Telefonica Tech builds momentum towards €3bn revenue target

PAC recently attended the latest global analyst day held by Telefónica Tech, the fast-growing IT solutions and services division of Spain’s telecoms giant.

The business has come hit the headlines in recent years due to its aggressive M&A strategy, with major purchases in the UK, Central Europe and Latin America. The business grew revenue by 27% to €1.9bn in 2023, which is still a relatively small part of Telefónica’s overall €41bn revenue.

However, with further acquisitions under its belt in 2024, Telefónica Tech looks well-set to meet its target of hitting €3bn in annual sales in 2026. Here are some of PAC’s key takeaways from the event:

Takeovers Fuel Regional Expansion
Like most major telecoms operators, Telefónica has dabbled in the world of enterprise IT services for several decades, with varying degrees of success.

But while the likes of BT have pared back some of their activities in this area after struggling to build scalable, profitable businesses, Telefónica has doubled-down on expanding the Tech division since the start of the decade.

The division now brings together more than 6,000 employees delivering a broad portfolio of services including product supply, cloud and infrastructure implementation, applications services and a growing focus on growth topics including AI, big data, cloud, IoT and cyber security.

Recent progress been bolstered three major acquisitions, and a string of smaller purchases. At the bigger end, Telefónica Tech swooped for the UK business of infrastructure services vendor Cancom for €398m in 2021 and followed this up in 2022 with moves for central European services firm BE-terna (for a price of up to €350m) and UK-based Microsoft specialist Incremental (€209m).

On top of this, it also snapped up two specialist Google partners (Altostratus in Spain and IPnet in Brazil), as well as UK data analytics firm Adatis and Microsoft Dynamics specialist Redspire. These moves have left Telefónica Tech with two major hubs outside of its domestic Spanish market in the UK & Ireland and in the Central European region, which incorporates the Nordics, DACH and some Eastern European markets. Both have more than 1,000 employees in-region, supported by near-shore delivery centers in Bulgaria and India.

A Mover in the Microsoft Ecosystem
In order to build greater consistency across its international go-to-market, Telefónica Tech has developed a new operating model aimed at expanding its local capabilities to a global level, by creating Global Service Lines in areas such as artificial intelligence, IoT and business applications.

At the heart of the company’s proposition in this last area is focus on Microsoft. The whirlwind M&A strategy has helped the company rapidly emerge as one of Microsoft’s prominent application services partners in Europe, and it is one of only a handful to hold “Inner Circle” partnership status with the firm in the region.

The company shared some encouraging updates on its pipeline development across its three main regional hubs, which each have a slightly different focus. In Central Europe, the BE-terna acquisition gave the company a strong base of business in the manufacturing sector, but it has since diversified into sub-sectors including fashion, automotive and energy. In Spain, the company is at a much lower stage of development, and is looking to build on its international references and capabilities to develop in sectors including public sector and financial services.

Both industries are areas where Telefónica Tech’s Microsoft operation has a strong story in the UK and Ireland. One key reference is Virgin Money, where the vendor implemented the Power Platform on top of an existing Dynamics365 deployment. This helped to enhance the bank’s onboarding process for business customers, increasing customer acquisition from 5% to 34%.

Telefónica Tech sees strong growth opportunities in supporting legacy Navision users with their upgrade path to Microsoft’s Business Central platform, and in targeting other businesses at the lower end of the ERP replacement market. It faces tough competition from the likes of Avanade and KPMG, but the list of new logo wins highlights its progress in the core midmarket segment.

Tackling the Evolving Cyber Threat
Telefónica has a long-standing focus on protecting its customers’ networks from cyber-attacks, and Telefónica Tech is extending the role it plays across the organization.

The business has more than 2,500 cyber professionals in its ranks and works with partners Microsoft and Fortinet to offer services ranging from advisory and assessments through to managed security operations center (SOC) and managed detection and response (MDR).

The company recently extended a deal with long-term client Ferrovial, the global engineering group with €8.5bn annual revenue, to support its cyber operations. The company’s global CISO explained that Telefónica Tech’s role is to handle everything related to security operations, and cited its ability to access the best cyber talent, understanding of the evolving threat landscape and ability to provide international support as factors behind their 15-year relationship.

Ferrovial highlighted two major challenges for its cyber strategy. The first is the impact of artificial intelligence as both an attack and a defence mechanism, and the company pointed to the importance of protecting its ecosystem of contractors as an extra layer of complexity that companies in the construction sector face. The second is defending an expanding attack surface as the company’s operations technology (OT) environment becomes increasingly connected. Telefónica Tech is supporting the company in both of these areas.

PAC’s overall impression of Telefónica Tech are of a company that is moving at speed to bring together a series of acquisitions that have brought both focus and scale. It has some very strong stories in Microsoft- and cyber-related services in particular, and the creation of the Global Service Lines will help to ensure that the company’s aggressive M&A strategy becomes more than the sum of its parts. Telefónica Tech is well-placed to support the needs of the increasingly dynamic mid-market sector as it accelerates the pace of digital transformation.