17th May 2005 10:41
Telefonica SA17 May 2005 Quarterly results January-March 2005 TABLE OF CONTENTS Telefonica Group Financial Highlights Consolidated Results Financial Data RESULTS BY BUSINESS LINES Fixed Line Business • Telefonica de Espana Group • Telefonica Latinoamerica Group Mobile Business Other Business • Directories Business • Terra Networks Group • Atento Group • Content and Media Business • Telefonica Deutschland Group AddendA Companies included in each Financial Statement Key Holdings of the Telefonica Group and its Subsidiaries Significant Events Changes to the Perimeter and Accounting Criteria of Consolidation This document contains financial information/data reported under IFRS. Thesedata are preliminary, as only full compliance with International FinancialReporting Standards issued at 31/12/2005 is required, unaudited, and thus, beingsubject to potential future modifications. This financial information has beenprepared based on the principles and regulations known to date, and on theassumption that IFRS principles presently in force will be the same as thosethat will be adopted to prepare the 2005 full year consolidated financialstatements and, consequently, does not represent a complete and finalinformation under these regulations. In addition, the IFRS financial informationcontained herein may not be comparable to financial information published byTelefonica that was prepared under Spanish GAAP. The English language translation of the consolidated financial statementsoriginally issued in Spanish has been prepared solely for the convenience ofEnglish speaking readers. Despite all the efforts devoted to this translation,certain omissions or approximations may subsist. Telefonica, its representativesand employees decline all responsibility in this regard. In the event of adiscrepancy, the Spanish-language version prevails. These consolidated financial statements are presented on the basis of accountingprinciples generally accepted in International Financial Reporting Standards(IFRS). Certain accounting practices applied by the Group that conform withgenerally accepted accounting principles in IFRS may not conform with generallyaccepted accounting principles in other countries. TELEFONICA GROUP TELEFONICA GROUP ACCESSES Unaudited figures (thousands) January March 2005 2004 % Chg Fixed telephony accesses (1) 37,713.9 37,410.4 0.8 Internet and data accesses 11,400.8 9,870.4 15.5 Narrowband 5,551.3 6,206.4 Broadband 5,214.1 3,203.9 ADSL (2) 4,847.8 2,981.1 Retail (3) 3,524.9 2,251.2 Other accesses (4) 635.5 460.2 Unbundled loops (5) 193.4 24.1 Pay TV 441.4 384.7 14.7 Cellular accesses (6) 81,438.2 54,192.4 50.3 Total Accesses 130,994.2 101,857.9 28.6 (1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primaryaccess x30; 2/6 Access. Company's accesses for internal use included. (2) T Deutschland's connections resold on a retail basis and Cable Modemin Peru included. (3) TdE Retail includes satellite. TASA Retail includes ISP in the north part ofthe country. (4) Cable modem El Salvador, WiFi clients, satellite Latam, fiber and leasedcircuits included. (5) Includes fully unbundled loops and shared loops. (6) Since the cancellation of Movistar Puerto Rico's management contract inSeptember 2004 , its subscriber base is excluded from the Group subscriber base. TELEFONICA GROUP Financial Highlights The most relevant factors of the Telefonica Group 2005 first quarter results arethe following: • Solid operating growth, with revenues increasing by 16.7% from the first quarter of 2004: • Improvement through all business lines, with the cellular business (+34.6%), Telefonica de Espana Group (+6.0%) and Telefonica Latinoamerica Group (+4.5%) standing out. • Both Operating Income before D&A (OIBDA) and Operating Income (OI) increased by 16.2% and 25.5%, respectively, from January-March 2004. • Organic1 growth in Revenues, OIBDA and OI would have been +9.2%, +9.5% and 21.3%, respectively. • Strong growth in the cash generation coupled with profitability, despite intense commercial efforts: • Operating free cash flow (OIBDA-CapEx) reached 2,670.7 million euros, with a year-on-year increase of 15.2%. • Consolidated OIBDA margin of 41.2% vs. 41.4% a year ago. • Consolidated net income of 912.2 million euros, 35.9% more than the one obtained the previous year: • Earnings per share amounted to 0.184 euros as of March 2005, in comparison with 0.135 euros in the first three months of 2004. • Total accesses reached 131.0 millions (+28.6% year-on-year), reflecting the strong commercial activity: • Cellular accesses increased by 50.3% to 81.4 million. • Retail ADSL accesses amounted to 3.5 million from 2.3 million a year ago. ------------------------ 1 Assuming constant exchange rates and includes the consolidation of the LatinAmerican assets acquired to BellSouth in Argentina, Colombia, Chile, Ecuador,Guatemala, Nicaragua, Panama, Peru, Uruguay and Venezuela in the cellularbusiness and Atrium in the Telefonica Latinoamerica Group from 1 January 2004. TELEFONICA GROUP Consolidated Results The results obtained by Telefonica Group and the management report included inthis report are based on the actions carried out by the various business unitsin the Group and which constitute the units over which management of thesebusinesses is conducted. This implies a presentation of results based on theactual management of the various businesses in which Telefonica Group ispresent, instead of adhering to the legal structure observed by theparticipating companies. In this sense, income statements are presented by business, which basicallyimplies that each line of activity participate in the companies that the Groupholds in the corresponding business, regardless of whether said holding hasalready been transferred or not, even though it might be the final intent ofTelefonica, S.A. to do so in the future. It should be emphasized that this presentation by businesses in no case altersthe total results obtained by Telefonica Group. These results are incorporatedfrom the date of effective acquisition of the holding. The results of the Telefonica Group during the first quarter of 2005 werecharacterized by the solid growth and profitability of operations despite theintense commercial activity (revenues up 16.7% and Operating Income before D&Aup 16.2%), and the higher operating cash flow generated (OIBDA-CapEx up15.2%). As a result, net income