Telefónica, S.A. ($TEF)

Good morning. Thank you for standing by, and welcome to the Telefonica's January to March 2026 Results Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr. Torsten Achtmann, Global Director of Investor Relations. Please go ahead, sir.

Good morning, and welcome to Telefonica's conference call to discuss January to March 2026 results. I'm Torsten Achtmann from Investor Relations. Before proceeding, let me mention that the financial information contained in this document has been prepared under International Financial Reporting Standards as adopted by the European Union. This financial information is unaudited. This conference call and webcast, including the Q&A session, may contain forward-looking statements and information relating to the Telefonica Group. These statements may include financial or operating forecasts and estimates or statements regarding plans, objectives and expectations regarding different matters. All forward-looking statements involve risks and uncertainties that could cause the final developments and results to materially differ from those expressed or implied by such statements. We encourage you to review our publicly available disclosure documents filed with the relevant securities market regulators. If you don't have a copy of the relevant press release and the slides, please contact Telefonica's Investor Relations team. Now let me turn the call over to our COO, Mr. Emilio Gayo.

Good morning, and thank you for joining the call. With me today are Juan Azcue, CFO; Borja Ochoa, Santiago Argelich, and Lutz Schuler, CEO of Spain, Germany and U.K. We are pleased to report a good start to the year. We are growing in revenue, adjusted EBITDA and adjusted operating cash flow after leases, both in constant and current terms with an appropriate CapEx to sales ratio to deliver this growth. At the same time, we are reducing net financial debt despite the usual seasonality of free cash flow in Q1. Across markets, year-on-year growth rates accelerated in Spain and Brazil with a strong commercial performance. In Spain, we recorded the best ever churn. In Brazil, we achieved a record high mobile ARPU. In Germany, O2 contract churn remained at a low level. And in the U.K., fixed line net adds continue to improve. Revenue growth is driven by retail with a steady growth in B2C and B2B. This performance more than [ offset ] the loss of one-on-one revenues in Germany and the impact from the extension of wholesale agreement in Spain, which provides a more predictable and sustainable business long term. I'd like to highlight the steady growth in service revenue, partially offsetting weaker handset markets in some European countries. On the operating model front, we are reaping the benefits for leaner operations, including the first savings from restructuring plans in Spain and our global units, and the copper networks are done in Brazil. We are executing consistently against our Transform & Grow plan, making good progress. We remain confident in achieving our financial outlook for 2026 and reiterate our EUR 0.15 dividend per share. On Slide 2, let me share our progress across the strategic pillars of our plan. First, on customer experience, hyper personalization and network quality initiatives are leading to lower churn and a sound NPS. Second, in B2C, we are sustaining steady growth. We are fostering convergence with a solid traction of our offering in Brazil and Germany. At the same time, we're enhancing our ecosystems. In Spain, we have reached our premium content offering with the FIFA World Cup rights, and we are fostering digital security. In Brazil, we have reached more than 600,000 held subscriptions. We are also expanding the customer electronics business recording significant growth in Spain and Brazil. Third, in B2B, we have seen a strong momentum with revenue growth close to 6%. Noteworthy is the launch of Titan Connect portfolio and the acquisition of Altim in Spain and the Sao Martinho partnership in Brazil in the [ agro ] business. Fourth, we continue to enhance our infrastructure, expanding our fiber and 5G coverage while improving network quality. Fifth, on simplification. We are capturing the efficiencies from redundancy programs and legacy network switch off. At the same time, we continue to make solid progress on our Hispam asset with 6 assets sold in the last 12 months. Overall, this action reflects strong execution, positioning us well to continue delivering sustainable growth throughout the year. On Slide 3, we will review our domestic business. In the first quarter of the year, Telefonica Espana continued to deliver a strong operating and financial performance. We recorded solid commercial KPIs, reaching the lowest churn ever, 0.7%. despite the tariff update in mid-January. This figure proves the high stickiness of our customers to our excellent service and superior network quality, our differential ecosystem and our small [ segmentation. ] Such a competitive advantage is driving a positive balance in portability ratios. We have outperformed our competitors year-on-year, surpassing the 2025 average and 3x higher year-on-year. As a result, we achieved record customer base in fixed broadband and in contract mobile, a significant milestone. In B2C, convergent ARPU increased above EUR 91. It remains at leading levels in the market, both in absolute and in relative terms. Our premium digital ecosystem continues to support the highest customer lifetime value in the market while driving revenues up. In B2B, we also started the year with a strong traction. We are growing both incomes and IT services. I would like to highlight the recent launch of innovative service and network resilience for business continuity, advanced service security, drones in defense and sovereign technology. They will drive further growth in this segment. Regarding