Telefonica Earnings: Delivers on Guidance and Continues Reducing Costs in Spain and the U.K.

No-moat Telefonica's revenue grew by 4.1% organically year over year in fourth-quarter 2023, while EBITDA increased by 4.5% after restructuring and goodwill impairments were removed. In Spain, EBITDA continued to stabilize as seen in prior quarters, growing 0.1% on an organic basis as service revenue increased 3.2% compared with a decline of 2.1% last year as the firm delivered on cost efficiencies. It’s the second big restructuring Telefonica has undertaken in the past three years and will generate EUR 285 million in annual savings, compared with a restructuring expense of EUR 1.38 billion. We are pleased with Telefonica’s recent focus on cost-cutting, especially in Spain as we believe the firm's employee base is too large here. In Germany, Telefonica continued with the healthy performance we are used to as EBITDA grew organically by 3.7%. Brazil and Virgin Media O2 were the standouts with EBITDA up 8.9% and 10.6% in the quarter, respectively, the latter due to subscriber growth and realization of synergies after the merger. For 2024 Telefonica expects 1% revenue growth with EBITDA up 1%-2%, also in line with its medium-term targets for the next three years announced at its most recent capital markets day. Capital intensity will decrease in 2024, enhancing free cash flow generation, from 14% of sales this year to a maximum of 13%. We maintain our EUR 4.90 fair value estimate.