1st Mar 2007 18:52
Telefonica SA01 March 2007 Part 2 RESULTS BY BUSINESS LINES Telefonica O2 Europe The results of O2 Europe for the period ended 31 December 2006 comprise theresults of the O2 Group for the 11 month period ended 31 December 2006 and theresults of Telefonica O2 Czech Republic and Telefonica Deutschland for the 12month period ended December 2006. O2 Group also includes the results of be* from1 July 2006, Decision Focus from 1 august 2006 and The Link from mid September2006. At the end of December 2006, the contribution of Telefonica O2 Europe toTelefonica Group revenues was 13,159 million euros, and operating income beforedepreciation and amortization (OIBDA) reached 3,708 million euros. Telefonica O2 Europe CapEx for the period ended December 2006 amounted to 2,553million euros. For the period Feb-Dec 06, O2 Group CapEx, excludingacquisitions, totaled 2,238 million euros, in line with the guidance for theperiod provided by the Company (2,000-2,300 million euros). Among the latest actions taken in the quarter, we should highlight: • The launch of Telefonica O2 Slovakia's commercial service on 2 February 2007. In the first 12 days over 110,000 active customers were acquired. The initial offer, called "O2 Jednotky", includes prepaid on-net calls for SKK 2 and SKK 8.50 for calls to all other networks, and the Czech Republic, at anytime of the day. From 2 February until 31 march all customers will receive a 100% credit bonus when they top up for the first time. Top up vouchers are available with a value of SKK 250 and 350 (valid for 3 months), as well as SKK 550 and 950 (valid for 6 months). Vouchers will be sold through a broad distribution network of more than two thousand points of sale located across Slovakia. • O2 launched its DSL service and refreshed its successful Genion Homezone tariffs, enabling the company to offer integrated mobile, DSL landline telephony and broadband Internet access services. The DSL packages, O2 DSL S /M/L, are priced from 40 euros to 55 euros a month and comprise a DSL connection of 4 to 16 megabits per second with flat rate Internet access, plus fixed line calls charged either at flat rate or per minute. O2 DSL customers who are also O2 mobile contract customers receive a discount of 5 euros per month. The refreshed Genion tariffs - S/M/L - are closely integrated with the new DSL offering. The new tariffs simplify and reduce prices for making calls from both within and outside the Homezone. The Genion S tariff is a postpay tariff without a fixed contract term and no basic monthly fee. Genion M offers a flat rate tariff for calls from the Homezone, while the Genion L tariff introduces a Germany-wide flat rate for a monthly fee of 25 euros. • Be* continued its network rollout in the UK, with over 500 exchanges across the UK unbundled by february 2007, enabling it to provide broadband services to more than one third of the UK population. Be* operates one of the most innovative and technically-advanced UK broadband networks, using ADSL 2+ technology which offers download speeds of up to 24 Mbps. Be* also launched "Upload Plus" during the quarter, a service which allows business broadband customers to send data at much faster speeds of up to 2.5Mbps, more than double the nearest competitor. Be* is the first UK ISP to offer this service, with a rollout to consumers planned for the second quarter. Plans to offer an integrated mobile and broadband service from O2 in mid 2007 are progressing well, driven by three aims: to make customers' lives easier; to offer the best service quality and customer service in the market; and to give straightforward value for money. • During the quarter O2 UK finished the re-branding of 96 Link stores, bringing the total number of O2 Retail stores to around 400. This expansion is part of an ongoing shift in the UK market towards increased direct distribution by network operators. As the focus moves to retention and loyalty in an increasingly mature market O2 is well placed to improve the customer experience through its award winning retail chain. In December O2 Ireland announced a joint venture with Tesco in Ireland, Tesco Mobile, to offer exclusively Tesco branded mobile services in Tesco Ireland stores nationwide. The MVNO service will use the O2 network and is expected to launch in summer 2007.In October O2 Ireland and Arqiva jointly announced the first consumer trial of broadcast mobile TV in Ireland, featuring all the main Irish TV channels plus content from Sky and other channels. 