financial, Spain is delivering a solid cash generation with growth acceleration across all financial metrics. Growth in revenues accelerating to 2% year-on-year, supported by service revenue. B2B digital services maintained robust growth. Adjusted EBITDA grew over retail revenue, delivering a 56% margin due to revenue growth and savings from the redundancy program. This more than offset the anticipated lower wholesale revenues. In addition, CapEx discipline and the more stable leases led to a 2.3% growth in adjusted operating cash flow after leases. In an upsell, our domestic business had a strong start into the year, and we are in a strong position to continue to excel. On Slide 4. Telefonica Brazil's performance was once again remarkable. Vivo recorded solid commercial momentum in the most valuable segment and a grew above inflation across all key lines. We maintain a clear leadership position in the market, leveraging our strong commitment to quality and customer satisfaction and our continued evolution in a broader digital platform. In mobile, we reached record levels both in contract net adds and ARPU with a sustained churn reduction. We added 850,000 new contract customers in the quarter, the highest figure of the last 5 quarters. ARPU is the highest ever, driven by our value-driven growth in the increase in recharge frequency in prepaid. In fact, we increased fiber connection to almost 8 million. This strong performance was driven by Vivo Total, resulting in a lower churn. Turning to financials, revenue and adjusted EBITDA grew year-on-year, well above inflation and accelerated versus the previous quarter. Revenue increased by 7.4%, supported by consistent growth in mobile service revenues and continued the strength in the fixed business. In B2C, new digital businesses maintained strong momentum. Consumer electronics stand out, growing 56% in the last 12 months, thanks to the launch of new financial options. In B2B, digital solutions were once again the main growth engine driven by cloud and IoT. Adjusted EBITDA and operating cash flow after leases both grew 9%, boosted by solid revenue growth and continued improvements in OpEx. Overall, Vivo delivered another strong set of results, showing growth across key financial KPIs. Moving on to Slide 5 to discuss Germany, Telefonica Deutschland, core business momentum showed resilience and market with lower promotional activity. We have recently seen some positive price moves in the market. And since March, we have maintained or even increased prices across all promos, stopping at O2 mobile promos at price point below [ EUR 20. ] This is consistent with our strategy to prioritize profitable growth, focus on value over volume while maintaining a low churn level. This quality of our customer base is improving with a growing number of customers with a second or third SIM card. This strategy impacts ARPU and support loyalty and higher net adds. Fixed broadband accesses grew for the third consecutive quarter with a better mix in the base, lower churn and higher ARPU. Notably, IoT accesses recorded another quarter of outstanding growth. Regarding financial results, the one-on-one customer migration continued to impact revenues with a year-on-year peak of this effect in Q1. Additionally, following a record fourth quarter last year, handset sales declined in a weak German handset market. Nevertheless, MSR trends slightly improved quarter-on-quarter. Our fixed revenue increased 4% year-on-year. Adjusted EBITDA was likewise affected by the [ in-year ] peak of one-on-one impact. However, efficiencies and cost control led to an increase in the adjusted EBITDA margin year-on-year, showing the solid performance of the healthier part of our business. To summarize, underlying performance remained resilient in Germany with a high single-digit year-on-year growth in adjusted EBITDA, excluding the one-on-one effect. We continue working to return to growth in 2027. Let's move to Slide 6. Virgin Media O2 started 2026 making clear progress in the line with its strategy. During the quarter, we achieved several important milestones. O2 Satellite was launched, making us the first U.K. mobile network to switch on direct-to-device satellite connectivity. At the same time, we continue to advance our mobile network transformation. We signed new strategic run upgrade agreements and completed the second tranche of [ spectrum transfer ] from Vodafone U.K. As a result, O2 now has the largest 5G stand-alone footprint in the U.K., reaching 86% of the population, 86% of the population. From a commercial perspective, we continue to show improvements in Q1. In fixed, we reduced losses supported by commercial initiatives, while ARPU remains impacted by the high promotional intensity in the market. In mobile, contract churn decreased quarter-on-quarter, while ARPU remained broadly stable year-on-year. In wholesale, we maintained our leading position in the MVNO market and continue to strengthen our wholesale fixed credentials. Regarding financials, both service revenue and adjusted EBITDA trends are on track with our 2026 guidance. Service revenue decreased, mainly driven by consumer revenue due to prior year customer losses and continued pressure on fixed ARPU. Business revenue declined, largely reflecting lower margin products. This was partly offset by a strong performance in wholesale supported by the growth in MVNO revenue. Total revenues are also affected by reduced net fiber build activity compared with the year before. Adjusted EBITDA decreased mainly due to the evolution of service revenue. Finally, we continue to progress as expected with the Netomnia acquisition, which together with our targeted network investment further strengthens Virgin Media O2 [indiscernible] for 2026. Now I would like to hand it over to Juan, who will cover financial results with more detail.

