet
access.
"FTTP"
or Fiber to the Premises refers to equipment used in fiber access
deployments where fibers extend all the way to the end-user
premises and the equipment is designed and optimized for use in
residential applications.
"FTTx"
is a generic term for any broadband network architecture that uses
optical fiber to replace all or part of the metal local
loop.
"Gbps"
means Gigabyte per second.
"GHz"
means gigahertz.
"ICT"
or information communication technology is the acquisition,
processing, storage and dissemination of vocal, pictorial, textual
and numerical information by a microelectronics-based combination
of computing and telecommunications.
"Interconnection revenues"
means revenues received from other operators which use Telefónica's
networks to connect to or finish their calls and SMS or to connect
to their customers.
"Internet and data accesses",
"Fixed broadband accesses" or "FBB accesses" include broadband
accesses (including retail asymmetrical digital subscriber line
(ADSL), very high bit-rate digital subscriber line (VDSL),
satellite, fiber optic and circuits over 2 Mbps), narrowband
accesses (Internet service through the PSTN lines) and the
remaining non-broadband final customer circuits. Internet and data
accesses also include "Naked ADSL", which allows customers to
subscribe for a broadband connection without a monthly fixed line
fee.
“IoT”
or Internet of Things refers to technologies that allow both mobile
and wired systems to communicate with other devices with the same
capability.
"IPTV"
or Internet Protocol Television refers to distribution systems for
television subscription signals or video using broadband
connections over the IP protocol.
"ISDN"
or Integrated Services Digital Network is a format commonly used
for transmitting information through a digital high speed
connection.
"Local loop"
means the physical circuit connecting the network termination point
at the subscriber's premises to the main distribution frame or
equivalent facility in the fixed public telephone
network.
"LTE"
or Long-Term Evolution is a 4G mobile access
technology.
"Market share"
is the percentage ratio of the number of final accesses over the
existing total market in an operating area.
"Mb"
means Megabytes.
"MHz"
means megahertz.
"MMS"
or Multimedia Messaging Service is a standard messaging system
allowing mobile phones to send and receive multimedia content,
including sound, video and photos.
"Mobile accesses"
include accesses to the mobile network for voice and/or data
services (including connectivity). Mobile accesses are categorized
into contract, prepay and IoT accesses.
"Mobile broadband"
includes Mobile Internet (Internet access from devices also used to
make voice calls such as smartphones), and Mobile Connectivity
(Internet access from devices that complement fixed broadband, such
as PC Cards/dongles, which enable large amounts of data to be
downloaded on the move).
"MTR"
or mobile termination rate is an established mobile network tariff
that applies when a customer makes a call to someone in a network
operated by another operator.
"MVNO"
or mobile virtual network operator is a mobile operator that
provides mobile services through another mobile operator. An MVNO
pays a determined tariff to such mobile network operator for using
the infrastructure to facilitate coverage to its
customers.
"Net adds/Net loss"
is the difference between the customer base as of the end of a
certain period compared to December of the prior year.
"OTT services"
or over the top services means services provided through the
Internet (such as television and video streaming).
"Pay TV"
includes cable TV, direct to home satellite TV (DTH) and
IPTV.
"PSTN"
is Public Switched Telephone Network.
"Revenues"
means net sales and revenues from rendering of
services.
"Service revenues"
are total revenues minus mobile handset sales. Service revenues are
mainly related to telecommunication services, especially voice- and
data revenues (SMS and data traffic download and upload revenues)
consumed by Telefónica's customers.
"SIM"
means subscriber identity module, a removable intelligent card used
in mobile handsets, USB modems, etc. to identify the user in the
network.
"Smart Wi-Fi"
is an application in which users can control their Wi-Fi network
and the devices connected to it from their mobile.
"SMS"
means short messaging service.
"STB (Set-top box)"
is a device that converts a digital television signal to analogue
for viewing on a conventional set, or that enables cable or
satellite television to be viewed.
"Tbps"
means terabytes per second.
"Tracker"
is a special server which contains the information needed for users
to connect with other users.
"UBB"
or
Ultra Broadband
is the fiber-to-the-premise broadband which is capable of giving a
minimum download speed of 100 Mbps and a minimum upload speed of 50
Mbps.
"JV VMO2"
means VMED O2 UK Limited.
"Voice traffic"
means voice minutes used by Telefónica's customers over a given
period, both outbound and inbound.
"VoIP"
means voice over Internet protocol.
"VPN"
or Virtual Private Network extends a private network across a
public network and enables users to send and receive data across
shared or public network.
"Wholesale accesses"
means accesses Telefónica provides to other companies, who then
sell services over such accesses to their residential and corporate
clients.
PART I
Item 3. Key Information
A. Selected Financial Data
The following table presents certain selected consolidated
financial data. It is to be read in conjunction with “Item 5.
Operating and Financial Review and Prospects” and “Item 4.
Information on the Company—Business Overview” in our 2021 Form 20-F
“Item 5. Operating and Financial Review and Prospects” and “Item 4.
Information on the Company—Business Overview” in this Report, the
Consolidated Financial Statements and the Condensed Consolidated
Interim Financial Statements.
The consolidated income statements and the consolidated statements
of cash flows data for the years ended December 31, 2019, 2020 and
2021 and the consolidated statements of financial position data as
of December 31, 2020 and 2021 set forth below are derived from, and
are qualified in their entirety by reference to the Consolidated
Financial Statements.
The consolidated income statements and the consolidated statements
of cash flows data for the nine months ended September 30, 2021 and
2022 and the consolidated statements of financial position data as
of September 30, 2021 set forth below are derived from, and are
qualified in their entirety by reference to the Condensed
Consolidated Interim Financial Statements.
Our Consolidated Financial Statements have been prepared in
accordance with IFRS as issued by the IASB. Our Interim
Consolidated Financial Statements have been prepared in accordance
with IAS 34, Interim Financial Reporting.
The basis of presentation is described in detail in Note 2 to our
Consolidated Financial Statements and in Note 2 to our Condensed
Consolidated Interim Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions of euros |
2019 |
2020 |
2021 |
Sept 2021(*)
|
Sept 2022(*)
|
|
Consolidated Income Statements Data |
|
|
|
|
|
|
Revenues |
48,422 |
|
43,076 |
|
39,277 |
|
29,603 |
|
29,793 |
|
|
Other income |
2,842 |
|
1,587 |
|
12,673 |
|
12,019 |
|
1,527 |
|
|
Supplies |
(13,635) |
|
(13,014) |
|
(12,258) |
|
(9,095) |
|
(9,523) |
|
|
Personnel expenses |
(8,066) |
|
(5,280) |
|
(6,733) |
|
(3,990) |
|
(4,108) |
|
|
Other expenses |
(14,444) |
|
(12,871) |
|
(10,976) |
|
(7,917) |
|
(8,096) |
|
|
Depreciation and amortization |
(10,582) |
|
(9,359) |
|
(8,397) |
|
(6,294) |
|
(6,670) |
|
|
OPERATING INCOME |
4,537 |
|
4,139 |
|
13,586 |
|
14,326 |
|
2,923 |
|
|
Share of income (loss) of investments accounted for by the equity
method |
13 |
|
2 |
|
(127) |
|
(58) |
|
481 |
|
|
Net finance expense |
(1,953) |
|
(1,740) |
|
(1,414) |
|
(960) |
|
(1,346) |
|
|
Net exchange differences |
121 |
|
182 |
|
50 |
|
22 |
|
(47) |
|
|
Net financial expense |
(1,832) |
|
(1,558) |
|
(1,364) |
|
(938) |
|
(1,393) |
|
|
PROFIT BEFORE TAX |
2,718 |
|
2,583 |
|
12,095 |
|
13,330 |
|
2,011 |
|
|
Corporate income tax |
(1,054) |
|
(626) |
|
(1,378) |
|
(1,554) |
|
(316) |
|
|
PROFIT FOR THE PERIOD |
1,664 |
|
1,957 |
|
10,717 |
|
11,776 |
|
1,695 |
|
|
Attributable to equity holders of the parent |
1,142 |
|
1,582 |
|
8,137 |
|
9,335 |
|
1,486 |
|
|
Attributable to non-controlling interests |
522 |
|
375 |
|
2,580 |
|
2,441 |
|
209 |
|
|
|
|
|
|
|
|
|
Other Data |
|
|
|
|
|
|
Weighted average number of shares-Basic (thousands) (1) |
5,933,094 |
|
5,952,695 |
|
5,864,070 |
|
5,884,374 |
|
5,753,826 |
|
|
Basic earnings per share attributable to equity holders of the
parent (euro) (1) |
0.14 |
|
0.22 |
|
1.34 |
|
1.56 |
|
0.23 |
|
|
Diluted earnings per share attributable to equity holders of the
parent (euro) (1) |
0.14 |
|
0.22 |
|
1.34 |
|
1.55 |
|
0.23 |
|
|
Basic earnings per ADS (euro) (1) |
0.14 |
|
0.22 |
|
1.34 |
|
1.56 |
|
0.23 |
|
|
Diluted earnings per ADS (euro) (1) |
0.14 |
|
0.22 |
|
1.34 |
|
1.55 |
|
0.23 |
|
|
Weighted average number of ADS-Basic (thousands)(1) |
5,933,094 |
|
5,952,695 |
|
5,864,070 |
|
5,884,374 |
|
5,753,826 |
|
|
Dividends per ordinary share (cash and scrip) (€) |
0.40 |
|
0.40 |
|
0.35 |
|
0.20 |
|
0.15 |
|
|
Dividends per ordinary share (cash and scrip) ($) (2) |
0.45 |
|
0.47 |
|
0.41 |
|
0.24 |
|
0.16 |
|
|
|
|
|
|
|
|
|
Consolidated Statements of Financial Position Data |
|
|
|
|
|
|
Cash and cash equivalents |
6,042 |
|
5,604 |
|
8,580 |
|
|
7,275 |
|
|
Property, plant and equipment |
32,228 |
|
23,769 |
|
22,725 |
|
|
24,233 |
|
|
Total assets |
118,877 |
|
105,051 |
|
109,213 |
|
|
115,041 |
|
|
Non-current liabilities |
63,236 |
|
58,674 |
|
55,034 |
|
|
57,721 |
|
|
Equity |
25,450 |
|
18,260 |
|
28,684 |
|
|
32,622 |
|
|
Capital stock |
5,192 |
|
5,526 |
|
5,779 |
|
|
5,775 |
|
|
|
|
|
|
|
|
|
Consolidated Statements of Cash Flows Data |
|
|
|
|
|
|
Net cash provided by operating activities |
15,022 |
|
13,196 |
|
10,268 |
|
7,544 |
|
7,598 |
|
|
Net cash from (used in) investing activities |
(5,641) |
|
(7,790) |
|
5,896 |
|
7,250 |
|
(2,565) |
|
|
Net cash used in financing activities |
(9,021) |
|
(5,438) |
|
(12,990) |
|
(10,359) |
|
(6,631) |
|
(*)
Data derived from the unaudited Condensed Consolidated Interim
Financial Statements
(1)The
per share and per ADS computations for all periods presented have
been reported using the weighted average number of shares and ADSs,
respectively, outstanding for each period, and have been adjusted
to reflect the stock dividends which occurred during the periods
presented, as if these had occurred at the beginning of the
earliest period presented. In accordance with IAS 33 (“Earnings per
share”), the weighted average number of ordinary shares (including
in the form of ADSs) outstanding for each of the periods covered
has been restated to reflect the issuance of shares pursuant to
Telefónica’s scrip dividend in June 2020, December 2020, June 2021,
December 2021 and June 2022.
(2)Quantities
in U.S. dollars are calculated in accordance with the conversion
rate published by the Depositary (Citibank, N.A.) in connection
with each dividend payment.
D. Risk Factors
The Telefónica Group’s business is affected by a series of risk
factors that affect exclusively the Group, as well as a series of
external factors that are common to businesses of the same sector.
The main risks and uncertainties faced by Telefónica, which could
affect its business, financial condition, results of operations
and/or cash flows are set out below and must be considered jointly
with the information set out in the 2021 Form 20-F and the rest of
this Report.
These risks are currently considered by the Telefónica Group to be
material, specific and relevant in making an informed investment
decision in respect of Telefónica. However, the Telefónica Group is
subject to other risks that have not been included in this section
based on the Telefónica Group’s assessment of their specificity and
materiality based on the Telefónica Group’s assessment of their
probability of occurrence and the potential magnitude of their
impact.
Risks are presented in this section grouped into four categories:
business, operational, financial, and legal and
compliance.
These categories are not presented in order of importance. However,
within each category, the risk factors are presented in descending
order of importance, as determined by Telefónica at the date of
this Prospectus. Telefónica may change its vision about their
relative importance at any time, especially if new internal or
external events arise.
Risks related to the Business Activities.
Telefónica's competitive position in some markets could be affected
by the evolution of competition and market
consolidation.
The Telefónica Group operates in highly competitive markets and it
is possible that the Group may not be able to market its products
and services effectively or respond successfully to the different
commercial actions carried out by its competitors, causing it to
not meet its growth and customer retention plans, thereby
jeopardizing its future revenues and profitability.
The reinforcement of competitors, the entry of new competitors
(either new players or providers of OTT Services), or the merger of
operators in certain markets, may affect Telefónica’s competitive
position, negatively affecting the evolution of its revenues and
market share or increasing its costs. In addition, changes in
competitive dynamics in the different markets in which the
Telefónica Group operates, such as in Chile, Colombia, Peru, Mexico
and Argentina, where there are aggressive customer acquisition
offers, including unlimited data and discounts on certain services,
among others, can affect the competitive position and the
efficiency of Telefónica’s operations.
If Telefónica is not able to successfully face these challenges,
the Group’s business, financial condition, results of operations
and/or cash flows could be adversely affected.
The Group requires government concessions and licenses for the
provision of a large part of its services and the use of spectrum,
which is a scarce and costly resource.
The telecommunications sector is subject to laws and
sector-specific regulations. The fact that the Group’s business is
highly regulated affects its revenues, operating income before
depreciation and amortization (“OIBDA”) and
investments.
Many of the Group’s activities (such as the provision of telephone
services, Pay TV, the installation and operation of
telecommunications networks, etc.) require licenses, concessions or
authorizations from governmental authorities, which typically
require that the Group satisfies certain obligations, including
minimum specified quality levels, and service and coverage
conditions. If the Telefónica Group breaches any of such
obligations it may suffer consequences such as economic fines or,
in a worst-case scenario, other measures that would affect the
continuity of its business. Exceptionally, in certain
jurisdictions, the terms of granted licenses may be modified before
the expiration date of such licenses or, at the time of the renewal
of a license, new enforceable obligations could be imposed or the
renewal of a license could be refused.
Additionally, the Telefónica Group could be affected by the
regulatory actions of antitrust authorities. These authorities
could prohibit certain actions, such as new acquisitions or
specific practices, create obligations or impose heavy fines. Any
such measures implemented by the antitrust authorities could result
in economic and/or reputational loss for the Group, in addition to
a loss of market share and/or harm to the future growth of certain
of its businesses.
Any of the foregoing could have an adverse effect on the business,
financial condition, results of operations and/or cash flows of the
Group.
Access to new concessions/ licenses of spectrum.
The Group requires sufficient spectrum to offer its services. The
Group’s failure to obtain sufficient or appropriate spectrum
capacity in the jurisdictions in which it operates, or its
inability to assume the related costs, could have an adverse impact
on its ability to maintain the quality of existing services and on
its ability to launch and provide new services, which may
materially adversely affect Telefónica’s business, financial
condition, results of operations and/or cash flows.
The intention of the Group is to maintain current spectrum capacity
and, if possible, to expand it, specifically through the
participation of the Group in spectrum auctions which are expected
to take place in the next few years, which will likely require cash
outflows to obtain additional spectrum or to comply with the
coverage requirements associated with some of the related
licenses.
In Spain, in September 2022, the Ministry of Economic Affairs and
Digital Transformation launched a public consultation on the
auction rules for the 26 GHz band. A previous consultation, on the
National Frequency Allocation Table, raised the possibility of
assigning the 450 MHz part of the spectrum to companies, industries
and organizations operating in a specific sector, that deploy
private networks to support their connectivity needs (verticals).
This could mean more competition in the private corporate network
segment and a possible increase in spectrum prices during the
auction. The auction is expected to take place before the end of
2022.
In the UK, in May 2022, Ofcom launched a public consultation on
opening access to the 26 GHz and 40 GHz bands for mobile use. This
is the first of a series of detailed consultations on the award,
with a process possible towards the end of 2023 at the earliest.
The consultation outlines the proposal to offer a range of local
and city-wide licenses, differentiating between low- and
high-density areas.
In Latin America, several auction processes are expected in the
near term: (i) in Colombia, the “5G Plan” as well as the 2020-2024
Spectrum Public Policy and the 2020-2024 Spectrum Allocation
Framework Plan were published. These policy documents announced
actions to auction the remaining spectrum in the 700 MHz, 1900 MHz
and 2500 MHz bands, without indicating a concrete time frame.
Additionally, with regards to spectrum in the 3.5 GHz band, the
Ministerio de las Tecnologías de la Información y las
Comunicaciones (“MinTic”) postponed the auction without indicating
a specific date to start the process. Telefónica has requested
MinTic to delay any spectrum auction until the review of the
existing spectrum valuation methodology, in order to align costs
with the spectrum value generation capacity is completed, and
specific measures to avoid resource monopolization by the dominant
operator are put in place; (ii) in Peru, notwithstanding the fact
that Telefónica del Perú S.A.A. was preselected for the auction on
the 1750 – 1780 MHz, 2150 – 2180 MHz and 2300 – 2330 MHz bands, the
auction has been suspended without indicating a specific date to
start the process. Recently, Peruvian authorities have announced
their interest in initiating the process before the end of the
year, but no specific date has been set. With regards to 5G and the
spectrum auction for the 3.5 GHz and 26 GHz band, the new
government has not yet taken a decision; and (iii) in Argentina,
the government has made public its intention to auction 5G spectrum
in 2023, but no specific date or terms and conditions for the
process have been published.
Existing licenses: renewal processes and modification of conditions
for operating services.
The revocation or failure to renew the Group’s existing licenses,
authorizations or concessions, or any challenges or amendments to
their terms, could materially adversely affect Telefónica’s
business, financial condition, results of operations and/or cash
flows.
In Germany, in the allocation procedure for the frequencies at 800
MHz, 1800 MHz and 2.6 GHz, which will partially expire at the end
of 2025, the Bundesnetzagentur has submitted a position paper for
consultation as a follow-up to the consultation of orientation
points which were connected with an initial survey of demand. In
the position paper, it considers a spectrum scarcity to be obvious
and is considering an auction as an award format. In order to
reflect the importance of the 800 MHz band for mobile coverage, the
Bundesnetzagentur proposes a swap in the term of the frequencies to
be awarded at 800 MHz with an equal amount of 900 MHz frequencies.
The frequencies at 900 MHz, 1800 MHz and 2.6 GHz would then be
auctioned off. The frequencies at 800 MHz would have a term until
the end of 2033. Next steps in the spectrum allocation procedure in
the form of cornerstones and a formal demand survey are expected in
the first quarter of 2023.
In the UK, mobile spectrum licenses are generally indefinite in
term, subject to an annual fee after a fixed period (usually 20
years) from the initial auction. Ofcom recently determined the
spectrum fees applicable for VMO2’s 2100 MHz spectrum, after its
fixed term expired at the end of 2021. There are no fee decisions
now pending until 2033, when the fixed term for VMO2’s 800 MHz
licenses expire.
With respect to Latin America:
In Brazil, the Agencia Nacional de Telecomunicações (“ANATEL”)
approved on February 8, 2021 Resolution 741/2021 which sets the
Regulation for the Adaptation of Fixed Commuted Telephony Service
(“STFC”) concessions. ANATEL has presented an estimate value for
calculating the migration balancing from the concession to the
authorization regime, which will be validated by the Federal Court
of Accounts. There is a risk that consensus between the parties on
the migration calculation may not be reached. In any case, if a
decision is made by Telefónica not to migrate, the STFC concession
held by Telefónica will remain in force until December 31, 2025.
Resolution 744/2021 of April 8, 2021 establishes that, at the end
of the life of the concession contracts, the transfer of the right
of use of shared-use assets will be guaranteed under fair and
reasonable economic conditions, in the event that the granting
authority or the company that succeeds the provider wishes to make
use of these assets to maintain the continuity of the provision of
STFC under the public regime. In addition, Telefónica could lose
its right to operate spectrum in the 450 MHz band, granted in
certain states, in the case that Telefónica could not provide
evidence of service activation in the 450 MHz band as a result of
the unavailability of 450 MHz devices ecosystem and of the waiver
clause contained in the tender notice, interpreted by ANATEL as
meaning that the waiver would operate automatically in case of
non-activation of the frequency within the contractual term, and
interpreted by Telefónica as meaning that such waiver would only
operate if explicitly requested. On September 1, 2022, ANATEL
determined the expiration of the authorizations held by other
providers. As the agency will still evaluate Telefónica’s case
separately, it is possible that it will follow the same path.