amounted to 912.2 million euros, up 35.9% inrelation to the same period of 2004. As of 31st March, 2005, Telefonica Group had 131.0 million of total accesses(fixed telephony accesses, Internet and data accesses, Pay TV and cellularaccesses), 28.6% more than in March 2004. If we include the Cesky Telecom'saccesses, total accesses would amount to 140.0 million. Cellular accesses were the highest contributor to this evolution, ending thequarter with a managed customer base of 81.4 million (+50.3% year-on-year), adding 3 million new customers in the first quarter 2005. Of thetotal customer base, 59.1 million corresponded to the Latin American operators,19.1 million to Telefonica Moviles Espana and 3.2 million to Medi Telecom(Morocco). Retail ADSL accesses in Spain and Latin America totaled 3.5 million as of March31st, 2005, a year-on-year growth of 56.6%. Telefonica Group retailADSL acceses in Spain totaled 2.1 million (+43.2 vs. March 2004), representingan estimated market share of 54.2% of total broadband market. Retail ADSLaccesses in Latin America amounted to 1.5 million, compared with 815,268 a yearago. Among Latin America operators, it should be mentioned Telesp , with 880,183retail ADSL accesses (+69.9% year-on-year). Revenues amounted to 8,278.8 million euros during the first three months of2005, a 16.7% increase over the same period of the previous year due to thegeneral growth of all business lines, specially the cellular business, thanks tothe incorporation of the Latin American operators acquired to BellSouth. Thenegative impact of exchange rates deducted only 0.6 percentage points from therevenues growth rate, while variations in the consolidation perimeter added 8.1percentage points. By companies, the cellular business, the main contributor to the Group'sgrowth, registered revenues of 3,675.9 million euros, which was 34.6% higherthan that recorded in the first quarter of 2004 (variations in the consolidationperimeter1 accounted for 25.5 percentage points of the growth rate), supportedby the positive performance of service revenues (+36%). Likewise, revenues fromhandset sales also progressed well (+25%). By countries, it's worth tohighlight the solid evolution of operations in Spain, Venezuela, Argentina andColombia. ------------------------ 1 Includes the consolidation of the Latin American assets acquired to BellSouthin Argentina, Colombia, Chile, Ecuador, Guatemala, Nicaragua, Panama, Peru,Uruguay and Venezuela in the cellular business and Atrium in the TelefonicaLatinoamerica Group from 1 January 2004. The Telefonica de Espana Group, the second largest contributor to the Group's growth, recorded revenues of 2,842.0 million euros during the firstquarter of 2005, 6.0% higher than in January-March of the previous year.This performance in sales is due to the contribution of Broadband revenues(+48.3% year-on-year), driven by the higher ADSL client base, and,to a lesser extent, the contribution of Traditional Business revenues (+4.1%year-on-year). Revenues from the Telefonica Latinoamerica Group, the third largest contributorto the Group's growth, amounted to 1,735.2 million euros during the firstquarter of this year to record a 4.5% growth in current euros with regard to thesame period of the previous year. In constant euros, this increase is reduced to3.4%, because of the positive effect of the variation in the exchange rates.This variation was primarily due to Telesp and TASA, whose revenues increased by3.2% and 11.4% respectively in local currency, although the positive progress ofTEA and TIWS (+6.1% and +29.5% in constant euros) must also be noted. By geographic areas at the end of the quarter, Spain accounted for 56.6% of theGroup's revenues, down 5.3 percentage points year-on-year as aresult of the increased contribution from Latin America following theacquisition of the BellSouth Latin American operators (39.7% vs. 33.4% at March31st 2004). In the Latin America region, it's worth to highlight Venezuela,which accounted for 3.2% of total sales in comparison with the 0.04% a year ago,Colombia (+1.9 percentage points to 2.0%) and Argentina (+1.1 percentage pointsto 5.0%). Brazil accounted for 16.6%, compared with 17.5% twelve months ago. Similar to previous quarters, operating expenses reflected the aforementionedcommercial efforts in the main business lines and the incorporation of BellSouthassets. Hence, there was a year-on-year increase of 18.2% to total4,993.6 million euros during the first quarter of 2005. According to thebreakdown of expenses, the performance was as follows: • Supplies expenses grew by 25.2% in relation to January-March 2004 (26.4% excluding the forex effect), primarily due to the purchase of equipment for ADSL and Imagenio services by the Telefonica de Espana Group and the purchase of handsets and variations in the consolidation perimeter in the cellular business. • Personnel expenses increased by 2.1% due to the trend in the average workforce. The average workforce for the first three months of the year stood at 176,891 employees, an increase of 27,087 people. This 18.1% growth is due to the sharp increase in the Atento Group workforce (+37.4% year& ndash;on-year). Excluding the Atento Group, the workforce grew by 6.8%, because the layoffs carried out at Telefonica de Espana (2003- 2007 Redundancy Program) cannot offset the increase in employees from BellSouth Latin American operators. In addition, a provision of 121.3 million euros associated to the acceptance of 398 layoffs from the 1,750 requests received to join the 2003-2007 Redundancy Program has been accounted for. • External services grew by 24.8% (+25.5% in constant euros) because of the increased commercial activity, mainly by the Telefonica de Espana Group, the Telefonica Latinoamerica Group and the cellular business, which was also influenced by the changes in the consolidation perimeter. Moreover, during the quarter there was a gain on sale of fixed assets for 120.6million euros (+26.6 million euros on January-March 2004), mainly comingfrom the capital gains generated by the sale of Infonet, Radio Continental andRadio Estereo, both belonging to the ATCO Group, together with the capital gainrelated to real estate disposal. As a result, the Telefonica Group recorded Operating Income before D&A (OIBDA)of 3,414.7 million euros in the first quarter 2005, 16.2% more than in the sameperiod of 2004. Assuming constant exchange rates and excluding variations in theconsolidation perimeter2, the OIBDA would have grown by 9.5%. The Group'sconsolidated EBITDA margin was 41.2%, 0.2 percentage points lower than the oneregistered a year ago.