350 O2 customers in the Greater Dublin area will be able to access broadcast TV on their mobile phone during the trial, using the Nokia N92 DVB-H handset. O2 has already conducted initial demonstrations of broadcast mobile TV at the 2006 Ryder Cup, with content from RTE 1, RTE 2, TV3, TG4 and Sky. The trial will commence in early March. • Following on from the announcement in December 2006, JPMorgan Cazenove has been instructed to conduct a strategic review of Airwave, including a possible sale of the business. Since that date JPMorgan Cazenove has been working with all stakeholders involved, including the UK government, to review options and produce an Information Memorandum, which is expected to be released in early Spring. With the conclusion of the Welsh Ambulance contract, Airwave has now contracted with all the blue light emergency services in the UK and continues to pursue other opportunities, such as winning new contracts and providing additional services to existing customers, as demonstrated by recent announcements regarding contracts with London Underground and Channel Tunnel Rail and the launch of new data services. O2 Group O2 UK Fourth quarter net service revenue grew by 13.7% year on year and for the elevenmonths to 31 December reached a total of 3,885 million pounds, an increase of14.7% compared to the same period last year, in line with the guidance providedfor 2006 (14%-15% range). This growth has been driven by continued strongcustomer and ARPU growth. OIBDA margin for the eleven months to 31 December 2006 was 28.4% compared to29.3% for the same period last year, reflecting the high level of customergrowth, with O2 UK adding 1.65 million customers in the calendar year. The dropin OIBDA margin reported for the 11 month period until December is fully alignedwith the last guidance provided by the Company (-1 p.p.) OIBDA for the elevenmonths to December 2006 was 1,211 million pounds, showing an increase of 10.2%vs. the same period last year. The quarter again saw tough competition in the market, but the businesscontinued to perform well with broadly stable gross additions quarter onquarter, although year on year gross additions were down around 5% due to theincreasingly mature nature of the UK market. A total of 295,500 net newcustomers were added in the quarter, taking the base to 17.6 million, 10.3%higher than at the same time last year (excluding the Tesco Mobile customerbase). A total of 136,200 net new contract customers were added in the quarter and atthe end of the period contract customers made up 35.3% of the total base,compared to 34.4% in the same period last year. 12 month rolling contract ARPUof 513 pounds was down 2 pounds quarter on quarter, and 4 pounds lower than thefourth quarter last year, as a result of new customer propositions and anincreasingly competitive market. 12-month rolling contract churn was 23%,compared to 27% for the same period last year, the sixth consecutive quarter ofdecline, reflecting the ongoing strategy of rewarding customer loyalty. A total of 159,300 net new pre-pay customers were added in the quarter, and 12month rolling pre-pay ARPU of 143 pounds was 7 pounds higher than the fourthquarter last year and 1 pound higher than the previous quarter, driven bypromotions such as O2 Long Weekends. 