Furthermore, regarding the extension of the 850 MHz band
authorizations, if the legal and regulatory requirements are met,
ANATEL agreed to extend the current authorizations for the use of
radio frequencies in Bands A and B, proposing their approval, on a
primary basis, until November 29, 2028. However, specific
conditions for renewal, including those related to the economic
valuation criteria and obligations, were challenged by the affected
service providers (including Telefónica). After ANATEL dismissed
the appeals filed by the providers, ANATEL referred the case to the
federal court of accounts of Brazil (“TCU”), and in September 2022,
TCU decided that the possibility of successive extensions brought
by Law 13.879/19 should be considered as an exception, applicable
only when certain requirements are met (art. 167 of Law 13.879/19
and article 12 of decree 10.402/20). Telefónica appealed that
decision, defending the successive extension of licences as a rule
and not as an exception, in accordance to Law 13.879/19.
Additionally, on August 2022, when deciding on an extension request
made by the provider TIM for the 850 MHz, 900 MHz and 1.8 GHz
bands, ANATEL issued a decision for the possibility of extending
the 900 MHz and 1.8 GHz bands only until 2032, when the Agency
intends to carry out a refarming action of these bands. This
decision may impact Telefónica’s extension requests for the
aforementioned bands.
In Peru, an arbitration process was started by Telefónica, to
challenge the decision adopted by the Ministry of Transportation
and Communications (“MTC”), denying the renewal of concessions for
the provision of fixed-line services, valid until 2027, which ended
with a favorable award for Telefónica. The award recognizes that
the methodology applied to assess compliance with the concession
obligations was not in accordance with the provisions of the
relevant Concession Contract. The MTC, following this award, must
issue a new regulation for renewals in a period of time yet to be
determined. Nevertheless, Telefónica del Perú S.A.A. holds other
concessions for the provision of fixed-line services that allow it
to provide these services beyond 2027. The renewal of the 1900 MHz
band in all of Peru (except for Lima and Callao), which expired in
2018, and of other licenses to offer
telecommunications services were requested by the Group and a
decision by the MTC is still pending. Nevertheless, these
concessions are valid while the procedures are in
progress.
In Colombia, in April 2021, Telefónica requested the renewal of the
license to use 15 MHz spectrum in the 1900 MHz band with expiration
in October 2021. Subsequently, the MinTic issued Resolution 2803 on
October 15, 2021, by which it established the conditions for the
renewal of such license, with a high price set for the spectrum
compared to international levels and with the inclusion of an
obligation of technological modernization. Telefónica challenged
such decision, in order to reduce the price and obligations
proposed for the renewal of the license. Finally, the MinTic
decided by resolution 2143 of June 17, 2022 to renew the 15 MHz for
20 years, reduced the price and accepted that the technological
modernization obligation should be valued and be part of the price,
revoking such obligation. However, given that the price is still
above international levels and that Telefónica’s request to renew
for a period of less than 20 years has been denied, legal
proceedings will be initiated challenging the aforementioned
Resolution. In 2023, Telefonica will have to renew 30 MHz of
spectrum in the AWS band. The spectrum renewal process has not been
initiated.
In Argentina, in connection with Decree of Necessity and Urgency
690/2020 (“DNU 690/2020”), Telefónica de Argentina, S.A. and
Telefónica Móviles Argentina, S.A. (collectively, “Telefónica
Argentina”) filed a lawsuit against the Argentine State, in
relation to a series of contracts for licenses to provide services
and spectrum use authorizations entered into between Telefónica
Argentina and the Argentine State, including the licenses resulting
from the 2014 spectrum auction. Such contracts and their regulatory
framework stated that the services provided by Telefónica Argentina
were private and prices would be freely set by Telefónica
Argentina. However, DNU 690/2020, by providing that the services
will be “public services” and that prices will be regulated by the
Argentine State, substantially modifies the legal status of those
contracts, affecting the performance of their obligations and
substantially depriving Telefónica Argentina of essential rights
derived from those contracts. The lawsuit filed by Telefónica
Argentina was rejected in September 2021 and Telefónica Argentina
appealed this decision. On December 17, 2021, the first instance
ruling was revoked and the application of articles 1, 2, 3, 5 and 6
of DNU 690/2020 and Resolutions 1666/2020, 204/2021 and 1467/2020
(relating to the control of tariffs and the universal basic
service) was suspended for six months or until the final decision
is adopted. On June 10, 2022, the Federal Contentious
Administrative Court extended for another six months the
precautionary suspension of the effects of DNU 690/2020 in favor of
Telefónica. During this period, Telefónica Argentina will not be
subject to the provisions contained in the DNU 690/2020 in relation
to price and public service regulations.
In Venezuela, on August 30, 2022, Telefónica presented a spectrum
renewal request for the Group’s 850 MHz band (25 MHz), 1900 MHz
band (50 MHz) and AWS band (20 MHz). The renewal process is
expected to be completed by November 2022, and no cash payment is
expected.
In Ecuador, Telefónica will renew in 2023 the Concession Contract
that authorizes the provision of telecommunication services and
includes the spectrum licenses (25 MHz in the 850 MHz band and 60
MHz in the 1900 MHz band).
In the nine months ended September 30, 2022, the Group’s
consolidated investment in spectrum acquisitions and renewals
amounted to 139 million euros, mainly due to the acquisition of
spectrum in Colombia (compared to 989 million euros in the same
period of 2021). In the event that the licenses mentioned above are
renewed or new spectrum is acquired, it would involve additional
investments by Telefónica.
Telefónica depends on its suppliers.
The existence of critical suppliers in the supply chain, especially
in areas such as network infrastructure, information systems or
handsets with a high concentration in a small number of suppliers,
poses risks that may affect Telefónica’s operations. This may cause
legal contingencies or damages to its image in the event that a
participant in the supply chain engages in practices that do not
meet acceptable standards or that otherwise fail to meet
Telefónica’s performance expectations. This may include delays in
the completion of projects or deliveries, poor-quality execution,
cost deviations and inappropriate practices.
As of September 30, 2022, the Group depended on three handset
suppliers (none of them located in China) and six network
infrastructure suppliers (two of them located in China), which,
together, accounted for 81% and 80%, respectively, of the aggregate
value of contracts awarded in the nine months ended September 30,
2022 to handset suppliers and network infrastructure suppliers,
respectively. One of the handset suppliers represented 40% of the
aggregate value of contracts awarded in the nine months ended
September 30, 2022 to handset suppliers.
These suppliers may, among other things, extend delivery times,
raise prices and limit supply due to their own stock shortfalls and
business requirements or for other reasons.
If suppliers cannot supply their products to the Telefónica Group
within the agreed deadlines or such products and services do not
meet the Group’s requirements, this could hinder the deployment and
expansion plans of the network. This could in certain cases affect
Telefónica’s compliance with the terms and conditions of the
licences under which it operates, or otherwise adversely affect the
business and operating results of the Telefónica Group. In
addition, the possible adoption of new protectionist measures in
certain parts of the world, including as a result of trade tensions
between the United States and China, and/or the adoption of
lockdown or other restrictive measures as a result of the COVID-19
pandemic or any other crisis or pandemic, as well as those derived
from geopolitical tensions such as the current war in Ukraine,
could disrupt global supply chains or may have an adverse impact on
certain of Telefónica’s suppliers and other players in the
industry. The semiconductor industry in particular is facing
various challenges, as a result mainly of supply problems at a
global level, which in turn is affecting multiple sectors
(including technology) through delivery delays and price increases,
which could affect the Telefónica Group or others who are relevant
to its business, including its customers, suppliers and partners.
During 2020, 2021 and the nine months ended September 30, 2022 a
specific monitoring has been carried out and action plans have been
developed by the Group with respect to the supply chain challenges
resulting from the COVID-19 pandemic, the war conflict in Ukraine
as well as the potential discontinuation of use of some suppliers
as a result of the U.S.-China conflict.
The imposition of trade restrictions and any disruptions in the
supply chain, such as those related to international transport,
could result in higher costs and lower margins or affect the
ability of the Telefónica Group to offer its products and services
and could adversely affect the Group’s business, financial
condition, results of operations and/or cash flows.
Telefónica operates in a sector characterized by rapid
technological changes and it may not be able to anticipate or adapt
to such changes or select the right investments to
make.
The pace of innovation and Telefónica’s ability to keep up with its
competitors is a critical issue in a sector so affected by
technology such as telecommunications. In this sense, significant
additional investments will be needed in new high-capacity network
infrastructures to enable Telefónica to offer the features that new
services will demand, through the development of technologies such
as 5G or fiber optic.
New products and technologies are constantly emerging that can
render products and services offered by the Telefónica Group, as
well as its technology, obsolete. In addition, the explosion of the
digital market and the entrance of new players in the
communications market, such as mobile network virtual operators
(“MNVOs”), internet companies, technology companies or device
manufacturers, could result in a loss of value for certain of the
Group’s assets, affect the generation of revenues, or otherwise
cause Telefónica to have to update its business model. In this
respect, revenues from traditional voice businesses are shrinking,
while new sources of revenues are increasingly derived from
connectivity and digital services. Examples of these services
include video, Internet of Things (“IoT”), cybersecurity, big data
and cloud services.
One of the technologies currently being developed by
telecommunications operators, including Telefónica (in Spain and
Latin America), is the new FTTx type networks which allow the
offering of broadband accesses over fiber optics with high
performance. However, the deployment of such networks, in which the
copper of the access loop is totally or partially replaced by
optical fiber, requires high levels of investment. As of September
30, 2022, in Spain, fiber coverage reached 27.8 million premises.
There is a growing demand for the services that these new networks
can offer to the end customer. However, the high levels of
investment required by these networks result in the need to
continuously consider the expected return on investment, and no
assurance can be given that these investments will be
profitable.
In addition, the ability of the Telefónica Group’s IT systems
(operational and backup) to adequately support and evolve to
respond to Telefónica’s operating requirements is a key factor to
consider in the commercial development, customer satisfaction and
business efficiency of the Telefónica Group. While automation and
other digital processes may lead to significant cost savings and
efficiency gains, there are also significant risks associated with
such transformation processes. Any failure by the Telefónica Group
to develop or implement IT systems that adequately support and
respond to the Group’s evolving operating requirements could have
an adverse effect on the Group’s business, financial condition,
results of operations and/or cash flows.
The changes outlined above force Telefónica to continuously invest
in the development of new products, technology and services to
continue to compete effectively with current or future competitors,
and, for this reason,
the Group’s profit and margins may be reduced or such investment
could not lead to the development or commercialization of new
successful products or services. To contextualize the Group’s
research and development effort, the total expenditure in the nine
months ended September 30, 2022 was 477 million euros (544 million
euros in the nine months ended September 30, 2021) representing
1.6% of the Group’s revenues (1.8% in the nine months ended
September 30, 2021). These figures have been calculated using the
guidelines established in the Organization for Economic
Co-operation and Development (“OECD”) manual.
If Telefónica is not able to anticipate and adapt to the
technological changes and trends in the sector, or to properly
select the investments to be made, this could negatively affect the
Group’s business, financial condition, results of operations and/or
cash flows.
The Telefónica Group's strategy which is focused on driving new
digital businesses and providing data-based services, involves
exposure to risks and uncertainties arising from data privacy
regulation.
The Telefónica Group’s commercial portfolio includes products
and/or services which are based on the use, standardization and
analysis of data, as well as the deployment of advanced networks
and the promotion of new technologies related to Big Data, Cloud
Computing, cybersecurity, Artificial Intelligence and
IoT.
The large amount of information and data that is processed
throughout the Group (related to approximately 383.5 million
accesses associated with telecommunications services, digital
products and services and Pay TV and an average number of employees
of 102,315 as of September 30, 2022), increases the challenges of
complying with privacy regulations. Moreover, there is a risk that
measures adopted in response to these regulations may stifle
innovation. Conversely, the Group’s efforts to promote innovation
may result in increased compliance risks and, where applicable,
costs.
One of the most important pieces of regulation for the Telefónica
Group’s operations in the European Union is Regulation (EU)
2016/679 of the European Parliament and Council of April 2016, on
the protection of natural persons with regard to the processing of
personal data and on the free movement of such data (“GDPR”), whose
content has become the common standard for all countries where the
Telefónica Group operates. In addition, progress continues to be
made on the proposal for a future European regulation concerning
the respect for privacy and protection of personal data in
electronic communications (“e-Privacy Regulation”), which would
repeal Directive 2002/58/EC. If approved, this proposal could
establish additional and more restrictive rules than those
established in the GDPR, with the consequent increase in the risks
and costs of non-compliance that this could entail.
Moreover, considering that the Telefónica Group operates its
business on a global scale, it frequently carries out international
data transfers concerning its customers, users, suppliers,
employees and other data subjects to countries outside the EEA that
have not been declared to have an adequate level of data protection
by the European Commission, either directly or through third
parties. In this context, it is particularly relevant to have the
necessary controls in place to ensure that such international data
transfers are carried out in accordance with the GDPR, in an
environment marked by uncertainty on this issue as to the adequate
and effective measures to mitigate such risks.
One of the relevant contractual measures to ensure the lawfulness
of international data transfers to any country outside the EEA not
found by the European Commission to have an adequate level of data
protection, is the signing, between the data importer and the data
exporter, of the new standard contractual clauses (“SCC”) approved
by the European Commission according to Implementing Decision (EU)
2021/914 of June 4, 2021. These new SCC, which entered into force
on June 27, 2021, repeal the old SCC and include a novel modular
set of clauses for their application according to the data
processing role of both the exporter and the importer. Furthermore,
the entry into force of the new SCC obliges companies that are
going to use them to legitimize their transfers to assess and adopt
additional measures deemed appropriate for the due protection of
the data transferred to the third country. This is because SCC, in
general, are not sufficient for this purpose, as the public
authorities of the third country, in accordance with their local
regulations, may have the power to access or request access to the
data transferred. The additional measures to be adopted are mainly
technical such as data encryption, and derive in particular from
the impact analysis of each transfer and the country of
destination, all following the guidelines issued by the European
Data Protection Board in its Recommendations 01/2020. Furthermore,
the adoption of the new SCC by the European Commission as the main
legal tool to legitimize transfers, obliges companies to replace
the old SCC, as the old SCC will cease to be legally valid at the
end of 2022 in accordance with the aforementioned Implementing
Decision. The entry into force of the new SCC and their novel
module structure and dispositive parts to be negotiated between
data exporters and importers, the possible uncertainty about their
scope of application and implementation, the mandatory assessment
and analysis of each
international transfer and changeable local regulations of the
country of destination and also the obligation to renew all
agreements that include the old SCC, pose a challenge for the Group
and, with it, a potential risk of non-compliance in the performance
of international data transfers in accordance with the
GDPR.
With regard to the international data transfer to the United States
of America, on October 7, 2022, U.S. President signed an executive
order directing the steps that the United States will take to
implement the U.S. commitments under the European Union–U.S. Data
Privacy Framework.
In addition, it should be highlighted that: (i) in the United
Kingdom, its exit from the European Union on January 1, 2021 means
that the Group must monitor how its operations and business in the
United Kingdom are affected in terms of applicable privacy
regulations and, specifically, the flow of data to and from the
United Kingdom. The European Commission declared the United Kingdom
as a country with an adequate level of data protection according to
the Adequacy Decision of June 28, 2021. Accordingly, entities that
transfer data between both territories will not be required to
adopt additional tools or measures to legitimize international
transfers. The Adequacy Decision establishes an initial period of
validity of four years, which may only be extended if the United
Kingdom demonstrates that it continues to ensure an adequate level
of data protection. In this regard, it is worth mentioning that,
since European Union regulations no longer apply in the United
Kingdom, the government of this country has published a draft
reform of its local privacy and data protection regulations in June
2022, which, if it finally passes through parliamentary procedures
and is approved, aims to update these regulations to address new
technological challenges and business opportunities in the use of
data. The result and approval of this amendment could impact the
Telefónica Group’s business in the United Kingdom and the
aforementioned international data transfers to and from the United
Kingdom, either because additional regulatory restrictions or
impositions are imposed that reduce the capacity for innovation and
the development of new services and products, or because the
European Union authorities consider that the United Kingdom is no
longer a country with an adequate level of data protection, in
which case the Telefónica Group may face similar challenges and
risks as it is currently facing with respect to data transfers to
the United States or other territories not declared as having an
adequate level of protection; and (ii) in Latin America, Law No.
13,709 in Brazil imposes standards and obligations similar to those
required by the GDPR, including a sanctioning regime which is in
force from August 2021, with fines for non-compliance of up to 2%
of the Group’s income in Brazil in the last financial year subject
to a limit of 50 million Brazilian reais (approximately 9 million
euros based on the exchange rate as of September 30, 2022) per
infraction which may increase compliance risks and
costs.
Furthermore, in the case of Ecuador, the Organic Law on Data
Protection has entered into force, aligned with the principles of
the European GDPR, although the effectiveness of the sanctioning
regime is postponed for a two-year adaptation period which ends in
2023 and, in other countries of Latin America where the Group
operates, such as Argentina and Chile, there are regulatory
proposals to bring regulation more in line with the provisions set
forth in the GDPR, which may increase compliance risks and
costs.
Data privacy protection requires careful design of products and
services, as well as robust internal procedures and rules that can
be adapted to regulatory changes where necessary, all of which
entails compliance risk. Failure to maintain adequate data security
and to comply with any relevant legal requirements could result in
the imposition of significant penalties, damage to the Group’s
reputation and the loss of trust of customers and
users.
Telefónica’s reputation depends to a large extent on the digital
trust it is able to generate among its customers and other
stakeholders. In this regard, in addition to any reputational
consequences, it is important to note that, in the European Union,
very serious breaches of the GDPR may entail the imposition of
administrative fines of up to the larger of 20 million euros or 4%
of the infringing company’s overall total annual revenue for the
previous financial year. Furthermore, once it is approved, the
e-Privacy Regulation may set forth sanctions for breaches of it
similar to those provided for in the GDPR.
Any of the foregoing could have an adverse effect on the business,
financial condition, results of operations and/or cash flows of the
Group.
Telefónica may not anticipate or adapt in a timely manner to
changing customer demands and/or new ethical or social standards,
which could adversely affect Telefónica's business and
reputation.
To maintain and improve its position in the market vis-à-vis its
competitors, it is vital that Telefónica: (i) anticipates and
adapts to the evolving needs and demands of its customers, and (ii)
avoids commercial or other actions or policies that may generate a
negative perception of the Group or the products and services it
offers, or that may have or be perceived to have a negative social
impact. In addition to harming Telefónica’s reputation, such
actions could also result in fines and sanctions.
In order to respond to changing customer demands, Telefónica needs
to adapt both (i) its communication networks and (ii) its offer of
digital services.
The networks, which had historically focused on voice transmission,
are evolving into increasingly flexible, dynamic and secure data
networks, replacing, for example, old copper telecommunications
networks with new technologies such as fiber optics, which
facilitate the absorption of the exponential growth in the volume
of data demanded by the Group’s customers.
In relation to digital services, customers require an increasingly
digital and personalized experience, as well as a continuous
evolution of the Group’s product and service offering. In this
sense, new services such as “Smart Wi-Fi”, “Connected Car”, “Smart
Cities”, “Smart Agriculture” and “Smart Metering” which facilitate
certain aspects of the Group’s customers’ digital lives, are being
developed. Furthermore, new solutions for greater automation in
commercial services and in the provision of the Group’s services
are being developed, through new apps and online platforms that
facilitate access to services and content, such as new video
platforms that offer both traditional Pay TV, video on demand or
multi-device access. However, there can be no assurance that these
and other efforts will be successful. For example, if streaming
television services, such as Netflix or others, become the
principal way television is consumed to the detriment of the
Group’s Pay TV service, the Group’s revenues and margins could be
affected.
In the development of all these initiatives it is also necessary to
take into account several factors: firstly, there is a growing
social and regulatory demand for companies to behave in a socially
responsible manner, and, in addition, the Group’s customers are
increasingly interacting through online communication channels,
such as social networks, in which they express this demand.
Telefónica’s ability to attract and retain clients depends on their
perceptions regarding the Group’s reputation and behavior. The
risks associated with potential damage to a brand’s reputation have
become more relevant, especially due to the impact that the
publication of news through social networks can have.
If Telefónica is not able to anticipate or adapt to the evolving
needs and demands of its customers or avoid inappropriate actions,
its reputation could be adversely affected, or it could otherwise
have an adverse effect on the business, financial condition,
results of operations and/or cash flows of the Group.
Operational Risks.
Information technology is key to the Group's business and is
subject to cybersecurity risks.
The risks derived from cybersecurity are among the Group’s most
relevant risks due to the importance of information technology to
its ability to successfully conduct operations. Despite advances in
the modernization of the network and the replacement of legacy
systems in need of technological renewal, the Group operates in an
environment increasingly prone to cyber-threats and all of its
products and services, such as mobile Internet or Pay TV services,
are intrinsically dependent on information technology systems and
platforms that are susceptible to cyberattacks. Successful
cyberattacks could prevent the effective provision, operation and
commercialization of products and services in addition to affecting
their use by customers. Therefore, it is necessary to continue to
identify and remedy any technical vulnerabilities and weaknesses in
the Group’s operating processes, as well as to strengthen its
capabilities to detect, react and recover from incidents. This
includes the need to strengthen security controls in the supply
chain (for example, by focusing on the security measures adopted by
the Group’s providers and other third parties), as well as to
ensure the security of the services in the cloud. As a result of
the circumstances brought by the COVID-19 pandemic, security
measures related to remote access and teleworking of employees and
collaborators were reviewed and strengthened.