------------------------ 2 Includes the consolidation of the Latin American assets acquired to BellSouthin Argentina, Colombia, Chile, Ecuador, Guatemala, Nicaragua, Panama, Peru,Uruguay and Venezuela in the cellular business and Atrium in the TelefonicaLatinoamerica Group from 1 January 2004. By companies, the cellular business is the Group's biggest contributor toconsolidated OIBDA growth, amounting to 1,317.9 million euros in absolute termsto represent 38.6% of total, after growing at a 16.7% rate in comparison withthe first three months of 2004. The increase in commercial costs resulting fromthe operator's strategic efforts to capture a significant part of thegrowth in Latin America and to maintain its competitive position in Spain led toa 5.5 percentage point reduction in the cellular business OIBDA margin inrelation to January-March 2004 to 35.9%. At the end of the first quarter, OIBDA at the Telefonica de Espana Group totaled1,191.9 million euros (34.9% of consolidated OIBDA), a year-on-yearincrease of 11.9% over the same period of the previous year. The OIBDA marginstood at 41.9% in March 2005, compared with the 39.7% twelve months earlier.OIBDA at the Telefonica Latinoamerica Group stood at 852.3 million euros duringthe first three months of 2005 (25.0% of total OIBDA), recording a year-on-year growth of 17.9% in current euros (16.8% in constant euros). Therationalization of operating expenses by operators resulted in a 5.6 percentagepoint improvement in the OIBDA margin compared with the January-March 2004period, standing at 49.1%. By geographic areas, Spain accounted for 63.1% of the Telefonica Group'sconsolidated OIBDA at March 31 2005, 5.6 percentage points less than one yearago due to higher contribution from Latin America (33.6% compared with 29.9% inMarch 2004) following the acquisition of assets from BellSouth. In this context,the increased contribution from Venezuela (3.1% vs. 0.03% in March 2004) must benoted. Moreover, contributions from Brazil in March 2005 decreased by 1.1percentage point to stand at 17.7%. Depreciation and amortization recorded a 6.5% year-on-year growth tostand at 1,526.4 million euros at the end of the first quarter of 2005,primarily as a result of the depreciation and amortization of the cellularbusiness (+41.4%) associated to changes in the consolidation perimeter. Consolidated operating income (OI) amounted to 1,888.3 million euros during thefirst three months of the year, 25.5% more than in the same period of theprevious year. Changes in the consolidation perimeter2 and in exchange ratesadded 4.1 percentage points and 0.1 percentage points of growth, respectively. Financial expenses amounted to 317.7 million euros in the first quarter,including a positive result from forex of 62.8 million euros. As such, theeffective cost measured as a percentage of total average debt for the quarterwas 4.6% (or 5.5% excluding the positive income from forex). Total financialexpenses dropped by 1.2% with regard to those of the first three months of 2004estimated under IFRS, as the lower costs mostly offset the 17.5% increase inaverage total debt. The net free cash flow after CapEx generated by the Telefonica Group amounted to1,164.8 million euros for the first quarter of the year. Of this, 906.3 millioneuros were devoted to financial investments (net of divestiture) and 224.0million euros for net payment for dividends and treasury stock. Including thesum of 39.3 million euros received from the sale of real estate, the free cashflow after dividends available to reduce financial debt stood at 73.8 millioneuros. Free cash flow stood at 1,355.7 million euros (according to the criteriaused at the 3rd and 4th Investor Conferences) prior to payments made to amortizecommitments related to headcount reduction plan (and taking into account thealmost absence of dividend payments to minority interests during the firstquarter). The Telefonica Group's net financial debt at the end of March 2005 stoodat 23,948.1 million euros. Most of the increase in debt was due to theappreciation of the dollar and the Latin American currencies against the eurothroughout the first quarter, which accounted for 292.4 million euros of theincrease in debt. Total debt (including guarantees and labour commitments for atotal of 3,648.2 million euros) amounted to 27,596.3 million euros, equivalentto 2.0 times OIBDA annualized for the quarter. The negative results of associated companies recorded a year-on-yearreduction of 69.1% in comparison to the first quarter of 2004 to total -9.1 million euros (-29.5 million euros a year before). The lower lossesrelated to Sogecable, IPSE 2000, Medi Telecom and Lycos Europe and the higherstake in Portugal Telecom explain this performance. The tax provision for the first three months of the year reached 579.9 millioneuros, even though the cash outflow will be more reduced for the TelefonicaGroup to the extent that negative tax bases obtained in previous years areoffset. Results attributed to minority interest deducted 69.4 million euros from theGroup's net income for the January-March 2005 period in comparison withthe -45.6 million euros of the same period of 2004. The 52.2% growth inthis item is justified by the lower losses at Terra Networks Group. Due to the performance of the above items, net income amounted to 912.2 millioneuros for the first three months of the year, a 35.9% year-on-yeargrowth. The Telefonica Group's CapEx for the first quarter of the year amounted to744.0 million euros, registering a 20.1% year-on-year increase, dueto the higher investments made by the cellular business (+39.7%) and by theTelefonica Latinoamerica Group (+24.3%). In the cellular business, the rise inCapEx was due to the investment in BellSouth operators and the growth in Braziland Chile. In the Telefonica Latinoamerica Group, higher investments were due tobroadband development. Assuming constant exchange rates and excluding variationsin the consolidation perimeter3, CapEx would have grown by 13.8% year-on–year. However, it should be noted that there is a strong cyclicalcomponent to the investment, so this performance cannot be extrapolated for thefull year.