(Bloomberg) -- Spain’s Telefonica SA missed analysts’ earnings expectations after taking an impairment in the UK and a provision as part of a plan to cut staff costs. 

Fourth-quarter operating income before depreciation and amortization was €1.8 billion ($1.9 billion), the company said in a statement on Thursday. That compares to an average analyst estimate of €1.99 billion, according to a survey by Bloomberg.

In a sign that the situation in its biggest market is improving, Telefonica’s organic Oibda in Spain rose 0.1% last quarter compared to a year earlier, the first increase in four years. Shares rose 0.6% to €3.70 as of 10:07 a.m. in Madrid. 

Telefonica forecast earnings before interest, tax, depreciation and amortization will grow 1% to 2% this year as the carrier embarks on its new strategy. The firm has pledged to grow profit by about 2% each year through 2026 as part of the plan, with the first year expected to be slower than the rest.

“Our aim is to accelerate FCF delivery right from the first year,” Chief Executive Officer José María Álvarez-Pallete said in the release. Free-cash-flow growth will be driven by growing profits and declining capital intensity, he said.

The company recorded a €1.8 billion goodwill impairment in its UK joint venture with Liberty Global, VMO2, due to rising discount rates and broader macro conditions in the country, Telefonica said. It also had a €1.3 billion provision relating to a plan that will see headcount in Spain decline by 16%.

“The results are muddied at the reported level by certain accounting adjustments, like the redundancies in Spain and the deterioration in the UK,” GVC Gaesco analyst Juan Peña said by email. “Excluding these effects that have no impact on cash, the results for me are positive.”

What Bloomberg Intelligence Says:

Telefonica’s 2024 outlook for more than 10% free cash flow growth, in line with midterm aims, compares with 5.3% consensus and points to upward revisions to estimates, particularly after 4Q was much better than expected. Consensus may continue to trail guidance, as the profit outlook in the UK JV is weak and Oibda was softer-than-expected in Spain amid a slowdown in broadband operational performance in 4Q.

— Erhan Gurses, BI telecom analyst

Net debt rose to €27.3 billion in the quarter, due to the acquisition of an increased stake in Telefonica Deutschland, shareholder remuneration and the issuance and repurchase of hybrid bonds.

The earnings come against the backdrop of deep changes in Spain’s competitive landscape. A merger of Masmovil Ibercom SA and Orange SA’s Spanish operations was approved by the European Commission this week, in a deal that will create Spain’s biggest mobile operator, leapfrogging Telefonica.  

Telefonica’s shareholding structure is also in the middle of a transformation since Saudi Telecom Co., which is controlled by the Saudi sovereign wealth fund, announced plans to acquire a €2.1 billion stake in September. 

Spain’s government said in December that it will buy as much as 10% of shares through its investment vehicle SEPI in a bid to safeguard the strategically important asset. If completed, the acquisition could turn the government into the former monopoly’s largest shareholder, more than two decades after it sold the last of its Telefonica shares.

(Updates with shares, additional details starting in third paragraph.)

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