Telecommunications companies worldwide face continuously increasing
cybersecurity threats as businesses become increasingly digital and
dependent on telecommunications, computer networks and Cloud
Computing technologies. The Telefónica Group is aware of the
possible cybersecurity risks arising from the conflict in Ukraine,
monitoring cyberattacks that may affect our infrastructure, and
maintaining contact with national and international organizations
to obtain cyberintelligence information, without having detected a
significant increase in attacks in our perimeter compared to other
previous periods. Cybersecurity threats may include gaining
unauthorized access to the Group’s systems or propagating computer
viruses or malicious software, to misappropriate sensitive
information like customer data or disrupt the Group’s operations.
In addition, traditional security threats, such as theft of laptop
computers, data devices and mobile phones may also affect the Group
along with the possibility that the Group’s employees or other
persons may have access to the Group’s systems and leak data and/or
take actions that affect the Group’s networks or otherwise
adversely affect the Group or its ability to adequately process
internal information or even result in regulatory
penalties.
In particular, in the past three years, the Group has suffered
several cybersecurity incidents. Attacks during this period include
(i) intrusion attempts (direct or phishing), exploitation of
vulnerabilities and corporate credentials being compromised; (ii)
Distributed Denial of Service (DDoS) attacks, using massive volumes
of Internet traffic that saturate the service; and (iii)
exploitation of vulnerabilities to carry out fraud through online
channels, usually through the subscription of services without
paying for them. While none of these incidents had significant
material consequences, this may change in the future.
Some of the main measures adopted by the Telefónica Group to
mitigate these risks are early vulnerabilities detection, access
control measures, proactive log review of critical systems, network
segregation in zones and the deployment of protective systems such
as firewalls, intrusion prevention systems and virus scanners among
other physical and logical security measures. In the event that
preventive and control measures do not prevent all damage to
systems or data, backup systems are designed to provide for the
full or partial retrieval of information.
Although Telefónica seeks to manage these risks by adopting
technical and organizational measures, such as those referred to
above, as defined in its digital security strategy, it cannot
guarantee that such measures are sufficient to avoid or fully
mitigate such incidents. Therefore, the Telefónica Group has
insurance policies in place, which could cover, subject to the
policies terms, conditions, exclusions, limits and sublimits of
indemnity, and applicable deductibles, certain losses arising out
of these types of incidents. To date, the insurance policies in
place have covered some incidents of this nature, however due to
the potential severity and uncertainty about the evolution of the
aforementioned events, these policies may not be sufficient to
cover all possible losses arising out of these risks.
Natural disasters, climate change and other factors beyond the
Group's control may result in unanticipated network or service
interruptions or quality loss.
Unforeseen service interruptions can be due to system failures,
natural disasters caused by natural or meteorological events or
phenomena, lack of electric supply, network failures, hardware or
software failures, theft of network elements or cyber-attacks. Any
of the foregoing can affect the quality of, or cause interruption
to, the provision of the services of the Telefónica
Group.
Changes in temperature and precipitation patterns associated with
climate change may increase the energy consumption of
telecommunications networks or cause service disruption due to
extreme temperature waves, floods or extreme weather events. In
addition, these changes may cause increases in the price of
electricity due to, for example, reduction in hydraulic generation
as a result of recurrent droughts. Further, as a result of global
commitments to tackle climate change, new carbon dioxide taxes may
be imposed and could affect, directly or indirectly, Telefónica,
and may have a negative impact on the Group’s operations results.
Telefónica analyses these risks in accordance with the
recommendations of the Task force on Climate-related financial
disclosures (“TCFD”).
Network or service interruptions or quality loss could cause
customer dissatisfaction, a reduction in revenues and traffic, the
realization of expensive repairs, the imposition of sanctions or
other measures by regulatory bodies, and damage to the image and
reputation of the Telefónica Group, or could otherwise have an
adverse effect on the business, financial condition, results of
operations and/or cash flows of the Group.
Financial Risks.
Worsening of the economic and political environment could
negatively affect Telefónica's business.
Telefónica’s international presence enables the diversification of
its activities across countries and regions, but it exposes
Telefónica to diverse legislation, as well as to the political and
economic environments of the countries in which it operates. Any
adverse developments in this regard, including exchange rate or
sovereign-risk fluctuations, as well as growing geopolitical
tensions, may adversely affect Telefónica’s business, financial
position, cash flows and results of operations and/or the
performance of some or all of the Group’s financial
indicators.
The beginning of the conflict between Ukraine and Russia opened a
period of high uncertainty that, almost eight months later, remains
unclear. Since then, inflationary pressures have intensified, not
only due to the evolution of energy and food commodity prices
(noting that Russia is the world’s second largest exporter of oil
and the first of natural gas, and Ukraine is the European Union’s
largest supplier of cereals) but also because of the effect that
the recovery from the pandemic had on global supply chains
(including bottlenecks caused by the combination of the strong
upturn in demand and a still limited supply). Furthermore, the
prolongation of this situation over time led to a significant
pass-through of cost increases to the final prices of other goods,
and also some services, giving rise to inflation rates not seen in
the last 40 years. In response to this, most central banks have
accelerated the pace of
monetary stimulus withdrawal, which has dragged down risky assets
such as lower-quality credit and stock market assets, further
tightening conditions for the global economy. Going forward,
elements that could worsen the effects of the current situation
include the escalation of the armed conflict and the persistence of
possible political fallout that would delay the resolution of the
current supply disruptions and the cutting of key supplies by
Russia such as gas, which could lead to an energy crisis,
prolonging and amplifying the inflation-recession
scenario.
So far, the main European countries where the Group operates have
been affected through the price channel (higher commodity prices),
as their trade and financial exposure is limited. However, in
Europe there are concerns about energy supply for the coming winter
should the most adverse scenario materialize (i.e., total supply
cut and/or below-average winter temperatures), Latin America could
be affected by the slowdown in global and regional growth
associated with the tightening of monetary conditions to combat
inflation. Although the magnitude of the impact could be partially
offset in some countries in the region by higher trade and
financial flows as a result of the rise in commodity prices, since
these countries are generally net exporters of
commodities.
As of September 30, 2022, the contribution of each segment to
Telefónica Group's total assets was as follows: Telefónica Spain
22.4 % (22.9% as of December 31, 2021), VMO2 10.1 % (11.1 % as of
December 31, 2021), Telefónica Germany 16.6 % (18.3 % as of
December 31, 2021), Telefónica Brazil 23.4% (19.7 % as of December
31, 2021) and Telefónica Hispam 15.1 % (14.3 % as of December 31,
2021). Part of the Group's assets are located in countries that do
not have an investment grade credit rating (in order of importance,
Brazil, Argentina, Ecuador and Venezuela). Likewise, Venezuela and
Argentina are considered countries with hyperinflationary economies
in 2022 and 2021.
The main risks are detailed by geography below:
In Europe, there are several risks of an economic, political and
health nature. First, the recent conflict between Russia and
Ukraine has caused a major economic disruption which is already
reflected in a widespread downward GDP growth revision in the
Eurozone countries. The economic impact per country will depend
primarily on their trade, financial and, above all, energy
exposure. However, the sharp increase in global commodity prices
(energy and food) resulting from the conflict, is already having a
negative impact on the cost of the household consumption basket and
firms’ production costs. Nevertheless, fiscal packages announced in
countries such as Spain, Germany and the United Kingdom to offset
the increase in energy prices could cushion part of the impact.
Furthermore, the conflict has even called into question the
security of the continent’s energy supply. All of the above would
be coupled with existing pre-conflict economic risks such as the
consequences of an excessive tightening of financing conditions,
both for the private and public sectors, with a negative impact on
disposable income that could even lead to episodes of financial
stress. The catalyst for this scenario could be either global
factors stemming from the impact of the recent rise in inflation
and the consequences of the normalization of monetary policy in the
majority of countries, or domestic factors such as the financial
fragmentation caused by the process of raising interest rates in
Europe or a worsening of fiscal sustainability in a European
country, which would affect the economic conditions of the
countries in which Telefónica operates.
Spain:
there are several local sources of risks. One of them stems from
the risk that supply disruptions will have a more persistent
negative economic impact than expected in the case of, for example,
supply chains and high commodity prices and/or the emergence of
second round effects, prolonging the inflationary episode with a
deeper impact on household income. Secondly, as one of the most
open countries in the world, from a commercial point of view, being
among the top ten countries in respect of capital outflows and
inflows globally, any situation of protectionist backlash could
have significant implications. Lastly, the high public debt levels
accumulated are an additional risk in the event of financial
stress. On the other hand, European funds (NGEU) and the reforms
needed to continue accessing them could raise the country’s
potential growth, although delays in their implementation could
limit their effect.
Germany:
In the short term, the main sources of risk relate to the country’s
energy supply (as 35% of energy comes from Russia) and the
prolongation of bottlenecks in the supply of raw materials and
intermediate goods in the manufacturing sector, which could
continue to limit the expansion of economic activity. As for the
medium to long term, there is a risk that a potential escalation of
geopolitical tensions could significantly reduce international
trade, with a consequent impact on the country’s potential growth,
which is highly dependent on exports. In addition, long-term
challenges remain, such as the ageing of the population, in a
context where the drivers of growth are showing a worrying
stagnation.
United Kingdom:
an intensification of inflationary pressures, together with a
labour market showing signs of tightening, could lead to a faster
and closer monetary tightening than expected, which would
negatively affect
growth. On the political front, the low popularity of the current
government together with the growing support received in recent
polls by the Labour party could detract political capital from the
incoming executive, becoming another source of uncertainty in the
short to medium term. Finally, the formal exit of the United
Kingdom from the European Union on December 31, 2020 (Brexit) will
entail an economic adjustment regardless of the agreement reached
on the new economic and commercial relationship between the two
regions. The current dispute between the UK Government and the EU
over the application of the Free Trade Agreement to Northern
Ireland has the potential to create new trade barriers if it is not
resolved.
In Latin America, the exchange risk is moderate. The commodity
cycle, the end of electoral events and rapid central bank actions
to contain inflation may, at least partially, limit the impact of
external risks (global trade tensions, abrupt movements in
commodity prices, concerns about global growth, tightening U.S.
monetary policy and financial imbalances in China) and internal
risks (managing the monetary normalization and the possible
underlying fiscal deterioration).
Brazil:
fiscal sustainability remains the main domestic risk, given the
high level of public debt and expectations of public spending
growth in the coming years, amid discussions about adjustments to
the spending cap, which has been the main fiscal anchor in the past
years. Uncertainty now centers on the unknown economic guidelines
for the coming years of the new government, including the
definition of a new fiscal rule, expenditure increase and the
economic reform agenda. This has been contributing to increased
volatility in asset prices, including episodes of exchange rate
depreciation. The fact that the country’s rating is below
investment grade and that its domestic financing needs are high,
poses an added financial risk in a hypothetical global financial
stress scenario, which could also have a negative impact on the
evolution of the exchange rate. In addition, global recession risks
may affect Brazilian growth in the future, reducing exports and
increasing risk aversion. Finally, as the inflation scenario
remains challenging, interest rates are expected to remain at
higher levels for a relatively long period to facilitate the
convergence of inflation towards the target, contributing to lower
economic growth.
Argentina:
macroeconomic and exchange rate risks remain high. The challenges
faced by the economy, both internal (which include achieving
political consensus to reduce the public deficit and rebuilding
international reserves in a context of high inflation in order to
meet the targets agreed with the International Monetary Fund) and
external (a possible drop in soybean prices would significantly
affect the country’s foreign currency income), make the economy
vulnerable to episodes of volatility in the financial markets with
limited margin for action. In addition, the worsening inflation
outlook, political uncertainty, increasing foreign exchange
restrictions and the unorthodox price containment measures threaten
Telefónica’s profitability.
Chile, Colombia and Peru:
they are exposed not only to changes in the global economy, given
their vulnerability and exposure to changes in commodity prices,
but also to tightening of global financial conditions. On the
domestic side, existing political instability and the possibility
of further social unrest and the resurgence of populism could have
a negative impact in both the short and medium term. The limited
fiscal space after the increased spending to mitigate the effects
of COVID-19 could have negative effects on the future performance
of the economy and social stability to the extent that, on the one
hand, fiscal consolidation drives tax reforms or adjustments in the
path of social spending and, on the other hand, undermines the
capacity to respond to shocks. High inflation threatens to be more
persistent than expected, which is generating a strong reaction
from central banks, which could eventually result in an excessive
deterioration in local financing conditions, as well as a potential
source of new social protests. In political terms, the risks of an
early change of government prevail in Peru due to the constant
clashes between the President and the Congress, in Colombia the
arrival of a new President to the government is expected to imply
legislative changes that could affect private investments, and in
Chile the rejection of the proposed Constitution in the exit
plebiscite has not managed to resolve the institutional
uncertainty, as it is still unclear how the constituent process
will continue and, therefore, what its impacts will be in the
medium term.
The Group has and in the future could experience impairment of
goodwill, investments accounted for by the equity method, deferred
tax assets or other assets.
In accordance with current accounting standards, the Telefónica
Group reviews on an annual basis, or more frequently when the
circumstances require it, the need to introduce changes to the book
value of its goodwill (which as of September 30, 2022, represented
16.5% of the Group’s total assets), investments accounted for by
the equity method (which represented 10.8% of the Group's total
assets as of September 30, 2022), deferred tax assets (which as of
September 30, 2022, represented 4.7% of the Group’s total assets),
or other assets, such as intangible assets (which represented 10.8%
of the Group’s total assets as of September 30, 2022), and
property, plant and equipment (which represented 21.1% of the
Group’s total assets as of September 30, 2022). In the case of
goodwill, the potential loss of value is determined by the analysis
of the recoverable value of the cash-generating unit (or group of
cash-generating units) to which the goodwill is allocated at the
time it is originated. By way of example, in 2021 impairment losses
in the goodwill of Telefónica Perú were recognized for a total of
393 million euros.
In addition, Telefónica may not be able to realize deferred tax
assets on its statement of financial position to offset future
taxable income. The recoverability of deferred tax assets depends
on the Group’s ability to generate taxable income over the period
for which the deferred tax assets remain deductible. If Telefónica
believes it is unable to utilize its deferred tax assets during the
applicable period, it may be required to record an impairment
against them resulting in a non-cash charge on the income
statement. By way of example, in 2021 deferred tax assets
corresponding to the tax Group in Spain amounting to 294 million
euros were derecognized.
Further impairments of goodwill, deferred tax assets or other
assets may occur in the future which may materially adversely
affect the Group’s business, financial condition, results of
operations and/or cash flows.
The Group faces risks relating to its levels of financial
indebtedness, the Group's ability to finance itself, and its
ability to carry out its business plan.
The operation, expansion and improvement of the Telefónica Group’s
networks, the development and distribution of the Telefónica
Group’s services and products, the implementation of Telefónica’s
strategic plan and the development of new technologies, the renewal
of licenses and the expansion of the Telefónica Group’s business in
countries where it operates, may require a substantial amount of
financing.
The Telefónica Group is a relevant and frequent issuer of debt in
the capital markets. As of September 30, 2022, the Group’s gross
financial debt amounted to 42,505 million euros (42,295 million
euros as of December 31, 2021), and the Group’s net financial debt
amounted to 28,918 million euros (26,032 million euros as of
December 31, 2021). As of September 30, 2022, the average maturity
of the debt was 13.0 years (13.6 years as of December 31, 2021),
including undrawn committed credit facilities.
A decrease in the liquidity of Telefónica, or a difficulty in
refinancing maturing debt or raising new funds as debt or equity
could force Telefónica to use resources allocated to investments or
other commitments to pay its financial debt, which could have a
negative effect on the Group’s business, financial condition,
results of operations and/or cash flows.
Funding could be more difficult and costly in the event of a
deterioration of conditions in the international or local financial
markets due, for example, to monetary policies set by central
banks, including increases in interest rates and/or decreases in
the supply of credit, increasing global political and commercial
uncertainty and oil price instability, or if there is an eventual
deterioration in the solvency or operating performance of
Telefónica.
As of September 30, 2022, the Group’s gross financial debt
scheduled to mature in 2022 amounted to 1,923 million euros, and
gross financial debt scheduled to mature in 2023 amounted to 2,992
million euros.
In accordance with its liquidity policy, Telefónica has covered its
gross debt maturities for the next 12 months with cash and credit
lines available as of September 30, 2022. As of September 30, 2022,
the Telefónica Group had undrawn committed credit facilities
arranged with banks for an amount of 11,811 million euros (11,414
million euros of which were due to expire in more than 12 months).
Liquidity could be affected if market conditions make it difficult
to renew undrawn credit lines. As of September 30, 2022, 3.4% of
the aggregate undrawn amount under credit lines was scheduled to
expire prior to September 30, 2023.
In addition, given the interrelation between economic growth and
financial stability, the materialization of any of the economic,
political and exchange rate risks referred to above could adversely
impact the availability and cost of Telefónica’s financing and its
liquidity strategy. This in turn could have a negative effect on
the Group’s business, financial condition, results of operations
and/or cash flows.
Finally, any downgrade in the Group’s credit ratings may lead to an
increase in the Group’s borrowing costs and could also limit its
ability to access credit markets.
The Group's financial condition and results of operations may be
adversely affected if it does not effectively manage its exposure
to foreign currency exchange rates or interest rates.
Interest rate risk arises primarily in connection with changes in
interest rates affecting: (i) financial expenses on floating-rate
debt (or short-term debt likely to be renewed); and (ii) the value
of long-term liabilities at fixed interest rates.
In nominal terms, as of September 30, 2022, 74% of the Group’s net
financial debt plus commitments had its interest rate set at fixed
interest rates for periods of more than one year. To illustrate the
sensitivity of financial expenses to variations in short-term
interest rates as of September 30, 2022: (i) a 100 basis point
increase in interest rates in all currencies in which Telefónica
had a financial position at that date would have led to an increase
in financial expenses of 41 million euros, whereas (ii) a 100 basis
point decrease in interest rates in all currencies (even if
negative rates are reached), would have led to a reduction in
financial expenses of 41 million euros. For the preparation of
these calculations, a constant position equivalent to the position
at that date is assumed of net financial debt, which takes into
account the financial derivatives contracted by the Group excluding
commitments with employee’s hedges.
Exchange rate risk arises primarily from: (i) Telefónica’s
international presence, through its investments and businesses in
countries that use currencies other than the euro (primarily in
Latin America and the United Kingdom); (ii) debt denominated in
currencies other than that of the country where the business is
conducted or the home country of the company incurring such debt;
and (iii) trade receivables or payables in a foreign currency to
the currency of the company with which the transaction was
registered. According to the Group’s calculations, the impact on
results, and specifically on net exchange differences, due to a 10%
depreciation of Latin American currencies against the U.S. dollar
and a 10% depreciation of the rest of the currencies to which the
Group is most exposed, against the euro would result in exchange
gains of 33 million euros as of September 30, 2022 and a 10%
appreciation of Latin American currencies against the U.S. dollar
and a 10% appreciation of the rest of the currencies to which the
Group is most exposed, would result in exchange losses of 33
million euros as of September 30, 2022. These calculations have
been made assuming a constant currency position with an impact on
profit or loss for the nine months ended September 30, 2022 taking
into account derivative instruments in place.
In the nine months ended September 30, 2022, the evolution of
exchange rates positively impacted the Group’s results, increasing
the year-on-year growth of the Group’s consolidated revenues and
OIBDA by an estimated 4.3 percentage points and 2.3 percentage
points, respectively, mainly due to the evolution of the Brazilian
real (negative impact of 3.0 percentage points and 3.7 percentage
points, respectively, in the same period of 2021). Furthermore,
translation differences in the nine months ended September 30, 2022
had a positive impact on the Group’s equity of 2,295 million euros
(3,648 million euros in the same period of 2021).
The Telefónica Group uses a variety of strategies to manage this
risk including, among others, the use of financial derivatives,
which are also exposed to risk, including counterparty risk. The
Group’s risk management strategies may be ineffective, which could
adversely affect the Group’s business, financial condition, results
of operations and/or cash flows. If the Group does not effectively
manage its exposure to foreign currency exchange rates or interest
rates, it may adversely affect its business, financial condition,
results of operations and/or cash flows.
Legal and Compliance Risks.
Telefónica and Telefónica Group companies are party to lawsuits,
antitrust, tax claims and other legal proceedings.
Telefónica and Telefónica Group companies operate in highly
regulated sectors and are and may in the future be party to
lawsuits, tax claims, antitrust and other legal proceedings in the
ordinary course of their businesses, the outcome of which is
unpredictable.