------------------------ 3 Includes the consolidation of the Latin American assets acquired to BellSouthin Argentina, Colombia, Chile, Ecuador, Guatemala, Nicaragua, Panama, Peru,Uruguay and Venezuela in the cellular business and Atrium in the TelefonicaLatinoamerica Group from 1 January 2004. TELEFONICA GROUP Financial Data TELEFONICA GROUP SELECTED FINANCIAL DATA Unaudited figures (Euros in millions) January March 2005 2004 % Chg Revenues 8,278.8 7,093.4 16.7 Operating income before D&A (OIBDA) 3,414.7 2,937.6 16.2 Operating income (OI) 1,888.3 1,504.7 25.5 Income before taxes 1,561.4 1,153.5 35.4 Net income 912.2 671.4 35.9 Net income per share 0.184 0.135 35.9 Average number of shares (millions) 4,955.9 4,955.9 0.0 TELEFONICA GROUP RESULTS BY COMPANIES Unaudited figures (Euros in millions) REVENUES OIBDA OPERATING INCOME Mar Mar % Chg Mar Mar % Chg Mar Mar % Chg 2005 2004 2005 2004 2005 2004 Telefonica de 2,842.0 2,680.7 6.0 1,191.9 1,065.0 11.9 622.4 435.7 42.9Espana GroupTelefonica 1,735.2 1,659.7 4.5 852.3 723.0 17.9 449.6 326.4 37.7LatinoamericaGroupCellular 3,675.9 2,730.0 34.6 1,317.9 1,129.0 16.7 790.3 755.8 4.6BusinessDirectories 96.2 79.7 20.7 23.9 19.0 26.0 18.1 13.8 31.3BusinessTerra 113.0 105.4 7.2 14.3 1.5 n.s. (5.4) (22.9) (76.3)NetworksGroupAtento Group 178.7 134.4 32.9 22.6 19.2 17.8 15.5 9.8 57.8Content & 266.5 273.8 (2.6) 45.4 43.7 3.9 38.1 37.3 2.1MediaBusinessOther 187.3 189.5 (1.1) (47.5) (76.4) (37.8) (65.0) (92.9) (30.0)companies (*)Eliminations (816.0) (759.9) 7.4 (6.1) 13.7 c.s. 24.7 41.7 (40.8)Group Total 8,278.8 7,093.4 16.7 3,414.7 2,937.6 16.2 1,888.3 1,504.7 25.5 (*) OIBDA and Operating Income exclude the variation in investment valuationallowances accounted for by Telefonica S.A. parent company and that areeliminated in consolidation. TELEFONICA GROUP CAPEX BY BUSINESS LINES Unaudited figures (Euros in millions) January March 2005 2004 % Chg Telefonica de Espana Group 248.5 262.6 (5.4) Telefonica Latinoamerica Group 127.5 102.6 24.3 Cellular Business 311.4 223.0 39.7 Directories Business 2.4 3.6 (31.6) Terra Networks Group 2.5 5.1 (50.1) Atento Group 4.4 2.9 51.5 Content & Media Business 8.8 5.6 58.0 Other companies & Eliminations 38.4 14.2 170.0 Group Total 744.0 619.5 20.1 TELEFONICA GROUP CONSOLIDATED INCOME STATEMENT Unaudited figures (Euros in millions) January March 2005 2004 % Chg Revenues 8,278.8 7,093.4 16.7 Internal expenditure capitalized in fixed 87.4 88.3 (1.0) assets (1) Operating expenses (4,993.6) (4,225.4) 18.2 Supplies (2,114.5) (1,689.1) 25.2 Personnel expenses (1,298.1) (1,271.6) 2.1 Subcontracts (1,420.4) (1,138.5) 24.8 Taxes (160.5) (126.2) 27.2 Other net operating income (expense) (74.7) (42.8) 74.7 Gain (loss) on sale of fixed assets 120.6 26.6 n.s. Impairment of goodwill and other assets (3.8) (2.5) 56.2 Operating income before D&A (OIBDA) 3,414.7 2,937.6 16.2 Depreciation and amortization (1,526.4) (1,432.9) 6.5 Operating income (OI) 1,888.3 1,504.7 25.5 Profit from associated companies (9.1) (29.5) (69.1) Net financial income (expense) (317.7) (321.6) (1.2) Income before taxes 1,561.4 1,153.5 35.4 Income taxes (579.9) (406.6) 42.6 Income from continuing operations 981.6 746.9 31.4 Income (Loss) from discontinued 0.1 (29.9) c.s. operations Minority interest (69.4) (45.6) 52.2 Net income 912.2 671.4 35.9 Average number of shares (millions) 4,955.9 4,955.9 0.0 Net income per share 0.184 0.135 35.9 (1) Including work in process. TELEFONICA GROUP CONSOLIDATED BALANCE SHEET Unaudited figures (Euros in millions) March 2005 2004 % Chg Noncurrent assets 49,725.7 46,999.4 5.8 Intangible assets 5,914.9 4,848.7 22.0 Goodwill 6,656.4 4,131.3 61.1 Property, plant and equipment and 23,416.2 24,016.6 (2.5) Investment property Longterm financial assets and other 4,959.4 4,729.8 4.9 noncurrent assets Deferred tax assets 8,778.8 9,272.9 (5.3) Current assets 11,362.3 10,978.1 3.5 Inventories 718.1 437.0 64.3 Trade and other receivables 6,311.5 5,555.4 13.6 Current tax receivable 1,208.9 861.6 40.3 Shortterm financial investments 2,063.5 3,550.0 (41.9) Cash and cash equivalents 1,048.8 571.2 83.6 Noncurrent assets classified as held for 11.4 2.8 304.1 sale Total Assets = Total Equity and Liabilities 61,088.0 57,977.5 5.4 Equity 13,000.2 14,275.8 (8.9) Equity attributable to equity holders of 11,313.5 12,089.6 (6.4) the parent Minority interest 1,686.7 2,186.2 (22.8) Noncurrent liabilities 28,800.0 30,381.2 (5.2) Longterm financial debt 18,113.2 19,781.9 (8.4) Deferred tax liabilities 1,871.5 1,429.7 30.9 Longterm provisions 7,687.9 7,836.5 (1.9) Other longterm liabilities 1,127.5 1,333.1 (15.4) Current liabilities 19,287.7 13,320.4 44.8 Shortterm financial debt 9,455.1 5,450.6 73.5 Trade and other payables 5,488.4 4,909.2 11.8 Current tax payable 1,997.6 1,250.2 59.8 Shortterm provisions and other liabilities 2,341.2 1,710.5 36.9 Liabilities associated with noncurrent 5.4 0.0 N.S. assets classified as held for sale Financial Data Net Financial Debt (1) 23,948.1 (1) Net Financial Debt = Long term financial debt + Other long term liabilities + Short term financial debt - Short term financial investments - Cash and cash equivalents - Long term financial assets and other non-current assets. TELEFONICA GROUP FREE CASH FLOW AND CHANGE IN DEBT Unaudited figures (Euros in millions) January March 2005 2004 % Chg I Cash flows from operations 2,695.2 2,557.8 5.4 II Net interest payment (1) (400.5) (382.8) III Payment for income tax (192.9) (32.5) A= Net cash provided by operating 2,101.8 2,142.5 (1.9) I+II+III activities B Payment for investment in fixed and (937.0) (826.8) intangible assets C=A+B Net free cash flow after CAPEX 1,164.8 1,315.7 (11.5) D Net Cash received from sale of Real 39.3 143.2 Estate E Net payment for financial (906.3) (64.5) investment F Net payment for dividends and (224.0) (304.5) treasury stock (2) G= Free cash flow after dividends 73.8 1,089.9 (93.2) C+D+E+F H Effects of exchange rate changes on 292.4 net financial debt I Effects on net financial debt of 78.6 changes in consolid. and others J Net financial debt at beginning of 23,650.9 period K=JG+H+I Net financial debt at end of period 23,948.1 (1) Including cash received from dividends paid by subsidiaries that are not under full consolidation method.