12 month rolling data ARPU of 84 pounds was 7 pounds higher than the same periodlast year and 1 pound higher than the previous quarter, driven primarily bygrowth in text message volumes, up 30% year on year in the fourth quarter, aswell as increasing usage of a range of non-SMS services such as the usergenerated content service "Look at Me". O2 UK's blended 12 month rolling ARPU of 273 pounds was 6 pounds higher than thefourth quarter last year, and 1 pound higher than the previous quarter,reflecting the continued growth in data ARPU coupled with broadly stable voiceARPU. Quarterly monthly minutes of use were up 9.1% year on year to 180 minutes amonth, driven by propositions such as 50% extra minutes on 18 month contracts,Treats and Long Weekends. O2 UK's own channels accounted for around 60% of gross connections in thequarter. O2 UK also completed the re-branding of 96 Link stores to expand its O2Retail network to around 400 stores. Blended customer acquisition costs (SAC) onan annual basis fell by around 9% year on year. CapEx in the eleven months to December (excluding CapEx related to theacquisition of be*and The Link) was 518 million pounds, with continuedexpenditure on rolling out coverage of the 3G network as well as investment inthe existing 2G network to ensure a high level of service. O2 UK promoted a number of products and services during the quarter, aimed atacquisition and retention of customers and revenue growth. These included: • O2 Long Weekends, offering free on net calls from Saturday to Monday for new and existing O2 Pay and Go customers who top up 15 pounds a month and free calls to any network in the UK for new Pay Monthly and upgrading customers; • O2 Treats, offering customers bundles of free texts, voice minutes or value added services after 6 months as an O2 customer to reward loyalty; • O2 Rewards, offering prepay customers 10% of top-ups back every 3 months; • Bluebook, which enables customers to store contact information, text messages, pictures and video clips to a free web-accessible personal account. The converged service is a first for any UK mobile operator; • The Xda Orbit, the latest model in the successful Xda range, a stylish, ultra slim, lightweight device with inbuilt Global Positioning System (GPS). The Xda Orbit features Microsoft(R) Windows(R) Mobile 5.0, with direct push email giving real time access to Microsoft(R) Outlook(R) Inbox, Calendar, Contacts and Tasks. The Xda Orbit also has an FM radio, an MP3 player, a 2.0 megapixel camera and a quad band mobile phone. O2 UKSELECTED OPERATING DATAUnaudited figures 2005 2006 December March June September December % Chg Cellular customer (thousands) 15,980.9 16,340.6 16,814.3 17,337.7 17,633.2 10.3 Prepaid 10,479.2 10,654.4 10,940.5 11,255.8 11,415.1 8.9 Contract 5,501.6 5,686.2 5,873.8 6,081.9 6,218.1 13.0 4Q 1Q 2Q 3Q 4Q % Chg MOU (minutes) 165 162 169 175 180 9.1 ARPU (EUR) 33.3 32.3 33.1 34.0 34.1 2.5 Prepaid 17.2 16.8 17.3 17.9 18.2 5.7 Contract 63.7 61.6 62.7 63.9 63.5 (0.4) Data ARPU 10.0 9.8 10.0 10.6 10.7 6.7 %non-P2PSMS over data revenues 12.2% 12.5% 13.3% 13.1% 12.5% 0.3 p.p. Note: MOU and ARPU calculated as monthly quarterly average. O2 Germany Service revenue grew by 3.3% in the fourth quarter, and for the eleven months toDecember reached a total of 2,808 million euros, an increase of 6.7% compared tothe same period last year vs. the guidance of High Single Digit growth providedby the Company for the period. This growth has been driven by the continuedexpansion of the customer base, which partly offset ARPU weakness in the Germanmarket. Fourth quarter service revenue was reduced by almost 5 p.p. due to thetermination rate cuts in December 2005 and November 2006. OIBDA margin for the eleven months to December was 20.7%, 1 percentage pointlower than the same period last year. OIBDA for the eleven months to December2006 was 631 million euros, broadly flat compared to the same period last year.OIBDA and consequently the OIBDA margin were negatively impacted by theinclusion of a charge related to a rebalancing of the workforce towardscustomer-facing areas. O2 Germany plans to increase the number of employees inareas such as customer service and to reduce positions in non-customer facingareas. Excluding this charge, the OIBDA margin for the eleven months to December2006 is 21.8%, stable in comparison to the same period last year and in linewith the full year guidance. In this competitive environment, O2 Germany continued to trade well. Roughly396,000 net new customers were added in the quarter, taking the base to 11.0million, 12.9% higher than at the same time last year. The Tchibo Mobilecustomer base grew by 55,000 to 827,000 by the end of the quarter. O2 Germany added a total of 192,700 net new contract customers in the quarter,its highest level since the fourth quarter last year. 12 month rolling contractARPU of 475 euros was 6 euros lower than the previous quarter, and 33 euroslower than the same quarter last year. This reflected the impact of thetermination rate cuts in both December 2005 and November 2006, as well asincreasing competition in the German market and the introduction of new customeroffers. A total of 203,400 net new pre-pay customers were added in the quarter. 