The Telefónica Group is subject to regular reviews, tests and
audits by tax authorities regarding taxes in the jurisdictions in
which it operates and is a party and may be a party to certain
judicial tax proceedings. In particular, the Telefónica Group is
currently party to certain litigation in Peru concerning certain
previous years’ income taxes, in respect of which a
contentious-administrative appeal is currently pending, and to
certain tax and regulatory
proceedings in Brazil, primarily relating to the ICMS (a Brazilian
tax on telecommunication services) and the corporate
tax.
With respect to the latter, as of September 30, 2022, Telefónica
del Perú has registered a provision amounting to 790 million euros,
without payment of the aforementioned liquidations as of September
30, 2022; while Telefónica Brazil maintained provisions for tax
contingencies amounting to 467 million euros and provisions for
regulatory contingencies amounting to 393 million euros. Although
the Group considers its tax estimates to be reasonable, if a tax
authority disagrees, the Group could face additional tax liability,
including interest and penalties. There can be no guarantee that
the payment of such additional amounts will not have a significant
adverse effect on the Group’s business, results of operations,
financial condition and/or cash flows. In addition to the most
significant litigation indicated above, further details on these
matters are provided in Note 25 and 29 of the Consolidated
Financial Statements. The details of the provisions for litigation,
tax sanctions and claims can be found in Note 24 of the
Consolidated Financial Statements.
An adverse outcome or settlement in these or other proceedings,
present or future, could result in significant costs and may have a
material adverse effect on the Group’s business, financial
condition, results of operations and/or cash flows.
The Telefónica Group is exposed to risks in relation to compliance
with anti-corruption laws and regulations and economic sanctions
programs.
The Telefónica Group is required to comply with the anti-corruption
laws and regulations of the jurisdictions where it conducts
operations around the world, including in certain circumstances
with laws and regulations having extraterritorial effect such as
the U.S. Foreign Corrupt Practices Act of 1977 and the United
Kingdom Bribery Act of 2010. The anti-corruption laws generally
prohibit, among other conduct, providing anything of value to
government officials for the purposes of obtaining or retaining
business or securing any improper business advantage or failing to
keep accurate books and records and properly account for
transactions.
In this sense, due to the nature of its activities, the Telefónica
Group is increasingly exposed to this risk, which increases the
likelihood of occurrence. In particular, it is worth noting the
continuous interaction with officials and public administrations in
several areas, including the institutional and regulatory fronts
(as the Telefónica Group carries out a regulated activity in
different jurisdictions), the operational front (in the deployment
of its network, the Telefónica Group is subject to obtaining
multiple activity permits) and the commercial front (the Telefónica
Group provides services directly and indirectly to public
administrations). Moreover, Telefónica is a multinational group
subject to the authority of different regulators and compliance
with various regulations, which may be domestic or extraterritorial
in scope, civil or criminal, and which may lead to overlapping
authority in certain cases. Therefore, it is very difficult to
quantify the possible impact of any breach, bearing in mind that
such quantification must consider not only the economic amount of
sanctions, but also the potential negative impact on the business,
reputation and/or brand, or the ability to contract with public
administrations.
Additionally, the Telefónica Group’s operations may be subject to,
or otherwise affected by, economic sanctions programmes and other
forms of trade restrictions (“sanctions”) including those
administered by the United Nations, the European Union and the
United States, including the U.S. Treasury Department’s Office of
Foreign Assets Control. The sanctions regulations restrict the
Group’s business dealings with certain sanctioned countries,
individuals and entities. In this context, the provision of
services by a multinational telecommunications group, such as the
Telefónica Group, directly and indirectly, and in multiple
countries, requires the application of a high degree of diligence
to prevent the contravention of sanctions (which take various
forms, including economic sanctions programmes applicable to
countries, lists of entities and persons sanctioned or export
sanctions). Given the nature of its activity, the Telefónica
Group’s exposure to these sanctions is particularly
noteworthy.
Although the Group has internal policies and procedures designed to
ensure compliance with the above mentioned applicable
anti-corruption laws and sanctions regulations, there can be no
assurance that such policies and procedures will be sufficient or
that the Group’s employees, directors, officers, partners, agents
and service providers will not take actions in violation of the
Group’s policies and procedures (or, otherwise in violation of the
relevant anti-corruption laws and sanctions regulations) for which
the Group, its subsidiaries or they may be ultimately held
responsible. In this regard, the Group is currently cooperating
with governmental authorities (and, where appropriate, conducting
the relevant internal investigations) regarding requests for
information potentially related, directly or indirectly to possible
violations of applicable anti-corruption laws. Telefónica believes
that, considering the size of the Group, any potential penalty as a
result of matters relating to those specific information requests
would not materially affect the Group’s financial
condition.
Notwithstanding the above, violations of anti-corruption laws and
sanctions regulations could lead not only to financial penalties,
but also to exclusion from government contracts, licences and
authorisations revocation, and could have a material adverse effect
on the Group’s reputation, or otherwise adversely affect the
Group’s business, financial condition, results of operations and/or
cash flows.
Item 4. Information on the Company
B. Business Overview
Telefónica is a telecommunications service
provider with its footprint in some markets in Europe and Latin
America. Our objective is to create, protect and promote fixed and
mobile connections for our customers helping them to take control
over their digital lifestyle. Therefore, we primarily offer our
customers the connectivity they need to interact and live in the
markets where we operate through simple products and services while
protecting their data and managing it in a responsible way. We rely
on modern technology to create a better and more inclusive society.
We aim at offering our customers the possibility to reach the
digital world regardless of their location, economic status, level
of digital knowledge and capacities.
The Telefónica Group’s strategy aims to:
Enhance value through:
•Making
our world more human, by connecting lives in a sustainable
way.
•Offering
good connectivity, for which our infrastructure management and our
continuous investment in network and platforms are
key.
•Good
connectivity is the enabler for all digital services. Telefónica
provides a wide range of services over connectivity through a fixed
and mobile bundled offer which includes video and digital services.
We offer our customers additional data in order to amplify services
through unique, simple and clear offers.
•Focusing
on customers’ needs, making their life and digital experience
easier through customized offers,
With the following enablers:
•Fiber,
4G and 5G deployment enables Telefónica to continue gaining
prominence among customers through better experience and a lower
churn. These networks help Telefónica to continue to maintain high
quality services for home offices and a higher consumption of
entertainment services.
•Big
Data and innovation to add value to our customers and return the
control over data to our customers.
•Digital
trust: as we manage ever more personal information about our
customers, their trust in us is key. Telefónica seeks a
relationship of trust with its customers, and therefore we invest
in network security. Telefónica is developing tools to protect
information in end user devices and communications, fixed and
mobile, networks, as well as to protect customers' digital
identity.
•End-to-end
digitalization: seeking the reduction of our legacy investments to
increase virtualization, the reduction of physical servers, data
centers and applications, the digitalization of IT systems and
processes and the digitalization of front and back office.
Digitalization efforts undertaken in the past have allowed
Telefónica to provide a rapid response to companies as they adapted
to and sought to enhance their competitiveness in the new
landscape.
•Continued
focus on the simplification of processes.
9M 2022 highlights
Telefónica has improved growth momentum as the Company continues to
leverage opportunities in the markets and deliver against
Telefónica's strategy focused on value creation. During the first
nine months of 2022 Telefónica successfully launched miMovistar
portfolio in Spain, Oi mobile assets were integrated in Brazil,
further strengthening the Company's leadership, investments in the
United Kingdom digital infrastructure accelerated and VMO2 showed
revenue growth in its first year of integration, whilst commercial
and financial momentum remained intact in Germany.
These steps have contributed to our sustainable growth goals,
driven by the relentless execution of our strategy, demonstrating
the ability to proactively manage existing macro
challenges.
Telefónica’s
total accesses
totaled 383.5 million as of September 30, 2022. This amount
includes 100% of the accesses of JV VMO2 (in respect of which
Telefónica has a 50% stake). In addition, it includes the Oi mobile
accesses base incorporated on April 1, 2022 within Telefónica
Brazil. For additional information on the related transactions, see
Note 2 to the Condensed Consolidated Interim Financial Statements.
The accesses base increased by 4.9% year-on-year, mainly due to the
impact of such transactions. Excluding the sale of Telefónica El
Salvador (which sale was completed on January 13, 2022) since
January 1, 2022, the increase of the accesses base is
5.4%.
The table below shows the evolution of Telefónica’s total accesses
over the past two years as of September 30 of such
years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCESSES |
|
|
|
Thousands of accesses |
September 2021 |
September 2022 |
% Reported
YoY |
% excl El Salvador
YoY |
|
Fixed telephony accesses
(1)
|
30,521.3 |
|
28,151.3 |
|
(7.8 |
%) |
(7.4 |
%) |
|
Broadband |
25,713.4 |
|
26,107.7 |
|
1.5 |
% |
1.5 |
% |
|
UBB |
21,873.3 |
|
23,328.3 |
|
6.7 |
% |
6.7 |
% |
|
FTTH |
11,709.8 |
|
13,720.0 |
|
17.2 |
% |
17.2 |
% |
|
Mobile accesses |
274,263.8 |
|
292,749.0 |
|
6.7 |
% |
7.5 |
% |
|
Prepay |
129,147.7 |
|
132,771.1 |
|
2.8 |
% |
4.1 |
% |
|
Contract |
115,899.8 |
|
124,973.8 |
|
7.8 |
% |
8.0 |
% |
|
IoT |
29,216.4 |
|
35,004.0 |
|
19.8 |
% |
19.8 |
% |
|
Pay TV |
11,152.0 |
|
10,740.8 |
|
(3.7 |
%) |
(3.7 |
%) |
|
Retail Accesses |
341,887.8 |
|
357,963.9 |
|
4.7 |
% |
5.3 |
% |
|
Wholesale Accesses |
23,854.6 |
|
25,573.8 |
|
7.2 |
% |
7.2 |
% |
|
Fixed wholesale accesses |
3,699.8 |
|
3,687.7 |
|
(0.3 |
%) |
(0.3 |
%) |
|
FTTH wholesale accesses |
2,913.5 |
|
3,174.2 |
|
8.9 |
% |
8.9 |
% |
|
Mobile wholesale accesses |
20,154.8 |
|
21,886.1 |
|
8.6 |
% |
8.6 |
% |
|
Total Accesses |
365,742.4 |
|
383,537.6 |
|
4.9 |
% |
5.4 |
% |
Notes:
-The table includes, with respect to 2021, accesses of Telefónica
El Salvador (2.0 million total accesses). The sale of Telefónica El
Salvador was completed on January 13, 2022.
(1)
Includes fixed wireless and VoIP accesses.
The Group's strategy is based on capturing high value customers in
the markets in which it operates.
Mobile accesses
totaled 292.7 million as of September 30, 2022, up 6.7% compared to
September 30, 2021 mainly due to the inclusion of Oi accesses,
offset in part by the exclusion of Telefónica El Salvador.
Excluding the sale of Telefónica El Salvador, mobile accesses
increased by 7.5%. Postpaid accesses represented 48.5% of the
mobile accesses excluding IoT (+1.2 p.p. in reported terms and +0.9
p.p. excluding the impact of the sale of Telefónica El
Salvador).
Fixed broadband accesses
stood at 26.1 million at September 30, 2022, up 1.5% year-on-year.
Retail fiber (FTTH) accesses stood at 13.7 million at September 30,
2022, growing by 17.2% compared to September 30, 2021.
Pay TV accesses
totaled 10.7 million as of September 30, 2022, down 3.7%
year-on-year.
The table below shows Telefónica´s results for the nine months
ended September 30, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
Variation |
|
Consolidated Results |
2021 |
2022 |
2022 vs 2021 |
|
Millions of euros |
Total |
|
Total |
|
Total |
% |
|
Revenues |
29,603 |
|
|
29,793 |
|
|
190 |
|
0.6 |
% |
|
Other income |
12,019 |
|
|
1,527 |
|
|
(10,492) |
|
(87.3 |
%) |
|
Supplies |
(9,095) |
|
|
(9,523) |
|
|
(428) |
|
4.7 |
% |
|
Personnel expenses |
(3,990) |
|
|
(4,108) |
|
|
(118) |
|
2.9 |
% |
|
Other expenses |
(7,917) |
|
|
(8,096) |
|
|
(179) |
|
2.3 |
% |
|
OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION
(OIBDA) |
20,620 |
|
|
9,593 |
|
|
(11,027) |
|
(53.5 |
%) |
|
OIBDA Margin |
69.7 |
% |
|
32.2 |
% |
|
|
-37.5 p.p. |
|
Depreciation and amortization |
(6,294) |
|
|
(6,670) |
|
|
(376) |
|
6.0 |
% |
|
OPERATING INCOME (OI) |
14,326 |
|
|
2,923 |
|
|
(11,403) |
|
(79.6 |
%) |
|
Operating Margin |
48.4 |
% |
|
9.8 |
% |
|
|
-38.6 p.p. |
|
Share of income of investments accounted for by the equity
method |
(58) |
|
|
481 |
|
|
539 |
|
c.s. |
|
Net financial expense |
(938) |
|
|
(1,393) |
|
|
(455) |
|
48.5 |
% |
|
PROFIT BEFORE TAX |
13,330 |
|
|
2,011 |
|
|
(11,319) |
|
(84.9 |
%) |
|
Corporate income tax |
(1,554) |
|
|
(316) |
|
|
1,238 |
|
(79.7 |
%) |
|
PROFIT FOR THE PERIOD |
11,776 |
|
|
1,695 |
|
|
(10,081) |
|
(85.6 |
%) |
|
Attributable to equity holders of the parent |
9,335 |
|
|
1,486 |
|
|
(7,849) |
|
(84.1 |
%) |
|
Attributable to non-controlling interests |
2,441 |
|
|
209 |
|
|
(2,232) |
|
(91.4 |
%) |
Analysis of results
The Group's operating results in the first nine months of 2022 have
been impacted mainly by:
–Changes
in the scope of consolidation:
The main changes are the exclusion from the perimeter of
consolidation of the entities that comprised our former Telefónica
United Kingdom segment (after the incorporation of JV VMO2 in June
2021, which results are accounted for under the equity method,
based on the Group’s 50% stake), the tower divisions of Telxius
Group (since June 2021), Telefónica de Costa Rica (since August
2021) and InfraCo, SpA in Chile (since the sale of a 60% interest
therein in July 2021).
–Capital
gains/losses on sale of business,
which significantly decreased period-on-period: In the first nine
months of 2022 Telefónica booked a gain from the sale of fiber
optic assets in Colombia (183 million euros). In the first nine
months of 2021, Telefónica recorded capital gains generated in the
incorporation of JV VMO2 (4,408 million euros), the sale of the
tower divisions of the Telxius Group (6,099 million euros), the
sale of 60% of the shares in InfraCo, SpA in Chile (274 million
euros), the establishment of FiBrasil (26 million euros), and the
sale of Telefónica de Costa Rica (142 million euros).
–Foreign
exchange effects:
Foreign exchange effects had a positive impact on our reported
results for the first nine months of 2022 compared with the same
period of 2021, mainly due to the appreciation of the Brazilian
real.
See also "Item
5. Operating and Financial Review and Prospects―Operating
Results―Significant Factors Affecting the Comparability of Our
Results of Operations in the Periods under
Review”.
Revenues
in the first nine months of 2022 totaled 29,793 million euros,
increasing 0.6% year-on-year, negatively impacted by changes in the
consolidation perimeter (-9.3 p.p.), mainly the exit of Telefónica
United Kingdom from the perimeter on June 1, 2021, partially offset
by the exchange rate effect (+4.3 p.p.), mainly due to the
appreciation of the Brazilian real against the euro. Telefónica
highlights the increase in revenues year on year in all segments,
with double digit growth in Telefónica Brazil and Telefónica Hispam
and growth in Telefónica Germany and Telefónica Spain.
Other income
mainly includes gains on disposal of assets and capitalized costs
on fixed assets. In the first nine months of 2022, other income
totaled 1,527 million euros compared to 12,019 million euros
recorded in the same period of 2021. In the first nine months of
2022, other income included the capital gains resulting from the
sale of Fiberco Colombia (183 million euros). In the first nine
months of 2021, other income was attributable mainly to the capital
gains from the establishment of JV VMO2 (4,408 million euros), the
sale of the Telxius towers business (6,099 million euros), the sale
of 60% of the shares in InfraCo, SpA in Chile (274 million euros),
the sale of Telefónica de Costa Rica to Liberty Global (142 million
euros) and the establishment of FiBrasil (26 million
euros).
The
total amount of supplies, personnel expenses and other
expenses
(mainly external services and taxes) was 21,727 million euros in
the first nine months of 2022, up 3.5% year-on-year compared to the
first nine months of 2021. This increase was mainly attributable to
the impact of changes in foreign exchange rates (+4.0 p.p.).The
evolution of these expenses is explained in greater detail
below:
•Supplies
amounted to 9,523 million euros in the first nine months of 2022,
up 4.7% year-on-year, mainly as a result of the impact of changes
in foreign exchange rates (+3.1 p.p.) and of higher handset costs
in all segments, offset in part by the deconsolidation of the
entities that comprised our former Telefónica United Kingdom
segment in June 2021.
•Personnel
expenses
amounted to 4,108 million euros in the first nine months of 2022,
up 2.9% year-on-year compared to the first nine months of 2021,
mainly as a result of the impact of changes in foreign exchange
rates (+3.8 p.p.), restructuring costs mainly in Telefónica Hispam
totaling 85 million euros and higher expenses in Germany, Brazil
and Hispam, offset in part by the deconsolidation of the entities
that comprised our former Telefónica United Kingdom segment in June
2021.
The average headcount was 102,315 employees in the first nine
months ended September 30, 2022, down 6.0% compared to the same
period of 2021, mainly as a result of the deconsolidation of the
entities that comprised our former Telefónica United Kingdom
segment in June 2021.
•Other
expenses
amounted to 8,096 million euros in the first nine months of 2022,
up 2.3% year-on-year. This increase was mainly attributable to the
impact of foreign exchange rates (+5.2 p.p.) and higher expenses in
all segments, offset in part by the deconsolidation of the entities
that comprised our former Telefónica United Kingdom segment in June
2021.
As a result of the foregoing, OIBDA totaled 9,593 million euros in
the first nine months of 2022, compared with 20,620 million euros
in the first nine months of 2021. The period-on-period evolution
was strongly impacted by the capital gains, in 2021, from the
transactions recorded in "Other income" (-52.2 p.p.) and changes in
the scope of consolidation (-4.8 p.p.), partially offset by
favorable exchange rate moves (+2.3 p.p.). Telefónica highlights
the increased OIBDA period on period with double digit growth in
Telefónica Brazil and a steady growth in Telefónica Germany. OIBDA
is a
non-GAAP financial measure.
For a reconciliation of OIBDA to operating income, see
“Item
5. Operating and Financial Review and Prospects- Non-GAAP Financial
Information”.
Depreciation and amortization
amounted to 6,670 million euros in the first nine months of 2022,
increasing by 6.0% mainly affected by the impact of foreign
exchange rates (+5.3 p.p.) and changes in the scope of
consolidation (+1.8 p.p.) which had an impact on the amortization
of rights of use, in particular the tower divisions sale completed
in the first nine months of 2021, partially offset by the lower
impact of the accelerated amortization in Telefónica Mexico as a
consequence of the transformation of its operational
model.
Operating income (OI)
for the first nine months of 2022 totaled 2,923 million euros
compared to 14,326 million euros recorded in the same period of
2021. The period-on-period evolution was strongly impacted by the
capital gains on the sale of businesses in 2021 discussed above
(-75.2 p.p.), the changes in the scope of consolidation (-7.6 p.p.)
and the increase in depreciation and amortization.
The
share of income (loss) of investments
accounted for by the equity method in the first nine months of 2022
was a profit of 481 million euros, compared to a loss of 58 million
euros in 2021, mainly due to the results from JV VMO2, affected by
the change in fair value of derivatives.
Net financial expense
amounted to 1,393 million euros in the first nine months of 2022,
increasing by 455 million euros compared to the first nine months
of 2021 largely due to the rise in interest rates and the increase
in debt denominated in Brazilian reais ( including as a result of
the appreciation of this currency against the euro).
Corporate income tax
amounted to 316
million euros in the first nine months of 2022, decreasing by 1,238
million euros compared to the same period of 2021. The period on
period change was mainly due to the accounting in 2021 of the tax
charge resulting from a tax inspection which was closed that year
in Spain, the recording in 2021 of a new tax provision in
Telefónica Peru, the effect of the deconsolidation of the entities
that comprised our former Telefónica United Kingdom segment in
2021, and the reversal, in 2022, of a tax provision related to the
3G Group in Germany.
As a result,
profit for the period attributable to equity holders
of the parent
in the first nine months of 2022 was 1,486 million euros (9,335
million euros in the same period of 2021).
Profit attributable to non-controlling interests
was 209 million euros in the first nine months of 2022 (2,441
million euros in the first nine months of 2021). The variation
year-on-year is mainly due to the minority interest of Telxius
Telecom in connection with the sale of the tower divisions in
Europe and Latin America in 2021.
Capex
totaled 4,020 million euros in the first nine months of 2022, down
17.8% year-on-year, impacted by the change in the consolidation
perimeter (-20.0 p.p.) and lower spectrum purchases in 2022 (-12.4
p.p.), partially offset by the exchange rates effect (+4.2
p.p.).