(2) Dividends paid by Telefonica S.A. and dividend payments to minoritaries from subsidiaries that are under full consolidation method and treasury stock. TELEFONICA GROUP RECONCILIATIONS OF CASH FLOW AND OIBDA MINUS CAPEX Unaudited figures (Euros in millions) January March 2005 2004 % Chg OIBDA 3,414.7 2,937.6 16.2 CAPEX accrued during the period (EoP 744.0 619.5 exchange rate) Payments related to commitments (236.4) (233.4) Net interest payment (400.5) (382.8) Payment for income tax (192.9) (32.5) Results from the sale of fixed assets (120.7) (26.6) Investment in working cap. and other (2,043.5) (1,566.1) deferred income and expenses = Net Free Cash Flow after Capex 1,164.8 1,315.7 (11.5) + Net Cash received from sale of Real 39.3 143.2 Estate Net payment for financial investment (906.3) (64.5) Net payment for dividends and treasury (224.0) (304.5) stock = Free Cash Flow after dividends 73.8 1,089.9 (93.2) Note: At the Investor Conference held in October 2003, the conceptexpected "Free Cash Flow" 20032006 was introduced to reflect theamount of cash flow available to remunerate Telefonica S.A.Shareholders, to protect solvency levels (financial debt andcommitments), and to accomodate strategic flexibility. The differences with the caption "Net Free Cash Flow after Capex"included in the table presented above, are related to "Free CashFlow" being calculated before payments related to commitments(workforce reductions and guarantees) and after dividend payments tominoritaries, due to cash recirculation within the Group. Jan-Mar Jan-Mar 2005 2004 Net Free Cash Flow after Capex 1,164.8 1,315.7 + Payments related to cancellation of 191.3 196.7 commitments Ordinary dividends payment to (0.4) (1.8) minoritaries = Free Cash Flow 1,355.7 1,510.6 TELEFONICA GROUP NET FINANCIAL DEBT AND COMMITMENTS Unaudited figures (Euros in millions) March 2005 Longterm debt 18,603.1 Short term debt including current maturities 9,455.1 Cash and Banks (1,048.8) Short and Longterm financial investments (1) (3,061.4) A Net Financial Debt 23,948.1 Guarantees to IPSE 2000 483.9 Guarantees to Newcomm 47.1 B Commitments related to guarantees 531.0 Gross commitments related to workforce reduction 5,405.0 (2) Value of associated Longterm assets (3) (786.8) Taxes receivable (4) (1,501.0) C Net commitments related to workforce reduction 3,117.2 A + B + C Total Debt + Commitments 27,596.3 Net Financial Debt / OIBDA (5) 1.8x Total Debt + Commitments/ OIBDA (5) 2.0x (1) Short term investments and certain investments in financialassets with a maturity profile longer than one year, whose amount isincluded in the caption "Investment" of the Balance Sheet. (2) Mainly in Spain, except 86,0 million euros related to theprovision of pension fund liabilities of corporations outside Spain.This amount is detailed in the caption "Provisions for Contingenciesand Expenses" of the Balance Sheet, and is the result of adding thefollowing items: "Provision for Preretirement, Social SecurityExpenses and Voluntary Severance", "Group Insurance", "TechnicalReserves", and "Provisions for Pension Funds of Other Companies". (3) Amount included in the caption "Investment" of the BalanceSheet, section "Other Loans". Mostly related to investments in fixedincome securities and longterm deposits that cover thematerialization of technical reserves of the Group insurancecompanies. (4) Net present value of tax benefits arising from the futurepayments related to workforce reduction commitments. (5) Calculation based on annualized OIBDA. TELEFONICA GROUP EXCHANGES RATES APPLIED P&L (1) Balance Sheet and CapEx (2) jan-mar jan-mar mar 2005 mar 2004 2005 2004 USA (US Dollar/Euro) 1.311 1.249 1.296 1.222 Argentina (Euro/ 3.839 3.631 3.782 3.496 Argentinean Peso) Brazil (Euro/Brasilian 3.495 3.619 3.457 3.555 Real) Chile (Euro/Chilean Peso) 757.576 735.294 757.576 751.880 Colombia (Euro/Colombian 3,086.420 3,386.202 3,076.923 3,273.783 Peso) El Salvador (Euro/Colon) 11.468 10.933 11.343 10.696 Guatemala (Euro/Quetzal) 10.108 10.137 9.849 9.912 Mexico (Euro/Mexican Peso) 14.654 13.717 14.641 13.635 Nicaragua (Euro/Cordoba) 21.533 n.d. 21.427 n.d. Peru (Euro/Peruvian Nuevo 4.277 4.338 4.230 4.231 Sol) Uruguay (Euro/Uruguayan 33.156 36.905 33.124 36.305 Peso) Venezuela (Euro/Bolivar) 2,816.901 2,398.844 2,785.515 2,347.008 (1) These exchange rates are used to convert the P&L accounts of the Groupforeign subsidiaries from local currency to euros. P&L accounts for subsidiariesthat use inflation adjusted accounting criteria (Venezuela), are first convertedto US dollars at the closing exchange rate, and then the conversion into eurosis made according to the average exchange rate. (2) Exchange rates as of 31/03/05 and 31/03/04. RESULTS BY BUSINESS LINES Fixed Line Business TELEFONICA DE ESPANA GROUP The first quarter of 2005 reflected strong growth in the broadband market.Telefonica de Espana Group, which has been the driving force of the market, wasthe main actor in this growth, promoting its transformation business through itsinnovative portfolio of services. In this market environment, the intensecommercial activity of Telefonica de Espana was aimed at defending is positionin the traditional business, and overall at developing broadband services, withmain activity focus on Value Added Services as the key element to secure itsleadership position in the market. The main actions aimed at the development of broadband services have been thefollowing: • Launching of new broadband services, where ADSL MINI and Voice over IP (VoIP) services should be noted. ADSL MINI service, which allows Internet surfing and downloading of up to 1GB of information per month at any time of the day for a monthly fee of 29.90 euros; additional downloads are billed at 5 euros for every additional 2GB or fraction thereof, to a monthly maximum of 42 euros. The VoIP service, launched on April with a promotional monthly fee of 2 euros, enables a virtual voice line with an independent numbering from the traditional PSTN/ISDN line for ADSL or Imagenio clients; together with the additional line, an optional voice flat rate for fixed to fixed domestic calls (local, and long distance provincial and interprovincial), on promotion for six euros per month, is also commercialised. Among the Value Added Services launched, "Solucion ADSL Flexible Negocio" (Business Flexible ADSL Solution), "Solucion ADSL e-gestion factura" (Billing e- management ADSL Solution) and some sectorial solutions (shoemakers and juridical sectors) are to be mentioned. • During the first months of the year the Company has progressed significantly