Thank you, Emilio, and good morning to all. Moving to Slide 7, we show how the strong underlying momentum that Emilio explained translate into tangible financial results with growth both in constant and current FX terms for the second quarter in a row. Our growth in current is supported by the strengthening and well-performing Brazilian reals. Revenue reached EUR 8.1 billion, growing 0.8% year-on-year in constant terms, underpinned by a [ 1.0% ] increase in service revenue. B2B continues to be a growth driver with an outstanding growth of 5.7%, alongside a consistent B2C increase of 1.5%. Adjusted EBITDA and adjusted operating cash flow after leases came in at EUR 2.8 billion and EUR 1.4 billion, respectively, 1.8% and 2.4% higher than a year ago. As such, operating leverage in the business is the main driver behind the higher adjusted operating cash flow after leases margin, 0.3 percentage points more year-on-year. CapEx to sales stood at 10.7%, declining by 0.2 percentage points year-on-year. Current free cash flow is EUR 333 million, affected by the usual seasonality. Net financial debt decreased to EUR 25.3 billion, primarily due to the receipt of proceeds from Colombia and Chile this quarter. After the sale of Chile in February 2026 and the agreement to sell Mexico in April '26, both companies are classified as discontinued operations in the first quarter. Slide 8 shows free cash flow performance in the first quarter of the year. Our performance remains solid and fully on track. We are committed to our free cash flow trajectory and our ability to meet our full year free cash flow guidance of around EUR 3 billion. Consistent with prior years, our free cash flow generation of EUR 333 million reflected the usual seasonality of the quarter, mainly due to working capital and its back-ended loaded profile. As such, we anticipate acceleration through the year. With this behind us, we are delivering a constant execution towards a derisked free cash flow as operational efficiency drives us to our target for the year. As such, we are progressing in a stronger position due to: first, a more predictable free cash flow following the successful execution of the sale of 6 Hispam countries over the last 12 months, with a total firm value above EUR 4 billion. Second, a solid free cash flow, thanks to the execution of our efficiency plan. With the work for restructuring in Spain and global units already in place among other initiatives. Third, a growing free cash flow with upgraded guidance for 2026 after exceeding it in 2025. On Slide 9, you can see that net financial debt has decreased by EUR 1.5 billion in the first 3 months of the year, mainly due to the disposal of our subsidiaries in Colombia and Chile. Our net debt-to-EBITDAaL ratio has decreased to 2.72x from the 2.78x in December last year. Deleveraging is on track towards our 2.5x target in 2028. Telefonica has demonstrated an excellent refinancing execution this year. We have been active in the capital markets, raising EUR 3 billion long-term financing at the group ahead of recent market volatility while maintaining an ample liquidity position. Finally, the average cost of debt has been reduced year-on-year from 3.30% in March '25 to 2.81% in March '26. Turning to Slide 10. In Telefonica, sustainability is a driver of competitiveness and resilience. On the environmental side, we continue to enhance operational efficiency by decoupling traffic growth from energy consumption and supporting our customers in meeting their environmental goals. On the social front, we keep bridging the digital divide and promoting esteemed talent. Moving to governance, we have a balanced and diverse Board. We also uphold the highest standards of fiscal transparency. Lastly, we are proud to report positions across prestigious markets. Now I hand over to Emilio for the final remarks.

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

[Operator Instructions] And the first question today comes from the line of Andrew Lee from Goldman Sachs.

I had two questions. One was on the sustainability or outlook for Spanish growth through the year. And then secondly, just on Germany cost cutting. On Spain, I think your remarks suggested you think that the growth delivered in the first quarter is at least sustainable. But I'm also conscious that there's obviously some lumpiness in the wholesale revenue trends. What is it that gives you the confidence that you can sustain or improve the Spanish growth through the year? Are you seeing increasing markets? Is it going even better than expected as we run into 2Q? Just any help on that would be really useful. And then just secondly, on Germany cost cutting, it looked like the cost cutting accelerated in the first quarter. I wonder if you could just talk through that a little bit, that would be helpful.