OIBDA-CapEx
stood at 5,573 million euros in the first nine months of 2022,
compared to 15,727 million euros in the first nine months of 2021,
strongly affected by the above mentioned capital gains from the
sale of businesses (-68.5 p.p.), partially offset by the positive
effect of lower spectrum purchase (+3.9 p.p.) and foreign exchange
effects (+1.7 p.p.).
2022/2021 Segment results
For information on how segment information is presented in this
Report, see
"Item 5. Operating and Financial Review and Prospects―Operating
Results―Presentation of Financial Information”.
TELEFÓNICA SPAIN
The table below shows the evolution of accesses in Telefónica Spain
over the past two years as of September 30 of such
years:
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCESSES |
|
|
Thousands of accesses |
September 2021 |
September 2022 |
%Reported
YoY |
|
Fixed telephony accesses
(1)
|
8,437.9 |
|
8,186.3 |
|
(3.0 |
%) |
|
Broadband |
5,873.6 |
|
5,853.9 |
|
(0.3 |
%) |
|
FTTH |
4,774.5 |
|
4,980.5 |
|
4.3 |
% |
|
Mobile accesses |
18,732.9 |
|
19,176.8 |
|
2.4 |
% |
|
Prepay |
783.6 |
|
757.5 |
|
(3.3 |
%) |
|
Contract |
15,194.8 |
|
15,085.7 |
|
(0.7 |
%) |
|
IoT |
2,754.5 |
|
3,333.6 |
|
21.0 |
% |
|
Pay TV |
3,755.5 |
|
3,553.1 |
|
(5.4 |
%) |
|
Retail Accesses |
36,809.2 |
|
36,778.7 |
|
(0.1 |
%) |
|
Wholesale Accesses |
3,679.1 |
|
3,669.1 |
|
(0.3 |
%) |
|
FTTH Wholesale Accesses |
2,907.1 |
|
3,168.6 |
|
9.0 |
% |
|
Total Accesses |
40,488.3 |
|
40,447.8 |
|
(0.1 |
%) |
(1)
Includes "fixed wireless" and Voice over IP accesses.
In May 2022, miMovistar was presented, a new global portfolio for
the general public through which customers will be able to choose
the products and services they need in a simple, customizable and
flexible way. The proposal is the natural evolution of Movistar
Fusión, Movistar's benchmark product over the last ten
years.
The portfolio starts with connectivity (Internet, voice and data),
to which, if the customer wishes, modules can be added to include a
television content offer and value-added services such as,
initially, health, gaming and security, to build the most complete
and adapted formula that the customer wants. The company plans to
integrate in the future more services within the miMovistar
ecosystem, such as Movistar Car/Moto, Movistar Money, Home
Insurance, Energy, as well as additional connectivity
options.
With this new move, Telefónica Spain responds to the needs derived
from the transformation of the market and a consumer who demands
flexibility and personalization, both in connectivity services and
in content or services relevant to his life, being able to control
costs.
In addition, any of the miMovistar connectivity options will also
include a device at no cost to the customer, whose catalog will
depend on their choice and will include, in addition to
smartphones, smart TVs, tablets, laptops or smart
watches.
Existing Fusión customers can choose to continue with their current
tariff or switch to miMovistar and adapt it to what they
choose.
On the other hand, the investment in the 5G mobile network made it
possible to achieve 83% of population coverage as of September 30,
2022.
Additionally, in 2022, Telefónica Spain has continued to improve
its offer proposals to strengthen its relationship with customers
and reach new segments, highlighting
Solar 360,
the joint venture of Repsol and Telefónica Spain to develop the
solar self-consumption business. The new company started to operate
in June 2022, offering a comprehensive self-consumption solution to
private customers, communities of neighbors and companies, SMEs,
and large companies, through solar panel installation.
Telefónica Spain had 40.4 million
accesses
as of September 30, 2022, a decline of 0.1% as compared to
September 30, 2021, partly driven by a commercial policy focused on
generating value and promoting higher market rationalization by
reducing promotional activity, which had an impact on commercial
performance.
The
convergent offer
(residential and SMEs) had a customer base of 4.6 million customers
as of September 30, 2022, a decrease of 2.7% y-o-y.
Retail fixed accesses
totaled 8.2 million and decreased 3.0% as compared to September 30,
2021, with a net loss of 190 thousand accesses as of September 30,
2022.
Retail broadband accesses
totaled 5.9 million (-0.3% y-o-y), with a net loss of 21 thousand
accesses as of September 30, 2022.
Retail fiber (FTTH) accesses
reached 5.0 million customers (+4.3% as compared to September 30,
2021), representing 85.1% of total retail broadband customers (+3.8
p.p. y-o-y) with net adds of 133 thousand accesses as of September
30, 2022. At September 30, 2022, fiber deployment reached 27.8
million premises, 1.3 million more than at September 30,
2021.
Total retail mobile accesses
stood at 19.2 million as of September 30, 2022, an increase of 2.4%
as compared to September 30, 2021 as a result of an increase in the
IoT accesses base (+21.0% y-o-y positively impacted by a revision
recorded in March 2022 with respect to 2021 figures in an amount of
500 thousand accesses), offset by a decrease in both mobile
contract accesses (-0.7% y-o-y) and prepay accesses (-3.3%
y-o-y).
Pay TV accesses
reached 3.6 million at September 30, 2022, decreasing 5.4%
year-on-year.
Wholesale accesses
stood at 3.7 million at September 30, 2022, decreasing 0.3%
year-on-year, and wholesale fiber (FTTH) accesses (86.4% of total
wholesale accesses at September 30, 2022 compared with 79.0% at
September 30, 2021) were up 9.0% year-on-year.
The table below shows Telefónica Spain’s results for the nine
months ended September 30, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions of euros |
|
|
|
|
TELEFÓNICA SPAIN |
September 2021 |
September 2022 |
% Reported
YoY |
|
Revenues |
9,209 |
|
9,283 |
|
0.8 |
% |
|
Mobile handset revenues |
253 |
|
414 |
|
63.6 |
% |
|
Revenues ex-mobile handset sales |
8,956 |
|
8,869 |
|
(1.0 |
%) |
|
Retail |
7,220 |
|
7,161 |
|
(0.8 |
%) |
|
Wholesale and Other |
1,736 |
|
1,708 |
|
(1.6 |
%) |
|
Other income |
369 |
|
558 |
|
51.4 |
% |
|
Supplies |
(3,357) |
|
(3,699) |
|
10.2 |
% |
|
Personnel expenses |
(1,362) |
|
(1,278) |
|
(6.2 |
%) |
|
Other expenses |
(1,324) |
|
(1,461) |
|
10.4 |
% |
|
OIBDA |
3,535 |
|
3,403 |
|
(3.7 |
%) |
|
Depreciation and amortization |
(1,615) |
|
(1,619) |
|
0.3 |
% |
|
Amortization of intangible assets, depreciation of property, plant
and equipment |
(1,359) |
|
(1,322) |
|
(2.7 |
%) |
|
Amortization of rights of use |
(256) |
|
(297) |
|
16.5 |
% |
|
Operating income (OI) |
1,920 |
|
1,784 |
|
(7.1 |
%) |
|
CapEx |
1,365 |
|
1,045 |
|
(23.5 |
%) |
|
OIBDA-CapEx |
2,170 |
|
2,358 |
|
8.7 |
% |
Analysis
of results
Revenues
in the first nine months of 2022 amounted to 9,283 million euros,
growing 0.8% y-o-y. This trend was supported by the continued
growth of mobile handset revenues, due to the inclusion in the
portfolio of several devices as part of the packages (including 5G
smartphones of different brands, Smart TVs, tablets and laptops,
among others). The evolution of revenues excluding mobile handset
sales is described below:
•Retail
revenues
totaled 7,161 million euros in the first nine months of 2022,
decreasing by 0.8% year-on-year, due in part to the customer base
decline, partially offset by higher IT revenues due to the higher
demand for digitalization projects in the B2B segment.
•Wholesale
and other revenues
totaled 1,708 million euros in the first nine months of 2022,
decreasing by 1.6% year-on-year, due mainly to the decrease in
fixed traffic revenues, mobile interconnection revenues due to
lower mobile termination rates, and the impact of the lesser "La
Liga" content available in the wholesale offer since mid-August.
These have been partially offset by the recovery in roaming-in
revenues to pre-pandemic levels and growth of MVNO’s
revenues.
OIBDA reached 3,403 million euros in the first nine months of 2022,
a year-on-year decrease of 3.7%.
Depreciation and amortization
amounted to 1,619 million euros in the first nine months of 2022,
increasing by 0.3% year-on-year.
Operating income
amounted to 1,784 million euros in the first nine months of 2022, a
year-on-year decrease of 7.1%. The year-on-year decrease was mainly
driven by lower service revenues and the impact of the higher
supplies and energy costs for most of the first nine months of
2022.
VMO2
After receiving the final approval from the Competition &
Markets Authority (CMA), the joint venture between Liberty Global
and Telefónica was established on June 1, 2021, and our former
Telefónica United Kingdom segment was replaced by the new VMO2
segment. Telefónica ceased to fully consolidate the results of the
entities that comprised our former Telefónica United Kingdom
segment in its consolidated financial statements and started to
account for JV VMO2's results under the equity method. Therefore,
since June 1, 2021, for purposes of the Group’s
consolidated
results, the results of JV VMO2 are reflected under a single
heading of the consolidated income statement, “Share of income of
investments accounted for by the equity method”. However, the VMO2
segment information included in this section is presented under
management criteria, and shows 100% of the JV VMO2's results;
Telefónica’s actual percentage ownership of JV VMO2 is
50%.
Since it is not practicable to restate the Group’s historical
segment financial information to reflect this change, the VMO2
segment information included in this section refers to the period
from January 1 to September 30, 2022 compared to the period from
June 1 to September 30, 2021. For additional information, see "Note
2. Basis of presentation of the consolidated financial statements -
Agreement between Telefónica and Liberty Global plc to combine
their operating businesses in the UK" to the Condensed Consolidated
Interim Financial Statements. See also For information on how
segment information is presented in this Report, see
"Item
5. Operating and Financial Review and Prospects―Operating
Results―Presentation of Financial Information”.
See also "Item
5. Operating and Financial Review and Prospects―Operating
Results―Significant Factors Affecting the Comparability of Our
Results of
Operations in the Periods under Review―Changes in the consolidation
perimeter”.
More than one year after the formation of JV VMO2, the company
continues to integrate and innovate while investing heavily to
expand and upgrade its fiber and 5G networks to provide the highest
quality connectivity to more regions of the country.
The FTTP speed upgrade of the existing network is accelerating
after the completion of tests in the first quarter of 2022, paving
the way for the planned deployment of fiber throughout the fixed
network starting later this year and ending in 2028.
The “Lightning” project rollout now totals 2.9 million accesses,
further reinforcing VMO2's gigabit leadership in the UK with speeds
of 1.1 Gbps offered across its entire footprint of 16 million
premises passed.
In July 2022, Liberty Global and Telefónica Infra, S.L.U, together
with InfraVia Capital Partners (“InfraVia”), a leading independent
financial investment firm specialising in infrastructure and
technology investments, reached an agreement to set up a new joint
venture that will roll out fibre-to-the-home (FTTH) to greenfield
premises across the country. The partnership will initially roll
out fibre to 5 million homes not currently served by JV VMO2’s
network by 2026, with the opportunity to expand to an additional
c.2 million homes. This investment will provide a major boost to
the nation’s digital economy and make a significant contribution to
the Government’s gigabit broadband ambitions.
Liberty Global and Telefónica will jointly hold a 50% stake in the
joint venture through a holding company, with InfraVia owning the
remaining 50%. Telefónica Group’s participation will be held
through Telefónica Infra.
VMO2 launched the “Better Connections Plan”, its first
sustainability strategy, on May 22 with a commitment to reduce
carbon emissions, champion the circular economy, such as recycling
devices and donating smartphones and tablets, and supporting the
society.
The table below shows the evolution of accesses of VMO2 over the
past two years as of September 30 of such years. Accesses include
100% of the accesses of JV VMO2 (in respect of which Telefónica has
a 50% stake):
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCESSES |
|
|
Thousands of accesses |
September 2021 |
September 2022 |
% Reported
YoY |
|
|
|
|
|
Broadband |
5,566.0 |
|
5,639.2 |
|
1.3 |
% |
|
UBB |
5,536.4 |
|
5,631.1 |
|
1.7 |
% |
|
|
|
|
|
Mobile accesses |
31,864.6 |
|
33,507.9 |
|
5.2 |
% |
|
Prepay |
8,284.0 |
|
8,169.7 |
|
(1.4 |
%) |
|
Contract |
15,809.3 |
|
16,008.4 |
|
1.3 |
% |
|
IoT |
7,771.3 |
|
9,329.7 |
|
20.1 |
% |
|
Pay TV |
3,381.0 |
|
3,200.8 |
|
(5.3 |
%) |
|
|
|
|
|
Retail Accesses |
45,549.5 |
|
46,601.9 |
|
2.3 |
% |
|
Wholesale Accesses |
9,773.7 |
|
10,647.2 |
|
8.9 |
% |
|
Total Accesses |
55,323.2 |
|
57,249.2 |
|
3.5 |
% |
The
total accesses base
grew 3.5% year-on-year and stood at 57.2 million at September 30,
2022, mainly driven by the increase in the mobile accesses base,
which grew 5.2% year-on-year and reached 33.5 million
accesses.
The
contract mobile customer base
grew 1.3% year-on-year and reached 16.0 million accesses adding
70.4 thousand new accesses to the base in the first nine months of
the year 2022. Churn remained stable at low levels.
The
prepay mobile customer base
decreased 1.4% year-on-year and totaled 8.2 million accesses,
despite the addition of 50.6 thousand new accesses in the first
nine months of the year 2022.
IoT mobile customer base
grew 20.1% year-on-year and reached 9.3 million accesses
underpinned by the Smart Metering Programme roll out.
Fixed broadband base
grew 1.3% year-on-year and reached 5.6 million accesses adding 12.5
thousand new accesses in the first nine months of the year 2022
supported by the increase in demand for higher speeds. The
company’s average broadband speed is 247 Mbps and grew 22%
year-on-year, almost x4 times higher than the national average
according to Ofcom.
The table below shows VMO2's results for the nine months ended
September 30, 2022 and for the four months ended September 30,
2021:
|
|
|
|
|
|
|
|
|
|
Millions of euros |
|
|
|
VMO2 |
June 1 to September 30, 2021 |
January 1 to September 30, 2022 |
|
Revenues |
4,026 |
|
9,013 |
|
|
Mobile Business |
2,258 |
|
5,084 |
|
|
Handset revenues |
612 |
|
1,313 |
|
|
Fixed Business |
1,589 |
|
3,519 |
|
|
Other |
179 |
|
410 |
|
|
OIBDA |
1,415 |
|
3,320 |
|
|
Depreciation and amortization |
(1,342) |
|
(3,105) |
|
|
Operating income (OI) |
73 |
|
215 |
|
|
Share of income (loss) of investments accounted for by the equity
method |
— |
|
1 |
|
|
Financial income |
6 |
|
16 |
|
|
Financial expenses |
(276) |
|
(724) |
|
|
Realized and unrealized gains on derivative instruments, net
(1)
|
579 |
|
4,078 |
|
|
Foreign currency transaction losses, net |
(485) |
|
(2,234) |
|
|
Net financial expense |
(176) |
|
1,136 |
|
|
Result before taxation |
(103) |
|
1,352 |
|
|
Result for the period |
(112) |
|
993 |
|
|
CapEx |
785 |
|
1,987 |
|
|
OIBDA-CapEx |
630 |
|
1,333 |
|
Notes:
(1) JV VMO2 entered into various derivative instruments to manage
interest rate exposure and foreign currency exposure. Generally, JV
VMO2 does not apply hedge accounting to its derivative instruments.
Accordingly, changes in the fair values of most of its derivatives
are recorded in the finance results of its consolidated income
statement.
Analysis of results
In the first nine months of 2022,
revenues
amounted to 9,013 million euros supported by the price increase in
fixed and mobile businesses alongside with synergies realization,
offset in part by the impact of the macroeconomic
downturn.
Mobile Revenues
amounted to 5,084 million euros in the first nine months of the
year 2022 and included 1,313 million euros from handset sales,
which were impacted by the current macroeconomic environment,
mitigated in part by price increases.
Fixed business revenues
amounted to 3,519 million euros in the first nine months of 2022
also impacted by rise of cost-of-living partially mitigated by
price increases.
Other revenues
amounted to 410 million euros in the first nine months of 2022
driven by the roll out of SMIP (Smart metering programme) and other
digital products.
OIBDA in the first nine months of 2022 reached 3,320 million
euros.
Depreciation and Amortization
amounted to 3,105 million euros in the first nine months of
2022.
Operating Income (OI)
amounted to 215 million euros in the first nine months of 2022
underpinned by price rises, cost efficiencies and synergies
realization mitigating the impact of the rising cost of
living.
The table below shows the reconciliation between VMO2 result for
the period and the share of income (loss) of investments accounted
for by the equity method in Telefónica:
|
|
|
|
|
|
|
|
|
|
Millions of euros |
June 1 to September 30, 2021 |
January 1 to September 30, 2022 |
|
Result for the period (100% VMO2) |
(112) |
|
993 |
|
|
50% attributable to Telefónica Group |
(56) |
|
497 |
|
|
Share-based compensation |
8 |
|
11 |
|
|
Other adjustments |
— |
|
32 |
|
|
Share of income (loss) of investments accounted for by the equity
method |
(48) |
|
540 |
|
TELEFÓNICA GERMANY
The table below shows the evolution of accesses of Telefónica
Germany over the past two years as of September 30 of such
years:
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCESSES |
|
|
Thousands of accesses |
September 2021 |
September 2022 |
%Reported
YoY |
|
Fixed telephony accesses
(1)
|
2,172.8 |
|
2,193.5 |
|
1.0 |
% |
|
Broadband |
2,255.4 |
|
2,275.9 |
|
0.9 |
% |
|
UBB |
1,837.7 |
|
1,910.8 |
|
4.0 |
% |
|
Mobile accesses |
45,325.3 |
|
46,974.0 |
|
3.6 |
% |
|
Prepay |
19,161.2 |
|
19,185.6 |
|
0.1 |
% |
|
Contract |
24,590.3 |
|
26,072.6 |
|
6.0 |
% |
|
IoT |
1,573.8 |
|
1,715.8 |
|
9.0 |
% |
|
Retail Accesses |
49,838.4 |
|
51,523.7 |
|
3.4 |
% |
|
Total Accesses |
49,838.4 |
|
51,523.7 |
|
3.4 |
% |
Notes:
(1)
Includes "fixed wireless" and Voice over IP accesses.
In the first nine months of 2022, Telefónica Germany delivered
strong operational and financial momentum. The company continues to
expand its mobile market share in a rational yet dynamic
environment on the back of core business strength building on
strong O2 brand appeal including strong customer demand for the
innovative O2 Grow tariff, network parity and ESG leadership.
Telefónica Germany’s key milestones the first nine months of 2022
were as follows:
•Sustained
commercial momentum, with 964 thousand new clients in contract
driven by O2 Free portfolio and strong traction of the successful
tariff innovation O2 Grow.
•5G
population coverage target over-achieved well ahead of year-end due
to roll-out efficiencies within the Capex full year
target.
•Telefónica
Germany celebrated the 20th anniversary of the O2 brand in Germany
with the launch in May 2022 of the promotional tariff O2 Grow and
O2 my Home products enriched with a new 1 Gigabit/sec offer on the
cable network.
The
total access base
grew 3.4% year-on-year and stood at 51.5 million at September 30,
2022, mainly driven by a 3.6% increase in the mobile accesses base,
which reached 47.0 million.
The
contract mobile customer base
grew 6.0% year-on-year and reached 26.1 million accesses,
increasing the share over the total mobile accesses base to 55.5%.
Net adds reached 1.0 million accesses driven by strong gross add
momentum of the O2 tariff portfolio whilst the contribution of
partner brands continued to be solid. The strong commercial
traction of the O2 brand is partially compensated for some
anticipated temporarily higher churn on the back of the European
Electronic Communications Code introduction (EECC), as contract
customers can finish the contract at any time.
The
prepay mobile customer base
increased 0.1% year-on-year to 19.2 million accesses due to the
revenue neutral SIM card reactivations, that offset the German
market trend of prepaid to postpaid migration, reaching net adds of
213 thousand prepay customers in the first nine months of
2022.
The
broadband accesses
reached 2.3 million accesses (up 0.9% y-o-y), with net adds of 13.6
thousand accesses in the first nine months of 2022, showing the
good customer demand for Telefónica Germany's technology agnostic
O2 my Home products (where customers can choose between four
tariffs with different fixed-line and internet offers) with cable
as a main driver.