on increasing the coverage o Imagenio, TV service over a 6Mbps ADSL connection. By the end of April, Imagenio was available at 104 major Spanish cities, covering over three and a half million households. • With regards to ADSL promotions, 85.902 new clients benefited from the free ADSL connection fee promotion starting January 26th and ending February 14th, and that did also include free local calls throughout the year 2005; the 25.7% discount on the ADSL monthly fee through 2005 promotion started on February 21st and ended on march 31st. Additionally, the Company has been actively promoting, through an intense commercial campaign, the ADSL Video Supervision service (Video Surveillance ADSL) during the first quarter. Relating the voice and access businesses, the following commercial actions havebeen undertaken: • The launch last February of the "Tarifa de Voz Mini", Mini Voice Rate, which offers the option of making all local, provincial and national calls at a set rate, regardless of their duration, to a maximum of 60 minutes. • The promotion from February 23rd to March 8th in which the first six months' fees for all new PSTN or ISDN lines signed up during that period were free of charge. 38,476 new clients benefited from this promotion. • Free connection fee campaign for new PSTN lines during April, recording 62.893 take ups. From a regulatory standpoint, it is very important to note that during the monthof April a group of eight bundles of services comprising double play and tripleplay (2P and 3P) offers were approved by the Spanish Regulator, Comision delMercado de las Telecomunicaciones, (CMT). Out of these bundles, the one thatwill be firstly commercialized is a 2P offer of voice plus TV (voice + ImagenioTV), whose launching is expected for May 2005. Equally to be noted, is the CMT authorization enabling the Telefonica de Espanato offer VoIP services, and the cancellation of the restriction on the Companypreventing bundling services with priced-in discounts on 3P servicesincluding Imagenio TV, broadband Internet access and voice services. Starting on the first quarter 2005, Telefonica de Espana Parent company ispublishing revenues breakdown adapted to the strategic corporate vision, inwhich access is the base for client relations and increases its value throughadded value services sold. Hence, revenues are to be distributed as follows: • Traditional Access, including connection and monthly fees • Traditional Voice Services which include revenues generated by outgoing and incoming (interconnection) voice traffic, voice consumptions, bonuses and handsets sales, voice value added services, and others. • Internet and Broadband Services, corresponding to revenues generated by the ADSL broadband business, including ADSL access revenues and VAS revenues, loop unbundling and narrowband Internet. • Data Services, which include the revenues from Virtual Private Networks, Circuits and Broadcasting, as well as wholesale services related to these type of data services. • IT Services, generated by systems integration and by outsourcing. It is worth noting that revenues previous included in the wholesale businesshave been distributed among these new categories according to their nature. • Revenues at Telefonica de Espana Group amounted to 2,842.0 million euros, a 6.0% growth compared to the first quarter of 2004. Telefonica de Espana Parent company registered revenues of 2,737.0 million euros in the first quarter of 2005, growing by 6,4% compared to the first quarter of 2004. Broadband and Traditional Access businesses stand out as main contributors to revenue growth at Telefonica de Espana Parent company, providing each 4.7 percentage points and 1.1 percentage points respectively. • Revenues from Traditional Access amounted to 707.7 million euros, a 4.1% growth attributable to the accumulated effect of the past two rises of the PSTN monthly fee. The first increase of the monthly fee was of 4.35%, equivalent to 0.55 euros a month, and was implemented on April 1st 2004; it will cease to contribute on revenues growth as of the second quarter of 2005. The second, a 2.0% rise, implemented on January 22nd, will continue to contribute to revenues growth throughout this year. The Spanish access market grew by 1.3% during the twelve months up to march 2005, staying at 87.7% the estimated access market share of Telefonica de Espana at the end of the first quarter of 2005, after having lost 0.5 percentage points of market share since the start of the year, and 2.2 percentage points over the past twelve months. In absolute terms, the loss of lines (PSTN+basic ISDN access) over the quarter stood at 85,133, a slightly greater loss than in previous quarters. It is estimated that April's free connection fee campaign will help offset this loss over the second quarter. Moreover, Traditional Voice Service revenues grew by 1.8% to total 1,283.3 million euros due to the management effort on promoting higher priced traffic (as international long distance) and reducing discount bonuses (on Comprehensive Maintenance Service, SIM). At this point, it is important to note the growth in revenues from outgoing voice traffic (national, international, fixed-to-mobile, intelligent network and other voice consumptions), which amounted to 5.2% despite the 9.8% drop in the volume of traffic processed in minutes. The difference in growth between revenues and traffic volume, which stood at 15.0 percentage points, is mainly due to two factors: The evolution of the traffic mix towards higher priced traffic per minute, explaining around 5 percentage points of the difference in growth, and the change in the accounting criteria on the SIM bonuses, that from April 2004 lower handset sales and others revenues whereas prior to April 2004 they were lowering voice usage revenues; this latter effect, represents around 6 percentage points of the difference in growths and will cease to have an impact as of the second quarter of this year, as already explained in detail during the second quarter of 2004. Amounting to 17.9% of Traditional Voice Service revenues, Interconnection revenues grew by 7.7% to 229.2 million euros, on the back of growing transit traffic carried to mobile networks despite the decline of fixed to fixed interconnection traffic. As regards voice traffic, the estimated total volume of the market in Spain, expressed in minutes, was down 5.0% in the first