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:
Form 20-F x
form 40-F o
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):
Yes o
No x
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):
Yes o
No x










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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;
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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.
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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.
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"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.
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“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.
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"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.


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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.

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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  (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
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(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.
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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.
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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
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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.
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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,
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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
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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.
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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.
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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
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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
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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.

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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.
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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
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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.
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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.



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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).

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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”.
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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.
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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  %)
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(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.
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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
31

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  %

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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 — 
Financial income 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.
33

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 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:
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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
35

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  %
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(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.
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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.
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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
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(-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  %)


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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.
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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".
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    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.

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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.

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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.
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  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.

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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.
47



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
48

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.
49

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
50

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 
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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.
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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).

53

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 

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Condensed Consolidated Interim Financial Statements for the nine months period ended September 30, 2022

Telefónica, S.A. and subsidiaries composing the Telefónica Group.
F-1

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.
F-2

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  0.11  0.23  1.55 
Unaudited data. The accompanying notes and appendices are an integral part of these condensed consolidated interim financial statements.

F-3

Consolidated Statements of comprehensive income January - September 2022 January - September 2021
Millions of euros    
Profit for the period 1,695  11,776 
Other comprehensive income (loss) 3,400  3,911 
Gains (losses) from financial assets measured at Fair value through other
comprehensive income
Income tax impact (1) — 
  2  1 
Gains (losses) on hedges 2,007  1,142 
Income tax impact (519) (279)
Reclassification of (gains) losses included in the income statement (1,629) (1,600)
Income tax impact 409  408 
  268  (329)
(Losses) gains on hedges costs (58) 93 
Income tax impact 15  (23)
Reclassification of (gains) losses included in the income statement (7) (8)
Income tax impact