The table below shows the evolution of Telefónica Germany’s results
for the nine months ended September 30, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions of euros |
|
|
|
|
TELEFÓNICA GERMANY |
September 2021 |
September 2022 |
% Reported YoY |
|
|
Revenues |
5,711 |
|
6,034 |
|
5.7 |
% |
|
Mobile Business |
5,102 |
|
5,416 |
|
6.2 |
% |
|
Handset revenues |
1,004 |
|
1,190 |
|
18.6 |
% |
|
Fixed Business |
603 |
|
603 |
|
(0.1 |
%) |
|
Other income |
90 |
|
113 |
|
25.6 |
% |
|
Supplies |
(1,765) |
|
(1,868) |
|
5.8 |
% |
|
Personnel expenses |
(430) |
|
(451) |
|
4.8 |
% |
|
Other expenses |
(1,811) |
|
(1,935) |
|
6.9 |
% |
|
OIBDA |
1,795 |
|
1,893 |
|
5.5 |
% |
|
Depreciation and amortization |
(1,786) |
|
(1,708) |
|
(4.4 |
%) |
|
Amortization of intangible assets, depreciation of property, plant
and equipment |
(1,361) |
|
(1,231) |
|
(9.6 |
%) |
|
Amortization of rights of use |
(425) |
|
(477) |
|
12.2 |
% |
|
Operating income (loss) |
9 |
|
185 |
|
n.m. |
|
CapEx |
810 |
|
902 |
|
11.3 |
% |
|
OIBDA-CapEx |
985 |
|
991 |
|
0.6 |
|
Analysis of results
Total
revenues
were 6,034 million euros in the first nine months of 2022, with a
year-on-year increase of 5.7%, driven by the increase in the mobile
business.
•Mobile
business revenues
totaled 5,416 million euros, increasing 6.2% y-o-y. This reflects
the sustained mobile service revenue momentum on the back of the
ongoing strong commercial traction of the O2 brand and a solid
contribution from partners, more than compensating for the lower
revenues from MTR.
•Handset
revenues
amounted to 1,190 million euros, increasing 18.6% y-o-y due to
continued good customer demand and availability of devices at
Telefónica Germany while customers are increasingly opting for
longer-term handset financing for high-value handsets.
•Fixed
business
revenues
were 603 million euros, almost stable y-o-y (-0.1%), with a higher
proportion of high-value customers in the base.
Mobile ARPU
was 10.0 euros (-0.3% y-o-y) due to the decrease by 3.6% y-o-y in
contract ARPU, while prepay ARPU increased by 5.5% y-o-y. Data ARPU
was 6.6 euros (+8.0% y-o-y), fueled by the successful O2
portfolio.
|
|
|
|
|
|
|
|
|
|
|
|
|
TELEFÓNICA GERMANY |
2021 |
2022 |
% Reported YoY |
|
ARPU (EUR) |
10.0 |
|
10.0 |
|
(0.3 |
%) |
|
Prepay |
6.3 |
|
6.6 |
|
5.5 |
% |
|
Contract
(1)
|
13.5 |
|
13.0 |
|
(3.6 |
%) |
|
Data ARPU (EUR) |
6.1 |
|
6.6 |
|
8.0 |
% |
|
|
|
|
(1)
Excludes IoT.
OIBDA totaled 1,893 million euros in the first nine months of 2022,
increasing by 5.5% y-o-y.
Depreciation and amortization
amounted to 1,708 million euros in the first nine months of 2022,
decreasing 4.4% year-on-year mainly as a result of the 3G
switch-off at year end 2021 which was partly offset by higher Right
of Use and spectrum depreciation and amortization in line with the
operator’s network modernization.
Operating income
totaled 185 million euros in the first nine months of 2022,
compared to 9 million euros in the first nine months of 2021
reflecting lower depreciation and amortization, own brand momentum,
further efficiency gains as well as higher roaming revenues, that
more than offset the higher supplies and other costs.
TELEFÓNICA BRAZIL
The table below shows the evolution of accesses of Telefónica
Brazil over the past two years as of September 30 of such
years:
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCESSES |
|
|
Thousands of accesses |
September 2021 |
September 2022 |
%Reported
YoY |
|
Fixed telephony accesses
(1)
|
7,802.4 |
|
7,047.3 |
|
(9.7 |
%) |
|
Broadband |
6,264.9 |
|
6,359.0 |
|
1.5 |
% |
|
UBB |
5,430.1 |
|
5,855.0 |
|
7.8 |
% |
|
FTTH |
4,356.0 |
|
5,277.2 |
|
21.1 |
% |
|
Mobile accesses |
82,244.6 |
|
97,321.3 |
|
18.3 |
% |
|
Prepay |
34,163.4 |
|
39,873.7 |
|
16.7 |
% |
|
Contract |
36,608.6 |
|
43,244.1 |
|
18.1 |
% |
|
IoT |
11,472.6 |
|
14,203.4 |
|
23.8 |
% |
|
Pay TV |
1,146.6 |
|
1,000.1 |
|
(12.8 |
%) |
|
IPTV |
917.8 |
|
887.7 |
|
(3.3 |
%) |
|
Retail Accesses |
97,516.6 |
|
111,780.4 |
|
14.6 |
% |
|
Total Accesses |
97,517.6 |
|
111,780.7 |
|
14.6 |
% |
(1)
Includes "fixed wireless" and Voice over IP accesses.
In the first nine months of 2022, Telefónica Brazil has
strengthened its leadership in the mobile value segment (38.3%
market share as of August 31, 2022, source: ANATEL), both due to
the growth of its customer base and the incorporation of Oi
accesses (42% in postpaid). In the fixed business, Telefónica
Brazil continued to focus on the implementation of strategic
technologies, such as fiber, to compensate the fall in the fixed
traditional business.
Telefónica Brazil reached 111.8 million
accesses
as of September 30, 2022, 14.6% higher than September 30, 2021 due
to the sustained growth in the mobile business, in addition to the
incorporation of the mobile customer base of Oi, despite the 3.0
million Oi inactive customer base disconnection, and the growth in
FTTH, which more than offset the decline in the fixed voice
business due to the continuous migration from fixed to mobile,
encouraged by unlimited voice offers in the market, the contraction
of the lower-value fixed broadband customer base and the loss of
DTH customers as a result of the company’s strategic decision to
discontinue legacy technologies.
In the
mobile business,
Telefónica Brazil maintained its leadership in terms of total
accesses, with an access market share of 38.3% as of August 31,
2022 (source: ANATEL) growing both in terms of contract customers
(+18.1% year-on-year) and prepaid customers (+16.7% year-on-year).
Telefónica Brazil's strategy continues to be focused on
strengthening the high-value customer base, reaching a 42% contract
market share, as of August 31, 2022 (source: ANATEL). Contract
commercial offers are focused on data plans, with extra data
allowances subject to subscription to digital invoicing,
supplemented by OTT services of their choice (for example, Disney+,
Netflix, Spotify, Vivo Meditação, Vivo Pay, Babbel, GoRead, among
others). The Vivo Travel roaming service for voice and data is
maintained in a selection of countries of America and Europe,
depending on the plan. For higher-value customers, Family plans are
maintained, with a greater number of available apps. Additionally,
Vivo Easy Prime was launched, with flexible proposals ranging from
7GB to 20GB and allowing customers to tailor their plans according
to their needs. In the prepaid segment, Telefónica Brazil offers
VIVO PreTurbo, which includes WhatsApp and unlimited minutes. All
of this is supported by the interaction with our customers through
the AURA virtual assistant in the Meu VIVO application,
transforming the service channels to improve the user
experience.
In the
broadband business,
Telefónica Brazil maintained its strategic focus on the deployment
of fiber, reaching 28.3 million real estate units passed with FTTx
access as of September 30, 2022, of which 22.3 million correspond
to FTTH. Additionally, it continued to develop alternative
deployment models to accelerate the expansion of fiber with lower
CapEx and a reduced time to market. Telefónica Brazil reached 5.9
million connected homes of which 5.3 million homes connected with
FTTH as of September 30, 2022, increasing 21.1% year-on-year. These
growths offset the drop in other broadband accesses (xDSL), placing
retail broadband accesses at 6.4 million as of September 30, 2022,
increasing by 1.5% year-on-year.
Fixed business accesses
decreased by 9.7% year-on-year due to the aforementioned
fixed-mobile substitution.
Pay TV customers
fell to 1.0 million as of September 30, 2022, decreasing 12.8%
year-on-year due to the strategic decision to discontinue the DTH
service (as from December 2022), whose customer base decreased
50.8% year-on-year.
The table below shows Telefónica Brazil’s results for the nine
months ended September 30, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions of euros |
|
|
|
|
TELEFÓNICA BRAZIL |
September 2021 |
September 2022 |
% Reported YoY |
|
|
Revenues |
5,108 |
|
6,509 |
|
27.4 |
% |
|
Mobile Business |
3,380 |
|
4,447 |
|
31.5 |
% |
|
Handset revenues |
277 |
|
390 |
|
40.9 |
% |
|
Fixed Business |
1,728 |
|
2,062 |
|
19.4 |
% |
|
Other income |
339 |
|
314 |
|
(7.3 |
%) |
|
Supplies |
(848) |
|
(1,244) |
|
46.6 |
% |
|
Personnel expenses |
(595) |
|
(804) |
|
35.1 |
% |
|
Other expenses |
(1,678) |
|
(2,073) |
|
23.6 |
% |
|
OIBDA |
2,326 |
|
2,702 |
|
16.2 |
% |
|
Depreciation and amortization |
(1,430) |
|
(1,753) |
|
22.6 |
% |
|
Amortization of intangible assets, depreciation of property, plant
and equipment |
(1,113) |
|
(1,336) |
|
20.0 |
% |
|
Amortization of rights of use |
(317) |
|
(417) |
|
31.6 |
% |
|
Operating income (OI) |
896 |
|
949 |
|
6.0 |
% |
|
CapEx |
1,002 |
|
1,297 |
|
29.5 |
% |
|
OIBDA-CapEx |
1,324 |
|
1,405 |
|
6.1 |
% |
Analysis of results
In the first nine months of 2022,
revenues
totaled 6,509 million euros, growing by 27.4%, mainly due to the
increase in service revenues, supported by the evolution of the
mobile business, the incorporation of the business acquired from
Oi, and services associated with new technologies (FTTH, IPTV and
Digital Services) and the appreciation of the Brazilian real, which
offset the erosion of revenues associated with voice and
traditional fixed accesses and the decrease in the sale of
handsets.
•Mobile
business revenues
totaled 4,447 million euros in the first nine months of 2022,
increasing 31.5% mainly because of the good performance of Vivo’s
customer base, the progressive update of tariffs, the incorporation
of Oi accesses and the appreciation of the Brazilian
real.
•Fixed
business revenues
totaled 2,062 million euros in the first nine months of 2022,
growing by 19.4% mainly related to higher FTTH and IT Services
revenues plus the impact of the appreciation of the Brazilian
real.
Mobile ARPU
increased by 12.3% year-on-year on the back of the appreciation of
the Brazilian real.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TELEFÓNICA BRAZIL |
2021 |
2022 |
% Reported YoY |
%Local Currency
YoY |
|
ARPU (EUR) |
4.1 |
|
4.6 |
|
12.3 |
% |
(4.1 |
%) |
|
Prepay |
1.9 |
|
2.3 |
|
17.4 |
% |
0.2 |
% |
|
Contract
(1)
|
7.4 |
|
8.3 |
|
12.2 |
% |
(4.2 |
%) |
|
Data ARPU (EUR) |
3.1 |
|
3.7 |
|
20.0 |
% |
2.4 |
% |
|
|
|
|
|
(1)
Excludes IoT.
OIBDA stood at 2,702 million euros in the first nine months of
2022, increasing 16.2%.
Depreciation and amortization
amounted to 1,753 million euros in first nine months of 2022,
increasing 22.6% affected by the appreciation of the Brazilian real
and renegotiations of lease contracts.
Operating income (OI)
amounted to 949 million euros in first nine months of 2022,
increasing 6.0%. This variation is due to the impact of the
appreciation of the Brazilian real, a greater commercial activity
and the integration of Oi's accesses, that more than offset the
increase in supplies and other costs.
TELEFÓNICA HISPAM
The table below shows the evolution of accesses of Telefónica
Hispam over the past two years as of September 30 of such
years:
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCESSES |
|
|
|
|
Thousands of accesses |
September 2021 |
September 2022 |
% Reported YoY |
|
Fixed telephony accesses
(1)
|
7,237.3 |
|
6,470.1 |
|
(10.6 |
%) |
|
Broadband |
5,700.5 |
|
5,934.1 |
|
4.1 |
% |
|
UBB |
4,280.0 |
|
4,950.8 |
|
15.7 |
% |
|
FTTH |
4,086.9 |
|
4,834.4 |
|
18.3 |
% |
|
Mobile accesses |
93,173.0 |
|
94,647.6 |
|
1.6 |
% |
|
Prepay |
65,143.7 |
|
64,784.6 |
|
(0.6 |
%) |
|
Contract |
23,494.7 |
|
24,563.0 |
|
4.5 |
% |
|
IoT |
4,534.6 |
|
5,299.9 |
|
16.9 |
% |
|
Pay TV |
2,869.0 |
|
2,986.8 |
|
4.1 |
% |
|
IPTV |
811.2 |
|
1,245.0 |
|
53.5 |
% |
|
Retail Accesses |
109,061.1 |
|
110,112.1 |
|
1.0 |
% |
|
Total Accesses |
109,080.7 |
|
110,130.4 |
|
1.0 |
% |
Notes:
(1)
Includes "fixed wireless" and Voice over IP accesses.
Telefónica Hispam's
total accesses
amounted to 110.1 million as of September 30, 2022 (+1.0%
year-on-year), as a result of the increase in mobile and FTTH
accesses.
Mobile accesses
amounted to 94.6 million, increasing by 1.6% y-o-y mainly due to
the higher post-pay customer base.
•Contract
accesses
increased by 4.5% year-on-year due to the increase in accesses in
Mexico (+14.8%), Colombia (+9.7%) and Argentina (+4.1%), partially
offset by the decrease in Venezuela (-6.7%). This evolution was
mainly driven by the commercial activity recovery and attractive
commercial offers.
•Prepay
accesses
decreased by 0.6% year-on-year, with a net loss of 1.3 million
accesses as of September 30, 2022. The year-on-year accesses
evolution was greatly impacted by the loss of accesses in Mexico
(-1.2 million accesses) due to a higher number of disconnected
non-active customers and the decrease in commercial campaigns. In
addition, accesses in Peru decreased by 613 thousand. The
year-on-year decrease was partially offset by a strong increase in
accesses in Colombia (+816 thousand accesses), and Chile (+110
thousand accesses) in a lesser extent.
Fixed accesses
stood at 6.5 million as of September 30, 2022 (-10.6% year-on-year)
with a net loss of 564 thousand accesses due to the continued
erosion of the traditional fixed business.
Fixed broadband accesses
amounted to 5.9 million as of September 30, 2022 (+4.1%
year-on-year). The penetration of FBB accesses over fixed accesses
stood at 91.7% (+13.0 p.p. y-o-y), as a result of the focus on
Ultra Broadband (UBB) deployment in the region reaching 5.0 million
connected accesses (+15.7% y-o-y) and 17.9 million premises. The
penetration of UBB accesses over fixed broadband accesses stood at
83.4% (+8.4 p.p. y-o-y).
Pay TV accesses
stood at 3.0 million as of September 30, 2022, with an increase of
4.1% y-o-y as a result of the net adds of 81 thousand customers,
mainly as a result of the increase in IPTV accesses (+332 thousand
accesses), in which Telefónica is placing strategic focus, offset
in part by the lower Direct-To-Home (DTH) technology
accesses
(-168 thousand accesses) due to the change in commercial strategy,
and the lower cable access base (-82 thousand
accesses).
The table below shows Telefónica Hispam’s results for the nine
months ended September 30, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions of euros |
|
|
|
|
TELEFÓNICA HISPAM |
September 2021 |
September 2022 |
% Reported YoY |
|
|
Revenues |
6,069 |
|
7,036 |
|
15.9 |
% |
|
Mobile Business |
3,954 |
|
4,611 |
|
16.6 |
% |
|
Handset revenues |
1,007 |
|
1,161 |
|
15.3 |
% |
|
Fixed Business |
2,104 |
|
2,425 |
|
15.3 |
% |
|
Other income |
526 |
|
400 |
|
(23.9 |
%) |
|
Supplies |
(2,050) |
|
(2,546) |
|
24.2 |
% |
|
Personnel expenses |
(857) |
|
(964) |
|
12.4 |
% |
|
Other expenses |
(2,047) |
|
(2,331) |
|
13.9 |
% |
|
OIBDA |
1,641 |
|
1,595 |
|
(2.8 |
%) |
|
Depreciation and amortization |
(1,449) |
|
(1,467) |
|
1.3 |
% |
|
Amortization of intangible assets, depreciation of property, plant
and equipment |
(1,138) |
|
(1,071) |
|
(5.9 |
%) |
|
Amortization of rights of use |
(311) |
|
(396) |
|
27.6 |
% |
|
Operating income (OI) |
192 |
|
128 |
|
(33.3 |
%) |
|
CapEx |
654 |
|
659 |
|
0.6 |
% |
|
OIBDA-CapEx |
987 |
|
936 |
|
(5.0 |
%) |
Analysis of results
Revenues
amounted to 7,036 million euros in the first nine months of 2022,
increasing 15.9% year-on-year. This growth was attributable in part
to the foreign exchange effects (+4.8 p.p.), higher revenues from
handsets and B2C (business to customer) and B2B (business to
business) services and increased fixed voice, broadband and new
services and TV revenues.
Mobile business
revenues amounted to 4,611 million euros in the first nine months
of 2022, increasing 16.6% year-on-year. This increase was due in
part to the foreign exchange effects (+5.4 p.p.), higher handset
sales due to increasing commercial activity and higher postpaid B2C
(business to customer) revenues. The performance by country was as
follows:
•In
Argentina, mobile revenues amounted to 1,189 million euros in the
first nine months of 2022, increasing 29.0% year-on-year. This
growth was mainly due to the good performance of handset revenues,
higher service revenues due to the increase in accesses and
continued tariff upgrades.
•In
Chile, mobile revenues amounted to 715 million in the first nine
months of 2022, decreasing 4.9% year-on-year, explained by
decreasing handset revenues that offset the higher mobile contract
service revenues.
•In
Peru, mobile revenues amounted to 685 million euros in the first
nine months of 2022, increasing 21.5% year-on-year, with higher
handset revenues due to increasing commercial activity, higher
service revenues as a result of the bigger contract client base and
the price increases carried out in the first half of
2022.
•In
Colombia, mobile revenues amounted to 683 million euros in the
first nine months of 2022, increasing 16.4% year-on-year. This
growth was due to the good performance of handset revenues, higher
B2C revenues due to increasing commercial activity, favorable churn
evolution, and higher digital services revenues.
•In
Mexico, mobile revenues amounted to 843 million euros in the first
nine months of 2022, increasing 14.1% year-on-year, due to higher
service revenues and B2C contract revenues.
Fixed business
revenues amounted to 2,425 million euros in the first nine months
of 2022, increasing 15.3% year-on-year. This increase was due in
part to foreign exchange effects (+3.3 percentage points), driven
by higher broadband revenues, new services in Peru and Colombia, TV
in Chile and Colombia and access and voice revenues in Colombia,
Chile and Peru.
OIBDA reached 1,595 million euros in the first nine months of 2022,
decreasing 2.8% year-on-year.
Depreciation and amortization
amounted to 1,467 million euros in the first nine months of 2022,
increasing 1.3% year-on-year. This result was mainly attributable
to the foreign exchange effects (+4.8 p.p.), partially offset by
the lower depreciation and amortization base in Telefónica Mexico
resulting from the transformation of the operational model in the
company.
Operating income (OI)
was 128 million euros in the first nine months of 2022 decreasing
33.3% year-over-year. This result is mainly explained by higher
capital gains on the sale of optic fiber assets in 2021 versus
2022, the foreign exchange effects and higher supplies and other
costs, partially offset by the lower amortization base in
Telefonica Mexico resulting from the transformation of the
operational model in the company and the decrease in restructuring
costs in the region in 2022 compared to 2021.
Below is additional information by country:
•In
Argentina, operating loss was 162 million euros in the first nine
months of 2022 (operating loss of 121 million euros in the first
nine months of 2021). The y-o-y evolution in the operating loss was
impacted by the higher depreciation and amortization expense, which
more than offset the higher revenues.
•In
Chile, operating income was 140 million euros in the first nine
months of 2022, decreasing 73.9% year-on-year, impacted by the
capital gains on the sale of optic fiber assets in 2021, offset by
lower depreciation and amortization.
•In
Peru, operating income was 28 million euros in the first nine
months of 2022 (operating loss of 57 million euros in the first
nine months of 2021). This evolution is mainly due to higher
revenues and expenses efficiencies, offset by higher depreciation
and amortizations expenses.
•In
Colombia, operating income reached 265 million euros in the first
nine months of 2022 (73 million euros in the first nine months of
2021), due to higher revenues, non-commercial cost efficiencies and
lower depreciation and amortization costs.
•In
Mexico, operating loss was 210 million euros in the first nine
months of 2022 (operating loss of 288 million euros in the first
nine months of 2021). The y-o-y reduction in the operating loss was
positively impacted by the lower depreciation and amortization base
in Telefónica Mexico resulting from the transformation of the
operational model in the company.