quarter in comparison with the same period of the previous year. Telefonica de Espana's estimated share of the voice market stood at 67.0% at March end, 1.0 percentage points lower than that recorded in December 2004 and 4.2 percentage points lower than the March 2004 share, and thus improving the behaviour of 2004, when 4.4 percentage points of market share were lost. The estimated total volume of minutes processed by Telefonica de Espana during the first quarter of 2005 amounted to 29,249 million, a 10.7% year& ndash;on-year drop. Total outgoing traffic (including internet), which accounted for 54.6% of total traffic, amounted to 15,965 million minutes and fell by 14.5% compared to the same period of the previous year. Traditional outgoing traffic totaled 11,366 million minutes at March end, down by 9.8% year on year due to the negative performance of the market and the aforementioned loss in market share. The negative trend in traffic continued over the quarter, with significant year-on-year falls in domestic fixed-to-fixed traffic: local traffic was down by 13.2%, provincial traffic by 13.2% and DLD traffic by 10.4%. There was also a 1.0% drop in fixed-to-mobile traffic during this period. Only international traffic maintained a positive trend, with a year-on-year growth of 11.6%, accelerating strongly over the quarter in comparison to the growth of the previous year, as a result of the successful capture of traffic generated by the immigrant population to their countries of origin. The number of outgoing minutes to the Internet amounted to 4,599 million to March and continues to represent a negative year-on- year change, 24.3% during this quarter, mainly as a result of switched internet traffic cannibalisation by broadband ADSL services. Finally, incoming traffic amounted to 13,284 million minutes, a 5.6% drop compared with the same period of the previous year. The total number of preselected lines increased by 23,925 over the quarter, which meant a significant reduction compared with the increase of 83,246 lines recorded during the last quarter of 2004. The total number of preselected lines amounted to 2,403,382 by the end of the first quarter of 2005. • Revenues from Internet and Broadband Services totaled 424.3 million euros during the quarter, a year-on-year growth of 27.1%. Broadband revenues, at 370.6 million euros, contributed 13.1% of the Telefonica de Espana Parent company revenues and grew by 48.3%, driven by the increased number of ADSL connections in service, particularly retail lines. Retail broadband services recorded revenues of 285.8 million euros, a 46.6% increase. Wholesale broadband services totaled 84.9 million euros. Of these, a little over 88% were from Telefonica's ADSL wholesale services, while the remaining 12% represented those associated to loops unbundling. The broadband market in Spain continued to grow strongly over the quarter to record a net gain of 420,883 new lines, which, despite being a little below the peak recorded in the last quarter of year 2004 (439,994 lines), presents a 54.1% increase on the first quarter of 2004 year. The net gain of Telefonica de Espana retail and wholesale ADSL lines during the first quarter of the year amounted to 282,694 lines, which represented getting 67.2% of the net broadband market gain for the quarter. The total number of these lines has now reached 2,772,807. Telefonica de Espana retail lines also benefited from the acceleration in growth, recording a net gain of 188,568 to give an aggregate total of 1,800,465 retail ADSL lines. The unbundled loops by competitors of Telefonica de Espana in the first quarter of the year were 21,790 as fully unbundled loops and 55,507 as shared loops; the total number of unbundled loops by the end of March being 193,409, of which 100,235 were fully unbundled and 93,174 were shared loops. There was accelerated growth in the net gain of unbundled loops, standing at 77,297 this quarter in comparison with the 43,925 of the previous quarter. In view of this, the Telefonica Group's estimated retail broadband market share stood at 54.2%, 1.3 percentage points down on the end of last year, which reflects a slowdown in market share loss (2.6 percentage points lost in the fourth quarter of 2005) which is attributable to the commercial initiatives undertaken by Telefonica de Espana. The determined push of Telefonica de Espana on ADSL Value Added Services is being backed by their highly acceptance among ADSL retail clients, having 54,3% of them contracted at least one VAS. Soluciones ADSL stand out among all VAS commercialised, with a total of 197.025 operative solutions at the end of the first quarter, showing a 10,6% increase compared to that figure as of 2004 year end. It should be noted that, at the end of march 2005, the total number of operative VAS surpassed 1.5 million, compared to the lower that 1.2 million operative VAS at the end of 2004. With regard to Imagenio service, this first quarter of the year has marked a turning point in its development, it performing solidly in terms of both coverage and clients. A net gain of 13,609 clients was recorded, compared with the 2,438 of the previous quarter, to end the first quarter of 2005 with a total of 19,633. This progress is being upheld, as can be seen by the 32.738 clients with access to Imagenio at the end of April 2005, and the volume of gross adds to the service, which continues to grow at a steady rate and already exceeds 3,500 connections a week. • Data Services grew by 6.3% to total 261.2 million euros. Virtual Private Network services maintained a steady level of revenues, despite the 3.5% growth in the number of connections. This is due to the pricing pressure exerted by the challenging competitive environment and to technological change. Wholesale circuit rental and transport capacity to other operators drove the growth in this sector, representing 35.5% of the data services total. • Lastly, Information Technology Services contributed with 60.5 million euros to total revenues, with a 14.9% increase. There are currently 139 client management centres operated by Telefonica, showing a 7.8% increase over December 2004, while the number of hosting servers grew by 11.8%. The lower rate of revenues growth at Telefonica de Espana Group compared to thatof Telefonica de Espana Parent company, a difference of 0.4 percentage points,is mainly due to Telefonica