Andrew, thank you very much for your question. Regarding Telefonica Spain, first of all, I would say that we are very happy with the results of the first Q. This result, I have to say that probably are slightly above our expectation. We are happy for that. These results are based on fundamentals in our commercial strategy, in our efficiency program, in our ecosystem, in our B2B revenues growth. For next quarter, we are seeing similar trends. And I will say that for the rest of the year, we are seeing in H2 even better than H1, then our result is that we can confirm our outlook that is to grow above 2025. Regarding Germany, I have to say that in Germany, we are best-in-class company managing the efficiencies. We have launched several cost efficiency programs that results in an underlying EBITDA growing and it is based in different elements of the company, everything around channels, cost channel, everything about energy, everything about the operating model, all the aspects are reviewed. And as a result of everything is a good performance in this kind of efficiency programs.

Can I just follow up on the Spanish side of things. Are you seeing any improvement in market dynamics? You've done the [ price rise ] this January. Are they holding better than last year? Or is it more company-specific assets that's driving that improvement?

I would say that we feel more comfortable than other peers in our commercial trends. Again, the fundamentals that we are managing in Spain are key fundamentals. Our offer is our [ segmented ] offer demonstrate that is the right approach in this market. The [ manage ] of the ecosystem really is performing very well with a very strong position in around the consumer electronics or the financial options in -- of the [indiscernible] market. We have reached more than 600,000 clients at this moment. And everything demonstrates that the main elements of the offer and the main effects that we need -- that happened in the market is on the table. In the case of B2B, we are growing at the same level that we're doing during the last years and demonstrated that Telefonica Spain is the best in terms of IT services in -- as a telco in Spain or we say, in Europe.

[Operator Instructions] And your next question today comes from the line of Mathieu Robilliard from Barclays.

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

Thank you for your questions. First of all, about the ARPU in Germany. Let me say, first of all, that the ARPU is the result of different effects. And one of these effects, for example, is the change in our strategy. We think that we are launching a more successful strategy in terms of 2 and 3 SIMs bundles. This is an example of how to move from volume to value, and it can have impacts in the ARPU in this case, but we think this is the right way. Anyway, I'm going to hand over to Santiago Argelich in order to give you more color about this.

Yes, Mathieu. So when looking at the ARPU, it is impacted by the success of family plans, which naturally result in a dilution of ARPU. We have a higher share today on second and third SIMs, which consolidate our household and convergence strategy. The market overall has largely embraced the family plans. The O2 ARPU performance is in line and even slightly better than the competitors ARPU in this sense. What's more important is that our household ARPU is growing year-on-year.

I guess a follow-up to that is, we don't really see the net adds accelerating in Q1. So I wonder how can we reconcile better SIM cards, which obviously has to be the case is the fact that net adds are not really moving up.

The net add results is again a mix of different strategies. One is the single bundling, but other strategies to move from value to -- from volume to value or even to reduce promotional activity. And then the results in the [ KPIs ] is a [indiscernible] of these aspect. But at the end, we believe that this permit us to have a more profitable way to grow in Germany. And secondly, regarding again about Spain competitive environment. We don't see an important change in front of us. We are seeing a rational market in the high-value market and our expectation that everything following the same in the same way. And in the case of the low end, it's a more competitive market, but we think that we are not expecting a special change in this market, too. But anyway, we think our O2 strategy, our [ cemented ] strategy permit us to be very resilient and most of the movements that can happen in the market. Remember, for example, that in the first quarter, we have increased the prices, but we have reached the lowest churn ever.

Your next question today comes from the line of Carl Murdock-Smith from Citi.

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

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

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

That's great. And can I just ask a clarification on other, when you said stable, does that mean 0? Or does it mean the same as Q1 compared to the rest of the quarters of the year?

Stable versus what you've seen in this quarter.

Your next question for today comes from the line of David Wright from Bank of America.

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

Let me say that we are happy, of course, with the scale that we have. We have developed a Transform & Grow program based in the asset that we have, and we are pretty sure and we feel comfortable, confident that we are able to reach our target, our guidance in the plan with the scale, with the operations that we have. Of course, we have talked -- we talked a lot during the last month about the opportunity for more scale related to create or to invest in technology in Europe and related to be more profitable. Of course, scale in telco business is provide better profits. But we feel that with the operations that we have, with the site operation that we have, we are able to compete in the markets in the right way, in a profitable way.

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

Your next question today comes from the line of Nick Lyall from Berenberg.

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

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

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

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

Your next question comes from the line of James Ratzer from New Street Research.