Item 5. Operating and Financial Review and Prospects
A. Operating Results
Presentation of Financial Information
The information in this section should be read in conjunction with
our Condensed Consolidated Interim Financial Statements , included
elsewhere in this Report. Our Condensed Consolidated Interim
Financial Statements have been prepared in accordance with IAS 34,
Interim Financial Reporting.
In 2022 the Telefónica Group is reporting financial information,
both internally and externally, according to the following
segments: Telefónica Spain, VMO2, Telefónica Germany, Telefónica
Brazil and Telefónica Hispam (formed by the Group's operators in
Colombia, Mexico, Venezuela, Ecuador, Argentina, Chile, Peru and
Uruguay).
During 2021, the Telefónica Group changed its reporting segments as
follows:
(i) On June 1, 2021, upon the establishment of the JV VMO2 (whose
results are accounted for under the equity method), the former
Telefónica United Kingdom segment was replaced by the VMO2 segment
(see notes 2 and 9 to the Condensed Consolidated Interim Financial
Statements). The Group’s consolidated results of the nine months
ended September 30, 2021 include the consolidation of Telefónica
United Kingdom from January 1 to June 1, and the equity accounting
of 50% of the net result of JV VMO2 from June 1 to September 30
(see Note 9 to the Condensed Consolidated Interim Financial
Statements). The gain registered on the establishment of the JV
VMO2, amounting to 4,408 million euros (see notes 2 and 23 to the
Condensed Consolidated Interim Financial Statements), are recorded
in "Other companies". The VMO2 segment information included in this
Report is presented under management criteria, and shows 100% of JV
VMO2’s results; Telefónica’s actual percentage ownership of JV VMO2
is 50%. Since it is not practicable to restate the Group’s
historical segment financial information to reflect this change,
the VMO2 segment information included in this Report refers to the
period from January 1 to September 30, 2022 compared to the period
from June 1 to September 30, 2021.
(ii) The Telxius Group ceased to be a reporting segment in 2021 as
a result of the sale of the telecommunications towers divisions in
Europe and Latin America (see Note 2 to the Condensed Consolidated
Interim Financial Statements). The Telxius Group’s results as well
as the gain obtained for the sale of the telecommunications towers
divisions, amounting to 6,099 million euros (see notes 2 and 23 to
the Condensed Consolidated Interim Financial Statements) are
included in "Other companies".
The segments referred to above include the information related to
the fixed, wireless, cable, data, Internet and television
businesses and other digital services provided in the related
region.
Inter-segment transactions are carried out on
an arm's length basis.
Information relating to other Group companies not specifically
included in the segments referred to above is reported under "Other
companies" (see Appendix I to the Condensed Consolidated Interim
Financial Statements), which includes Telefónica, S.A. and other
holding companies, our Central American operations, as well as
companies whose main purpose is to provide cross-sectional services
to Group companies, and other operations not included in the
segments. The Incremental and BE-Terna groups, acquired by
Telefónica Tech in March and June of 2022 (see Note 5 to the
Condensed Consolidated Interim Financial Statements), respectively,
are reported within "Other companies".
The Group centrally manages borrowing
activities, mainly through Telefónica, S.A. and other companies
included in Other companies, so most of the Group's financial
assets and liabilities are reported under Other companies. In
addition, Telefónica, S.A. is the head of the Telefónica tax group
in Spain. Therefore, a significant part of the deferred tax assets
and liabilities is included under Other companies. For these
reasons, the results of the segments are disclosed up through
operating income.
Revenues and expenses arising from intra-group invoicing for the
use of the trademark and management services were eliminated from
the operating results of each Group segment. The results of the
holding companies also exclude dividends from Group companies and
impairments of investments in Group companies. These adjustments
have no impact on the Group’s consolidated results. In addition,
segment reporting considers the impact of the purchase price
allocation to the assets acquired and the liabilities assumed by
the companies included in each segment. The assets and liabilities
presented in each segment are those managed by the heads of each
segment, regardless of their legal structure.
Significant Factors Affecting the Comparability of Our Results of
Operations in the Periods under Review
The following factors affect the comparability of our results of
operations in the periods under review:
Corporate transactions
The main corporate transactions in the first nine months ended
September, 30 2022 are related to the acquisition of mobile assets
of Oi Group on April 20, 2022, the acquisition of Incremental on
March 21, 2022 and the acquisition of BE-Terna on June 9, 2022 (see
Note 5 to the Condensed Consolidated Interim Financial
Statements).
The main corporate transactions in the first nine months ended
September, 30 2021 were related to the sale of Telxius Group’s
telecommunications towers on June 1, 2021, June 3, 2021 and August
2, 2021, the closing of the transaction for the establishment of JV
VMO2 on June 1, 2021 (see Note 2 to the Condensed Consolidated
Interim Financial Statements), the sale of Telefónica de Costa Rica
on August 9, 2021 and the partial sale of InfraCo, SpA on July 1,
2021.
In particular, JV VMO2 was the result of the combination of
Telefónica’s and Liberty Global’s operating businesses in the
United Kingdom (O2 Holdings Ltd. and Virgin Media UK,
respectively). Following the establishment of the JV VMO2 on June
1, 2021, Telefónica ceased to fully consolidate the results of O2
Holdings, Ltd (and the rest of the entities that comprised its
former Telefónica United Kingdom segment) in its consolidated
financial statements and started to account for JV VMO2's results
under the equity method, based on its stake in the JV VMO2 (50%).
Therefore, since June 1, 2021, the results of Telefónica’s
operations in the United Kingdom are reflected under a single
heading of the consolidated income statement, “Share of income of
investments accounted for by the equity method”. However, the VMO2
segment information is presented under management criteria and
shows 100% of JV VMO2’s results.
Spectrum acquisition
Spectrum acquisitions have a significant impact on our
CapEx.
In the first nine months of 2022, these acquisitions totaled 139
million euros, mainly including 129 million euros corresponding to
Colombia Telecomunicaciones.
In the first nine months of 2021, these acquisitions totaled 989
million euros, with 515 million euros corresponding to our former
Telefónica United Kingdom segment before the establishment of JV
VMO2 on June 1, 2021, 335 million euros corresponding to Telefónica
Spain and 133 million euros corresponding to Telefónica
Chile.
Foreign Exchange Effects and Hyperinflation in Argentina and
Venezuela
Foreign exchange rates had a positive impact on our reported
September 2022 results, mainly due to the appreciation of various
Latin American currencies (in particular the Brazilian real)
against the euro. Our reported results have also been impacted by
hyperinflation adjustments in Argentina and Venezuela.
B. Liquidity and Capital Resources
Cash Flow Analysis
The table below sets forth consolidated cash flow information for
the nine months ended September 30, 2021 and 2022. Positive figures
refer to cash inflows and those in parentheses refer to cash
outflows.
|
|
|
|
|
|
|
|
|
|
|
2021 |
2022 |
|
(Millions of euros) |
|
|
|
Net cash from operating activities |
7,544 |
|
7,598 |
|
|
Net cash from (used in) investing activities |
7,250 |
|
(2,565) |
|
|
Net cash used in financing activities |
(10,359) |
|
(6,631) |
|
For additional details regarding our cash flows for the nine months
ended September 30, 2021 and 2022, please see the Consolidated
Statements of Cash Flows and Note 25 to our Condensed Consolidated
Interim Financial Statements.
Anticipated Uses of Funds
Our principal liquidity and capital resource requirements consist
of the following:
•costs
and expenses relating to the operation of our
business;
•debt
service requirements relating to our existing and future
debt;
•capital
expenditures (including spectrum acquisitions) for existing and new
operations;
•acquisitions
of new licenses or other operators or companies engaged in
complementary or related businesses; and
•dividends,
other shareholder remuneration, and pre-retirement
payments.
In 2022, we expect to continue transforming our networks, evolving
them towards all-IP hyper-connected networks, by investing in FTTx
in key markets, and by expanding our mobile networks with LTE in
most of our operations. We also expect to continue investing in TV
and digital services to take advantage of the opportunities in
the digital markets. We may also use funds to acquire new licenses
engaged in complementary or related businesses in the digital
world.
We also have liquidity requirements related to the costs and
expenses relating to the operation of our business, financial
investments (including investment commitments with joint venture
partners), our payment of dividends, shareholder remuneration and
pre-retirement payment commitments.
We also have liquidity constraints related to debt service
requirements in connection with our existing and future debt. On
September 30, 2022, we had gross financial debt of 42,505 million
euros compared with 42,295 million euros on December 31, 2021. For
the amortization schedule of our consolidated gross financial debt
at September 30, 2022 and a further description of financing
activity in 2022, see “-Anticipated Sources of Liquidity” below.
Our net financial debt increased by 2,886 million euros to 28,918
million euros at September 30, 2022 (26,032 million euros at
December 31, 2021) despite a positive free cash flow generation of
2,474 million euros. This was related to (i) net financial
investments of 1,840 million euros (mainly the acquisitions of Oi’s
mobile assets, BE-terna and Incremental, net of the sale of El
Salvador and the closing of Colombia's InfraCo transaction), (ii)
shareholder remuneration of 833 million euros (including coupon
payments on capital instruments), (iii) labor-related commitment
payments of 649 million euros, and, (iv) other factors totaling in
net 2,038 million euros (mainly due to the higher value in euros of
net debt in foreign currencies, highlighting the impact of the
Brazilian real, spectrum renewal in Colombia in the second quarter
of 2022 and the partial use of the tax credits from the favorable
court decisions in Brazil).
For a reconciliation of net financial debt to gross financial debt,
see “—Non-GAAP Financial Information—Net financial debt and net
financial debt plus commitments”.
The following table describes our contractual obligations and
commitments with definitive payment terms which may require
significant cash outlays in the future. The amounts payable
(including accrued interest payments) are as of September 30, 2022.
For additional information, see our Condensed Consolidated Interim
Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
Millions of euros |
Total |
Less than 1 year |
More than 1 year |
|
Financial liabilities (1) |
42,505 |
|
5,496 |
|
37,009 |
|
|
Lease liabilities (2) |
9,196 |
|
2,040 |
|
7,156 |
|
|
Purchase and other contractual obligations (3) |
11,911 |
|
1,825 |
|
10,086 |
|
|
Other liabilities (4) |
2,589 |
|
637 |
|
1,952 |
|
|
Total |
66,201 |
|
9,998 |
|
56,203 |
|
(1)Estimated
future interest payments as of September 30, 2022 on our
interest-bearing debt (not included above) are as follows: 270
million euros in 2022, 1,311 million euros in 2023, 1,205 million
euros in 2024, 1,115 million euros in 2025, 1,034 million euros in
2026 and 9,389 million euros in subsequent years. With respect to
floating rate debt, we estimate future interest payments as the
forward rates derived from yield curves quoted for the different
currencies on September 30, 2022. This item includes the fair value
of derivatives classified as financial liabilities (i.e., those
with a negative mark-to-market) and excludes the fair value of
derivatives classified as current financial assets (1,178 million
euros), and those classified as non-current (3,968 million euros)
(i.e., those with a positive mark-to-market). For a more detailed
description of our financial derivative transactions, see Note 17
to our Condensed Consolidated Interim Financial Statements. For
details of the composition of this item, see “—Liquidity and
Capital Resources– Anticipated Sources of Liquidity”. Estimated
future principal payments as of September 30, 2022 on our long term
bonds are as follows: 12,851 million euros until 2028, 8,589
million euros between 2029 and 2033, 3,027 million euros between
2034 and 2038, 1,100 million euros between 2039 and 2043 and 5,281
million euros in subsequent years.
(2)This
item includes lease liabilities. For a more detailed description
see Note 21 to our Condensed Consolidated Interim Financial
Statements.
(3)This
item includes definitive payments (non-cancellable without penalty
cost) due for agreements to purchase goods (such as network
equipment) and services. Payments due by period were as follows:
Less than 1 year (1,825 million euros), 1-3 years (5,117 million
euros), 3-5 years (2,886 million euros) and more than 5 years
(2,083 million euros).
(4)“Other
liabilities” include: (a) long-term obligations that require us to
make cash payments, excluding financial debt obligations included
in the table under “Financial Liabilities” above and (b) other
provisions. Because of the nature of the risks covered by “Other
liabilities” such as other provisions, it is not possible to
determine a reliable schedule of potential payments, if any. For
details of the composition of other provisions, see Note 20 to our
Condensed Consolidated Interim Financial Statements.
Commitments for short-term leases and low value leases amounted to
26 million euros as of September 30, 2022.
In addition, at September 30, 2022, we had short-term and long-term
employee benefits provisions amounting to 887 million euros and
4,238 million euros, respectively, not included in the table above
(see Note 20 to our Condensed Consolidated Interim Financial
Statements) and non-current and current account payables, such as
trade payables, payables to suppliers of property, plant and
equipment and payables for spectrum acquisitions, amounting to
1,980 million euros and 12,362 million euros, respectively (see
Note 18 and 19 to our Condensed Consolidated Interim Financial
Statements), not included in the table above.
In addition, at September 30, 2021, JV VMO2 had commitments
amounting to 7,014 million euros related to purchase, programming,
network and connectivity and other commitments not included in the
table above (see Note 9 to our Condensed Consolidated Interim
Financial Statements).
For details of the composition of, and changes in, our debt, see
“—Liquidity and Capital Resources—Anticipated Sources of Liquidity”
and Note 16 "Financial Liabilities" to our Condensed Consolidated
Interim Financial Statements.
Anticipated Sources of Liquidity
Cash flows from operations are our primary source of cash funding
for existing operations, capital expenditures, investments,
licenses, interest obligations and principal payments. We also rely
on external financing, including a variety of short, medium and
long-term financial instruments, principally bonds and debentures,
undated deeply subordinated securities and borrowings from
financial institutions. Cash and cash equivalents are mainly held
in euros and euro-denominated instruments.
We hold most our cash and cash equivalents in demand and
three-month time deposits in euro. Additionally, we hold cash and
cash equivalents in time deposits in U.S. dollars, typically with a
term of less than one year and hedged to avoid any FX risk. These
transactions are executed with financial counterparties that have
credit ratings that satisfy Telefónica’s standards.
In recent years, we raised funds by issuing principally equity
instruments (undated deeply subordinated securities) and debt
securities. We have also raised funds through a series of asset
divestitures. In 2021, the main sources of funds came from the sale
of the European and Latin American tower divisions of Telxius to
American Tower Corporation for an amount of 6,346 million euros and
887 million euros, respectively, and the completion of the
agreement between Telefónica and Liberty Global plc to combine
their respective operating businesses in the United Kingdom in a
50:50 joint venture, pursuant to which Telefónica received 5,376
million pounds sterling of proceeds in total after an equalization
payment of 2,622 million pounds sterling. We also completed the
sale of Telefónica de Costa Rica and the sale of 60% of the shares
of InfraCo, SpA to KKR Alameda Aggregator. In 2022, we completed
the sale of Telefónica Móviles El Salvador.
Financing
The following table shows the amortization schedule of our
consolidated gross financial debt at September 30, 2022 as stated
in euro, excluding estimated future interest payments. We may have
exchange rate financial derivatives as instruments assigned to the
underlying debt instruments. The table below includes the fair
value of derivatives classified as financial liabilities (i.e.,
those with a negative mark-to-market) and excludes the fair value
of derivatives classified as current financial assets
(1,178
million euros), and those classified as non-current (3,968 million
euros) (i.e., those with a positive mark-to-market). For
description of our financial liabilities, see Note 16 to our
Condensed Consolidated Interim Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions of euros |
|
Maturity |
Current |
Non-current |
Total |
|
Debentures and bonds |
3,200 |
|
30,671 |
|
33,871 |
|
|
Promissory notes & commercial paper |
295 |
|
356 |
|
651 |
|
|
Total Issues |
3,495 |
|
31,027 |
|
34,522 |
|
|
Loans and other payables |
1,022 |
|
4,011 |
|
5,033 |
|
|
Derivative instruments |
979 |
|
1,971 |
|
2,950 |
|
|
Total |
5,496 |
|
37,009 |
|
42,505 |
|
Notes:
- Estimated future interest payments as of September 30, 2022 on
our interest-bearing debt (not included above) are as follows: 270
million euros in 2022, 1,311 million euros in 2023, 1,205 million
euros in 2024, 1,115 million euros in 2025, 1,034 million euros in
2026 and 9,389 million euros in subsequent years. With respect to
floating rate debt, we estimate future interest payments as the
forward rates derived from yield curves quoted for the different
currencies on September 30, 2022.
During the first nine months of 2022, we obtained financing
(excluding the refinancing of euro commercial paper and short-term
banking loans) totaling approximately 9,984 million euros of which
7,584 million euros was at the Group level, 1,740 million euros
equivalent were obtained by JV VMO2 and 599 million euros were
obtained by Cornerstone, a subsidiary of VMO2 and 61 million euros
were obtained by FiBrasil. Our financing activity in the first nine
months of 2022 was focused on maintaining a solid liquidity
position, as well as refinancing and extending the debt
maturities.
For a description of our financing, see Note 16 to our Condensed
Consolidated Interim Financial Statements.
Our borrowing requirements are not significantly affected by
seasonal trends.
Telefónica and its affiliates may, at any time and from time to
time, seek to retire or purchase our outstanding debt, hybrid or
other securities through cash purchases and/or exchanges for equity
or debt, in open-market purchases, privately negotiated
transactions or otherwise. Such repurchases or exchanges, if any,
may occur at any time or from time to time, will be upon such terms
and at such prices as we may determine, and will depend on
prevailing market conditions, our liquidity requirements,
contractual and legal restrictions and other factors. The amounts
involved may be material.
Availability of funds
At September 30, 2022, we had funds available (including cash and
cash equivalents, undrawn lines of credit and current financial
assets) totaling 22,108 million euros. This amount included:
undrawn lines of credit for an amount of 11,811 million euros
(11,414 million euros expiring in more than 12 months); cash and
cash equivalents and certain current financial assets.
We believe that, in addition to internal generation of funds, our
working capital, our medium-term note program, our euro commercial
paper program, our corporate domestic promissory note program,
other potential offerings of securities and available lines of
credit will allow us to meet our future capital requirements,
including (according to our liquidity policy) gross debt maturities
in the next 12 months.
For a description of our liquidity and undrawn lines of credit
available at September 30, 2022, see Note 16 to our Condensed
Consolidated Interim Financial Statements.
Telefónica, S.A. is the parent company of the Telefónica Group and
receives funding from its subsidiaries in the form of dividends and
loans. Consequently, certain restrictions on the ability of the
Group’s subsidiaries to transfer funds to Telefónica, S.A. in the
form of cash dividends, loans or advances, capital repatriation and
other forms would negatively affect our liquidity and thus our
business.
Certain Latin American economies, such as currently Venezuela or
Argentina, have experienced shortages in foreign currency reserves
and their respective governments have adopted restrictions on the
ability to transfer funds out of the country and/or convert local
currencies into U.S. dollars. This may limit our ability to
repatriate funds out of certain subsidiaries from such countries.
Regarding net repatriation of funds to Spain, at September 30, 2022
we received 130 million euros from our Latin American subsidiaries
of which 259 million euros were related to dividends partially
offset by capital increases amounting to 127 million
euros.
Credit Ratings
Our ability to use external sources of financing will depend
largely on our credit ratings. We believe that we are
well-positioned to raise capital in financial markets. However,
negative conditions in the financial markets or a downgrade of any
of the ratings of our debt or the Kingdom of Spain’s debt by any of
Fitch, Moody’s and/or Standard & Poor’s may increase the cost
of our future borrowings or may make it more difficult to access
the public debt markets. In connection with the credit rating
agencies’ review of our debt ratings, the rating agencies may give
considerable weight to general macroeconomic and political
conditions (including sovereign credit rating prospects), the
performance of our businesses in countries where we operate, our
financial and shareholder remuneration policy, our M&A and
divestiture policy, our ability to integrate acquired companies and
our ability to refinance debt.
At September 30, 2022, Telefónica, S.A.’s long-term issuer default
rating is "BBB stable outlook" from Fitch, “BBB- stable outlook"
from Standard & Poor's and “Baa3 stable outlook" from Moody's.
During the first nine months of 2022, there have not been changes
in the long-term credit ratings by any of the three agencies. The
last changes in the credit ratings took place in 2020 when Standard
and Poor’s revised the outlook to “negative“ from “stable” on April
1, 2020 and later, on November 20, 2020 downgraded the rating to
“BBB - stable” from “BBB negative”. On November 7, 2016 Moody's
downgraded the rating to “Baa3 stable” from “Baa2 negative” and on
September 5, 2016 Fitch downgraded the rating to “BBB stable” from
“BBB+ stable”.
In 2022, measures taken to protect the credit rating included the
closing of the sale of Telefónica Móviles El Salvador and the
completion of the agreement reached between Telefónica Colombia and
a Colombian company controlled by KKR, for the sale of fiber assets
and for the provision of connectivity services and deployment of
fiber network. In July 2022, Telefónica announced another strategic
deal to reinforce its business profile, namely, the agreement
reached with Vauban and Crédit Agricole Assurances (CAA) to
incorporate a joint company, Bluevia Fibra, S.L., for the
deployment and commercialization of a FTTH network mainly in rural
areas in Spain. Vauban and
CAA will acquire a 45% stake in Bluevia from Telefónica España
through an upfront consideration of 1,021 million euros in
cash.