Telecomunicaciones Publicas (TTP, Telefonica PublicTelecommunications), whose revenues fall by 8.8% in the first quarter of 2005. The 6.0% growth in Revenues recorded during the first quarter of 2004 cannot beextrapolated to the year as a whole, as the contribution to growth of effectssuch as the 2004 PSTN monthly fee increase, and the decrease of SIM bonuses inApril 2004 will cease to exist over successive quarters, as indicated above.Additionally, 2005 Price-Cap formula set at CPI-3% (equals to-1%) should be completed by the 1st of July 2005, while in 2004 it was fullyapplied on the 1st of November. Telefonica de Espana continued to develop its operational efficiency programthrough the 2003-2007 Redundancy Program (E.R.E. 2003-2007). A totalof 1,750 employees have requested to join the program by the end of the quarter.Of these requests, a total of 398 layoffs have already been accepted and madeeffective during the first quarter of 2005, carrying an associated provision of121.3 million euros. Telefonica de Espana Group's Operating Expenses reflect the commercialefforts the Company is making, and the total figure of 1,709.6 million eurosrepresents a 2.3% year-on-year increase. • Personnel expenses fell by 9.7% to 647.7 million euros, due to the lower provisions associated to the E.R.E. during the first quarter of 2005. Were these provisions to be excluded in 2004 (121.3 million euros) and 2005 (185.7 million euros), the decrease would stand at 0.9%, 8.8 percentage points below that recorded. This slight reduction, bearing in mind that the company is currently implementing the redundancy plan referred to, is primarily due to two factors: the review of salaries and incentives paid for staff not included in the collective agreement, which took place during the first quarter of 2005 and not the second as in 2004, and the appointing of 290 employees from Telefonica I+D (Telefonica R&D) and other Telefonica Group business lines by the Telefonica de Espana Group to undertake systems integration and outsourcing projects aimed at the business market. Following these appointments, the headcount at the Telefonica de Espana Parent company stood at 34,697 employees at the end of the first quarter, 348 fewer than at the end of 2004 and 1,647 fewer than the 36,344 figure as of March 2004. • Supplies expenses, which as of this quarter include payments for the interconnection of international traffic (net revenues were previously recorded once these expenses had been eliminated), grew by 10.7% to 710.4 million euros, despite the slight 0.8% rise in interconnection expenses at Telefonica de Espana Parent company, which represented over 67% of its total supplies expenses. Purchases of client equipment for ADSL and Imagenio services, and to a lesser extent, the expenses arising from the provision for Internet access by both services and those allocated to loops unbundling (OBA) in the central offices, are the main effects after the increase in supplies expenses. • External Services expenses increased by 13.2% to total 304.3 million euros owing to the commercial efforts made in response to the challenging competitive situation and the market developments that have characterized recent months. Commercial expenses at Telefonica de Espana Parent company amounted to 101.1 million euros, a 16.5% increase over the first quarter of 2004. The general effort made by the company to increase revenues and efficiency werereflected in an Operating Income Before Depreciation and Amortization (OIBDA) of1,191.9 million euros, a 11.9% year-on-year growth. As withpersonnel expenses, this progress was affected by the provisions allocated tothe Redundancy Program for 2004 and 2005. Were the provisions for both years tobe excluded, the growth rate would be 5.0%. The OIBDA margin totaled 41.9% during the first quarter of 2005, compared withthe 39.7% recorded in the same period of 2004. Were the effect of the RedundancyPlan provision over both quarters to be excluded, the first quarter margin of2005 would be 4.3 percentage points higher, although this would be 0.5percentage points down on the first quarter of 2004, as a result of greatercommercial efforts during 2005. Telefonica de Espana Parent company OIBDAamounted to 1,189.3 million euros, up 11.7% year on year. CapEx, significantly affected by seasonal behavior and, therefore, notrepresentative of the CapEx expected for the year as a whole, amounted to 248.5million euros, a 5.4% decrease compared with the first quarter of 2004. TELEFONICA DE ESPANA GROUP SELECTED OPERATING DATA Unaudited figures (Thousands) March 2005 2004 % Chg Fixed telephony accesses (1) 16,258.3 16,479.9 (1.3) Internet and data accesses 5,162.2 4,347.2 18.7 Narrowband 2,094.3 2,368.8 (11.6) Broadband (ADSL) 2,772.8 1,847.3 50.0 Retail (2) 1,800.5 1,194.3 50.8 Unbundled loops (3) 193.4 24.1 n.s. Pay TV 22.1 3.1 n.s. (1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primaryaccess x30; 2/6 Access. Company's accesses for internal use included. (2) Satellite included. (3) Includes fully unbundled loops and shared loops. TELEFONICA DE ESPANA PARENT COMPANY OPERATING REVENUES Unaudited figures (Euros in millions) January March 2005 2004 % Var Traditional Access (1) 707.7 680.1 4.1 Traditional Voice Services 1,283.3 1,261.0 1.8 Domestic Traffic (2) 356.0 370.1 (3.8) Fixed to Mobile Traffic 283.2 283.9 (0.3) International Traffic 111.5 87.8 27.0 Intelligent Network, other voice consumption 62.1 30.8 101.5 and bonusses (3) Interconnection (4) 229.2 212.8 7.7 Handsets sales and others (5) 241.4 275.6 (12.4) Internet Broadband Services 424.3 333.9 27.1 Narrowband 53.7 84.1 (36.1) Broadband 370.6 249.9 48.3 Retail (6) 285.8 194.9 46.6 Wholesale (7) 84.9 55.0 54.3 Data Services 261.2 245.7 6.3 VPN, Leased Circuits and Broadcasting 168.6 173.6 (2.9) Wholesale 92.6 72.1 28.4 IT Services 60.5 52.7 14.9 Total operating revenues 2,737.0 2,573.4 6.4 (1) Monthly and connection fees (PSTN, Public Use Telephony, ISDN and CorporateServices) and Telephone booths surcharges. (2) Local and domestic long distance (provincial and interprovincial) traffic. (3) Intelligent Network Services, Special Valued Services, Information Services(118xy), bonusses and others. (4) Includes revenues from fixed to fixed incoming traffic, fixed to mobileincoming traffic, and transit and carrier traffic.Related Shares:
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