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

Okay. Thank you for your questions. That's right, we don't discuss the underlying revenues, but we can say that we are really stable as other quarters. We don't see a critical change in this evolution. The service -- the whole service revenue, the total service revenues of this quarter is very impacted, as I mentioned during the conference call, due to the one-on-one effect [indiscernible], and then answering without figures because we don't give the figures, answering you again, we see the underlying being very resilient in revenues and being very positive even in EBITDA. This is fair. Regarding the second question, just to clarify any -- we are at the beginning of the process, and I'm going to hand over now to Borja Ochoa, to explain a little bit more of the process. But anyway, the investment that Telefonica can do here is always limited. And of course, in the parameters that we consider that are value accretive for the group. I'm going to hand over to Borja Ochoa to give you more color.

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

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

Let me take that one. Leading from an operational level, but as Borja said, from an investment level, we're talking about a minority. And when I talk minority, I'm talking about between 10% and 15% or something around that. So it's below, it's definitely below the amount you're saying because you have to remember that around 2/3 of that, if not more, is financed via debt. The rest is equity. I mean it's a consortium with the state, and we're only taking an amount of that size. Therefore, the amount is way lower than the figures you put. And the returns that you mentioned will be consistent with returns in the infra digital world.

Your next question today comes from the line of Joshua Mills from BNP Paribas.

There were reports in the press earlier in the year around potential German consolidation and some suggestion that from a Telefonica perspective, one-on-one's network quality might be an issue in any future negotiations. I'm not expecting you to comment on that specifically. But could you maybe give us a high-level view of how you think about the value in any potential consolidation deals, be that Germany, Spain, U.K.? And then perhaps more specifically, how you view the importance of the network quality of competitors. The reason I'm asking is, I think a lot of people view consolidation upside as really a debate around market repair, potential cost, which is [ broader ] than network complementarity. So I'd love to hear your view on that.

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

Just one, not sure much color I'm going to give you because in real terms, as I've said, we will pursue transactions that are value accretive and therefore, that have key measurable synergies. And that's quite [indiscernible]. That's mostly cost and network. That's what you can quantify. Yes, there's always revenue synergies, but then those, you have to you have to believe in them. So it's cost and network synergies. And these changes between market to market, different deals and different structures. So Netomnia, there is some revenue synergies. It's mostly CapEx synergy of us having access in fiber, but that can be different depending on the transaction.

Our next question today comes from the line of Fernando Cordero Barreira from Banco Santander.

The first one is in Spain, and I would like to zoom a little bit more in the wholesale revenue line performance after falling mid-single digit last year in a year-to-year basis, we have seen a material [ deceleration ] on that [indiscernible]. And I would like to understand what has been the driver and what should we expect for coming quarters from wholesale in Spain? And the second question is coming back to Germany, but now on an organic point of view. One of the key messages that you have shared in your Capital Markets Day was your push for convergence in Germany. I would like to understand, which kind of steps are you pursuing on that front?

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

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

Operator, we'll take one last question.

We will now take the final question, and your final question comes from the line of Fernando Abril-Martorell from Alantra.

In Spain, a couple please. In Spain, just to confirm, Emilio, when referring to improving momentum in H2, were you referring mainly to top line trends rather than EBITDA? And also linked to this, how much of the restructuring savings were already captured in Q1 and how much remains to come through over the rest of the year? And second question on guidance. So Q1 performance was already within the guidance range. However, Germany appears to have bottomed out. Brazil remains quite strong. And Spain should -- you also mentioned this, but restructured savings should also have greater impact through the year. So my question is, am I missing any relevant headwinds for the remainder of the year? Or is it just a simply conservative guidance?

Fernando, thank you for your question. Regarding the first question about the [indiscernible] problem in Spain, it's true that the impact in the Q1 is limited because we started the last month of the quarter around EUR 20 million, and around EUR 250 million during the whole year. But the EBITDA that we are seeing for H2, the same improvement that I mentioned for the rest of the financial [indiscernible] is a result of several impacts. [indiscernible] is one, the price increase is other, the cost increase is other, the salary increase is other, the wholesale agreement is other, the ecosystem is other, the B2B development is other. the result of everything is that we are seeing a better to compare with H1 in the financial metrics. In the case of Germany guidance. In the case of the Germany, we are seeing better results in H2 compared with H1. This is our expectation for Germany for the rest of the year. Okay, excuse me. I forgot part of the question. And regarding the guidance of the group, we are very confident to reach our targets and the headwinds -- and the tailwinds are based on the improvement in Germany, improvement in Spain and the solid performance in Brazil.

At this time, no further questions will be taken.

Thank you very much for your participation, and we certainly hope that we have provided some useful insights for you. So if you still have further questions, we clearly ask you to contact our Investor Relations department. Good morning, and thank you.

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