Intra-group Loans
We lend funds to our operating subsidiaries, directly or through
holding companies that head our different lines of business. At
September 30, 2022, companies in the Telefónica Group owed
Telefónica, S.A. a total of 2,180 million euros (3,772 million
euros at December 31, 2021), including amounts due under
intra-group loans and dividends distributed and uncollected at
September 30, 2022. Funds provided by Telefónica, S.A. to its
subsidiaries are derived from retained cash flows, loans, bonds,
issuances of undated deeply subordinated securities and other
sources (such as dividends and asset disposals).
F. Non-GAAP Financial Information
In addition to the measures expressly defined in the IFRS, the
Group also uses a series of other measures for decision-making
because they provide additional information useful to assess the
Group’s performance, solvency and liquidity. These measures should
not be viewed in isolation or as a substitute for the measures
presented according to the IFRS.
The non-GAAP financial measures included in this Report are
operating income before depreciation and amortization (OIBDA),
OIBDA-CapEx, OIBDA-CapEx excluding spectrum acquisitions, net
financial debt, net financial debt plus leases, net financial debt
plus commitments, net financial debt plus leases plus commitments
and free cash flow.
Operating income before depreciation and amortization
Operating income before depreciation and amortization (OIBDA) is
calculated by excluding solely depreciation and amortization from
operating income. OIBDA is used to track the performance of the
business and to establish operating and strategic targets of
Telefónica Group companies. OIBDA is a commonly reported measure
and is widely used among analysts, investors and other stakeholders
in the telecommunications industry. However, it is not a measure
expressly defined in the IFRS and therefore it may not be
comparable to similar indicators used by other companies. OIBDA
should not be considered as a substitute for operating
income.
Furthermore, the Group management uses the measure OIBDA margin,
which is the result of dividing the OIBDA by the
revenues.
After the implementation of IFRS 16 Leases in 2019, most of the
lease expenses that affected OIBDA until 2018 affect instead
depreciation and amortization and net financial expenses, resulting
in higher reported OIBDA under IFRS 16, which is therefore not
directly comparable with OIBDA for the years before
2019.
The following table provides a reconciliation of our OIBDA to
operating income for the periods indicated.
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
Millions of euros |
2021 |
2022 |
|
Operating income |
14,326 |
|
2,923 |
|
|
Depreciation and amortization |
(6,294) |
|
(6,670) |
|
|
Operating income before depreciation and amortization |
20,620 |
|
9,593 |
|
The following tables provide a reconciliation of OIBDA to operating
income for the Group and for each of the Group’s fully consolidated
segments for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2021 |
|
Millions of euros |
Telefónica Spain |
Telefónica United Kingdom(1)
|
Telefónica Germany |
Telefónica Brazil |
Telefónica
Hispam |
Other companies |
Eliminations |
Total Group |
|
Operating income |
1,920 |
|
919 |
|
9 |
|
896 |
|
192 |
|
10,372 |
|
18 |
|
14,326 |
|
|
Depreciation and amortization |
(1,615) |
|
— |
|
(1,786) |
|
(1,430) |
|
(1,449) |
|
(254) |
|
240 |
|
(6,294) |
|
|
Operating income before depreciation and amortization |
3,535 |
|
919 |
|
1,795 |
|
2,326 |
|
1,641 |
|
10,626 |
|
(222) |
|
20,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2022 |
|
Millions of euros |
Telefónica Spain |
Telefónica Germany |
Telefónica Brazil |
Telefónica
Hispam |
Other companies |
Eliminations |
Total Group |
|
Operating income |
1,784 |
|
185 |
|
949 |
|
128 |
|
(79) |
|
(44) |
|
2,923 |
|
|
Depreciation and amortization |
(1,619) |
|
(1,708) |
|
(1,753) |
|
(1,467) |
|
(156) |
|
33 |
|
(6,670) |
|
|
Operating income before depreciation and amortization |
3,403 |
|
1,893 |
|
2,702 |
|
1,595 |
|
77 |
|
(77) |
|
9,593 |
|
(1)
Our former Telefónica United Kingdom segment was replaced by our
new VMO2 segment on June 1, 2021. For additional information on
this change and how segment information is presented in this
Report, see “Item 5. Operating and Financial Review and
Prospects―Operating Results―Presentation of Financial Information”.
In the September 30, 2021 table, the “Telefónica United Kingdom”
column reflects the results of such segment from January 1, 2021
until its elimination on June 1, 2021.
The OIBDA of "Other companies" for the first nine months of 2021
includes the gains on the sale of the towers divisions of Telxius,
amounting to 6,099 million euros and from the establishment of JV
VMO2, amounting to 4,408 million euros (see Note 4 to the Condensed
Consolidated Interim Financial Statements).
OIBDA-CapEx and OIBDA-CapEx excluding spectrum
acquisitions
OIBDA-CapEx is defined as operating income before depreciation and
amortization, reduced by accrued capital expenditures, and
OIBDA-CapEx excluding spectrum acquisitions is defined as operating
income before depreciation and amortization, reduced by accrued
capital expenditures excluding those related to spectrum
acquisitions.
We believe that it is important to consider capital expenditures,
and capital expenditures excluding spectrum acquisitions, together
with OIBDA in order to have a more complete measure of the
performance of our telecommunications businesses. For example, we
believe that considering capital expenditures, and capital
expenditures excluding spectrum acquisitions together with OIBDA
provides useful information regarding both our performance during
the year as well as the investments we made during such year in
order to support our business going forward. As a result, we use
these measures internally to track the performance of our business,
to establish operating and strategic targets of the businesses of
the Group and in our internal budgeting process.
In addition, we believe that these measures provide useful
information to investors and other stakeholders to allow them to
better compare performance across telecommunications companies with
business models that differ based on whether they obtain network
access, IT and other infrastructure services by paying fees that
would be reflected in OIBDA versus through the development of owned
networks and infrastructures that would be reflected in capital
expenditures. Furthermore, similar metrics are reported externally
by other telecommunications companies, and investors and analysts
often track and compare these measures across different
telecommunications companies.
Based on our use of OIBDA-CapEx and OIBDA-CapEx excluding spectrum
acquisitions, we consider such measures to be primarily performance
measures. While our primary liquidity measure is free cash flow,
OIBDA-CapEx and OIBDA-CapEx excluding spectrum acquisitions also
provide certain information regarding our liquidity
given that they provide an indication of the resources generated by
the operation of our business during the year, after deducting the
investments we made during such year in order to support our
business going forward.
Neither OIBDA-CapEx nor OIBDA-CapEx excluding spectrum acquisitions
are measures expressly defined in IFRS, and therefore they may not
be comparable to similar indicators used by other companies. In
addition, neither OIBDA-CapEx nor OIBDA-CapEx excluding spectrum
acquisitions should be considered substitutes for operating income,
the most comparable financial measure calculated in accordance with
IFRS, or any measure of liquidity calculated in accordance with
IFRS.
The Group management also uses the measures OIBDA-CapEx margin and
OIBDA-CapEx excluding spectrum acquisitions margin, which is the
result of dividing these measures by revenues.
In the table below we provide a reconciliation of our OIBDA-CapEx
and OIBDA-CapEx excluding spectrum acquisitions to operating income
for the periods indicated.
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
Millions of euros |
2021 |
2022 |
|
Operating income |
14,326 |
|
2,923 |
|
|
Depreciation and amortization |
(6,294) |
|
(6,670) |
|
|
OIBDA |
20,620 |
|
9,593 |
|
|
Capital expenditures in intangible assets |
(1,873) |
|
(1,038) |
|
|
Capital expenditures in property, plant and equipment |
(3,020) |
|
(2,982) |
|
|
CapEx |
(4,893) |
|
(4,020) |
|
|
OIBDA-CapEx |
15,727 |
|
5,573 |
|
|
Spectrum acquisitions |
989 |
|
139 |
|
|
OIBDA-CapEx excluding spectrum acquisitions |
16,716 |
|
5,712 |
|
Net financial debt, net financial debt plus leases, net financial
debt plus commitments and net financial debt plus leases plus
commitments
As calculated by us, net financial debt
includes:
(A) adding the following liabilities:
i. Current and non-current financial liabilities in our
consolidated statement of financial position (which includes the
negative mark-to-market value of derivatives),
ii. Other liabilities included in "Payables and other non-current
liabilities" and "Payables and other current liabilities" (mainly
corresponding to payables for deferred payment of radio spectrum
that have an explicit financial component), and
iii. Financial liabilities included in "Liabilities associated with
non-current assets and disposal groups held for sale".
(B) subtracting the following amounts from the resulting amount of
the preceding step:
i. "Cash and cash equivalents",
ii. "Other current financial assets"
(which include short-term derivatives),
iii. Cash and other current financial
assets included in "Non-current assets and disposal groups held for
sale",
iv. The positive mark-to-market value of derivatives with a
maturity beyond one year,
v. Other interest-bearing assets (included in "Financial assets and
other non-current assets", "Receivables and other current assets"
and "Tax receivables" in our consolidated statement of financial
position), and
vi. Mark-to-market adjustment by cash flow hedging activities
related to debt.
With respect to step (B)(v), "Financial assets and other
non-current assets" includes derivatives, installments for the
long-term sales of terminals to customers and other long-term
financial assets, and "Receivables and other current assets"
includes the customer financing of terminal sales classified as
short-term.
We calculate net financial debt plus leases by adding lease
liabilities calculated under IFRS 16 (including those corresponding
to the companies held for sale) to net financial debt and deducting
assets from subleases.
We calculate net financial debt plus commitments by adding gross
commitments related to employee benefits to net financial debt and
deducting the value of long-term assets associated with those
commitments related to employee benefits and the tax benefits
arising from the future payments of those commitments related to
employee benefits. Gross commitments related to employee benefits
are current and non-current provisions recorded for certain
employee benefits such as termination plans, post-employment
defined benefit plans and other benefits.
We believe that net financial debt, net
financial debt plus leases, net financial debt plus commitments and
net financial debt plus leases plus commitments are meaningful for
investors and analysts because they provide an analysis of our
solvency using the same measures used by our management. We use
them to calculate internally certain solvency and leverage ratios.
Nevertheless, none of them as calculated by us should be considered
as a substitute for gross financial debt as presented in the
consolidated statement of financial position.
The following table presents a reconciliation of net financial
debt, net financial debt plus leases, net financial debt plus
commitments and net financial debt plus leases plus commitments as
of September 30, 2022 and December 31, 2021 to the Telefónica
Group’s gross financial debt as indicated in the consolidated
statement of financial position.
|
|
|
|
|
|
|
|
|
|
Millions of euros |
12/31/2021 |
09/30/2022 |
|
Non-current financial liabilities |
35,290 |
|
37,009 |
|
|
Current financial liabilities |
7,005 |
|
5,496 |
|
|
Gross financial debt (see Note 16 to the Condensed Consolidated
Interim Financial Statements) |
42,295 |
|
42,505 |
|
|
Cash and cash equivalents |
(8,580) |
|
(7,275) |
|
|
Other current financial assets |
(3,823) |
|
(3,022) |
|
|
Cash and other current financial assets included in "Non-current
assets and disposal groups held for sale" (see Note 27 to the
Condensed Consolidated Interim Financial Statements) |
(7) |
|
— |
|
|
Positive mark-to-market value of long-term derivative instruments
(see Note 12 and 17 to the Condensed Consolidated Interim Financial
Statements) |
(2,772) |
|
(3,968) |
|
|
Other liabilities included in "Payables and other non-current
liabilities" |
933 |
|
1,451 |
|
|
Other liabilities included in "Payables and other current
liabilities" |
455 |
|
147 |
|
|
Other assets included in "Financial assets and other non-current
assets" |
(1,808) |
|
(1,605) |
|
|
Other assets included in "Receivables and other current
assets" |
(468) |
|
(366) |
|
|
Other current assets included in "Tax receivables" |
(250) |
|
(221) |
|
|
Financial liabilities included in "Liabilities associated with
non-current assets and disposal groups held for sale" (see Note 27
to the Condensed Consolidated Interim Financial
Statements) |
35 |
|
— |
|
|
Mark-to-market adjustment by cash flow hedging activities related
to debt |
22 |
|
1,272 |
|
|
Net financial debt |
26,032 |
|
28,918 |
|
|
Lease liabilities |
8,080 |
|
9,163 |
|
|
Net financial debt plus leases |
34,112 |
|
38,081 |
|
|
Gross commitments related to employee benefits |
6,337 |
|
5,076 |
|
|
Value of associated long-term assets |
(94) |
|
(95) |
|
|
Tax benefits |
(1,626) |
|
(1,303) |
|
|
Net commitments related to employee benefits |
4,617 |
|
3,678 |
|
|
Net financial debt plus commitments |
30,649 |
|
32,596 |
|
|
Net financial debt plus leases plus commitments (*) |
38,729 |
|
41,759 |
|
|
(*) Includes assets and liabilities considered to be Net financial
debt plus leases plus commitments related to employee benefits for
companies classified as held for sale (see Note 27 to the Condensed
Consolidated Interim Financial Statements). |
Free Cash Flow
The Group’s free cash flow is calculated starting from "Net cash
flow provided by operating activities" as indicated in the
consolidated statement of cash flows; deducting (Payments on
investments)/Proceeds from the sale of investments in property,
plant and equipment and intangible assets, net, adding the cash
received from government grants, deducting dividends paid to
non-controlling interests and payments of financed spectrum without
explicit interest. The cash used to pay for commitments related to
employee benefits (included in the Net cash flow provided by
operating activities) is added back since it represents the
payments of principal of the debt incurred with those
employees.
We believe that free cash flow is a meaningful measure for
investors and analysts because it provides an analysis of the cash
flow available to protect solvency levels and to remunerate the
parent company’s shareholders and other equity holders (which is
why free cash flows do not consider payments to minority
interests). The same measure is used internally by our management.
Nevertheless, free cash flow as calculated by us should not be
considered as a substitute for the various cash flows presented in
the consolidated statements of cash flows.
The following table presents the reconciliation between the
Telefónica Group’s Net cash flow provided by operating activities
as indicated in the consolidated statement of cash flows and the
free cash flow for the first nine months of 2022, and 2021
:
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
Millions of euros |
2021 |
2022 |
|
Net cash flow provided by operating activities |
7,544 |
|
7,598 |
|
|
(Payments on investments)/Proceeds from the sale of investments in
property, plant and equipment and intangible assets,
net |
(5,144) |
|
(4,019) |
|
|
Dividends paid to non-controlling interests |
(263) |
|
(275) |
|
|
Payments for commitments related to employee benefits |
657 |
|
649 |
|
|
Payments of financed spectrum without explicit interest |
(21) |
|
(21) |
|
|
Free Cash Flow excluding lease principal payments |
2,773 |
|
3,932 |
|
|
Lease principal payments |
(1,303) |
|
(1,458) |
|
|
Free Cash Flow |
1,470 |
|
2,474 |
|
Condensed Consolidated Interim Financial Statements for the nine
months period ended September 30, 2022
Telefónica, S.A. and subsidiaries composing the Telefónica
Group.
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of financial position |
|
|
|
|
Millions of euros |
Notes |
09/30/2022 |
12/31/2021 |
|
ASSETS |
|
|
|
|
A) NON-CURRENT ASSETS |
|
90,921 |
|
84,284 |
|
|
Intangible assets |
(Note 6) |
12,478 |
|
11,725 |
|
|
Goodwill |
(Note 7) |
18,942 |
|
16,519 |
|
|
Property, plant and equipment |
(Note 8) |
24,233 |
|
22,725 |
|
|
Rights of use |
(Note 21) |
8,455 |
|
7,579 |
|
|
Investments accounted for by the equity method |
(Note 9) |
12,407 |
|
12,773 |
|
|
Financial assets and other non-current assets |
(Note 12) |
9,046 |
|
7,347 |
|
|
Deferred tax assets |
(Note 24) |
5,360 |
|
5,616 |
|
|
B) CURRENT ASSETS |
|
24,120 |
|
24,929 |
|
|
Inventories |
(Note 13) |
1,868 |
|
1,749 |
|
|
Receivables and other current assets |
(Note 14) |
9,323 |
|
8,287 |
|
|
Tax receivables |
(Note 24) |
2,577 |
|
2,120 |
|
|
Other current financial assets |
(Note 15) |
3,033 |
|
3,835 |
|
|
Cash and cash equivalents |
(Note 15) |
7,275 |
|
8,580 |
|
|
Non-current assets and disposal groups held for sale |
(Note 27) |
44 |
|
358 |
|
|
TOTAL ASSETS (A+B) |
|
115,041 |
|
109,213 |
|
|
|
|
|
|
|
|
Notes |
09/30/2022 |
12/31/2021 |
|
EQUITY AND LIABILITIES |
|
|
|
|
A) EQUITY |
|
32,622 |
|
28,684 |
|
|
Equity attributable to equity holders of the parent and other
holders of equity instruments |
(Note 11) |
25,724 |
|
22,207 |
|
|
Equity attributable to non-controlling interests |
(Note 11) |
6,898 |
|
6,477 |
|
|
B) NON-CURRENT LIABILITIES |
|
57,721 |
|
55,034 |
|
|
Non-current financial liabilities |
(Note 16) |
37,009 |
|
35,290 |
|
|
Non-current lease liabilities |
(Note 21) |
7,156 |
|
6,391 |
|
|
Payables and other non-current liabilities |
(Note18) |
3,660 |
|
3,089 |
|
|
Deferred tax liabilities |
(Note 24) |
3,241 |
|
2,602 |
|
|
Non-current provisions |
(Note 20) |
6,655 |
|
7,662 |
|
|
C) CURRENT LIABILITIES |
|
24,698 |
|
25,495 |
|
|
Current financial liabilities |
(Note 16) |
5,496 |
|
7,005 |
|
|
Current lease liabilities |
(Note 21) |
2,040 |
|
1,679 |
|
|
Payables and other current liabilities |
(Note 19) |
13,770 |
|
13,210 |
|
|
Current tax payables |
(Note 24) |
1,753 |
|
2,026 |
|
|
Current provisions |
(Note 20) |
1,639 |
|
1,441 |
|
|
Liabilities associated with non-current assets and disposal groups
held for sale
|
(Note 27) |
— |
|
134 |
|
|
TOTAL EQUITY AND LIABILITIES (A+B+C) |
|
115,041 |
|
109,213 |
|
Unaudited data at September 30, 2022. The accompanying notes and
appendices are an integral part of these condensed consolidated
interim financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income statements |
|
July - September |
January - September |
|
Millions of euros |
Notes |
2022 |
2021 |
2022 |
2021 |
|
|
|
|
|
|
|
Revenues |
(Note 4) |
10,343 |
|
9,298 |
|
29,793 |
|
29,603 |
|
|
Other income |
(Note 23) |
458 |
|
1,144 |
|
1,527 |
|
12,019 |
|
|
Supplies |
|
(3,323) |
|
(2,878) |
|
(9,523) |
|
(9,095) |
|
|
Personnel expenses |
|
(1,435) |
|
(1,246) |
|
(4,108) |
|
(3,990) |
|
|
Other expenses |
(Note 23) |
(2,795) |
|
(2,584) |
|
(8,096) |
|
(7,917) |
|
|
Depreciation and amortization |
(Note 4,6,8,21) |
(2,334) |
|
(2,155) |
|
(6,670) |
|
(6,294) |
|
|
OPERATING INCOME |
|
914 |
|
1,579 |
|
2,923 |
|
14,326 |
|
|
Share of income (loss) of investments accounted for by the equity
method |
(Note 4,9) |
376 |
|
10 |
|
481 |
|
(58) |
|
|
Finance income |
|
185 |
|
174 |
|
865 |
|
1,075 |
|
|
Exchange gains |
|
2,280 |
|
515 |
|
5,244 |
|
2,028 |
|
|
Finance costs |
|
(945) |
|
(605) |
|
(2,211) |
|
(2,035) |
|
|
Exchange losses |
|
(2,253) |
|
(470) |
|
(5,291) |
|
(2,006) |
|
|
Net financial expense |
|
(733) |
|
(386) |
|
(1,393) |
|
(938) |
|
|
PROFIT BEFORE TAX |
|
557 |
|
1,203 |
|
2,011 |
|
13,330 |
|
|
Corporate income tax |
(Note 24) |
(4) |
|
(354) |
|
(316) |
|
(1,554) |
|
|
PROFIT FOR THE PERIOD |
|
553 |
|
849 |
|
1,695 |
|
11,776 |
|
|
Attributable to equity holders of the parent |
|
460 |
|
706 |
|
1,486 |
|
9,335 |
|
|
Attributable to non-controlling interests |
|
93 |
|
143 |
|
209 |
|
2,441 |
|
|
Basic earnings per share (euros) |
|
0.07 |
|
0.11 |
|
0.23 |
|
1.56 |
|
|
Diluted earnings per share euros) |
|
0.07 |
|