12 monthrolling pre-pay ARPU of 105 euros was 6 euros lower than the previous quarterand 25 euros lower than the fourth quarter last year, reflecting the impact ofthe termination rate cuts, increasing competition, higher market penetration thegrowth in multiple SIM ownership and lower minutes of use. 12 month rolling data ARPU was 69 euros, 1 euro less than the previous quarterand 8 euros lower than the same period last year due to the higher number oflower spending pre-pay users in the base and a shift from SMS to voice usage.Non-SMS data users grew 12% compared to the same period last year. Blended 12 month rolling ARPU remains the highest in the German market at 290euros, down from 299 euros in the previous quarter and 332 euros in the samequarter last year. This trend reflects the ongoing impact of the terminationrate cuts, the rapid growth in the pre-pay customer base over the past 12months, which now makes up over 50% of the total base, and the increasinglycompetitive market environment. Termination rate cuts reduced 12 month rollingARPU in the quarter by approximately 13 euros. Blended customer acquisitioncosts (SAC) on an annual basis fell by around 8% year on year. Quarterly monthly minutes of use grew by 4% year on year, to 129 minutes, drivenby new propositions such as Genion flat rate. O2 Germany now has a total of 3.9million Genion customers (71% of the post-pay base), with 51% of all newpost-pay customers opting for Genion. CapEx in the eleven months to December was 1,139 million euros, with continuedexpenditure on both the 3G and 2G networks. Germany launched a number of new products and services during the quarter,including: • LOOP S/M/L, a new prepay tariff to reward larger top ups. For a 30 euros top up the customer receives a 20 euro bonus; • O2 Business flat, a nationwide flat rate tariff for on-net and fixed net calls. The flat rate is available for 25 euros per month SIM only and 35 euros with a handset. Off-net calls cost 15 cent/min. The Genion-Option for O2 Business and O2 Business Profi tariffs were also reduced, with local and long distance calls now charged at 2.5 cent/min; • The Xda Orbit, also launched in UK; • AOL Mobile. AOL Germany launched a mobile service during the quarter in co-operation with O2 Germany. The basic tariff costs 19 cent/min for calls to all networks, with SMS priced at 16 cents. Three additional options can be added to this basic tariff: Plus Family (4.99 euros/month) gives free calls between up to five numbers and an AOL phone; AOL Plus Friends (2.99 euros) enables national community calls for 5 cent/min; Plus Web offers 20 MB of WAP and Web browsing for 4.99 euros. • Launch of HSDPA on 1 December 2006. Data download speeds of up to 1.8 Mbit /s are available in Hamburg, Berlin, Cologne, Dusseldorf, Frankfurt and Munich. There is no HSDPA surcharge on existing UMTS tariffs. O2 GERMANYSELECTED OPERATING DATAUnaudited figures 2005 2006 December March June September December % Chg Cellular customer (thousands) 9,768.8 10,099.0 10,335.3 10,628.9 11,024.8 12.9 Prepaid 4,798.9 4,986.9 5,143.3 5,340.7 5,544.1 15.5 Contract 4,970.0 5,112.1 5,192.1 5,288.0 5,480.7 10.3 4Q 1Q 2Q 3Q 4Q % Chg MOU (minutes) 124 127 128 124 129 4.0 ARPU (EUR) 26.5 24.1 24.2 25.3 23.7 (10.6) Prepaid 10.4 9.2 8.9 9.0 8.3 (20.5) Contract 41.4 38.6 39.1 41.7 39.2 (5.3) Data ARPU 6.1 5.9 5.4 5.8 5.9 (3.6) %non-P2PSMS over data revenues 21.7% 23.0% 21.5% 21.4% 22.6% 0.9 p.p. Note: MOU and ARPU calculated as monthly quarterly average. O2 Ireland Service revenue fell by 1.5% in the fourth quarter due to termination rateregulation, increasing competition and the introduction of new customer offers.The termination rate cut of RPI minus 11% in January 2006 impacted fourthquarter service revenue growth by approximately 2%. For the eleven months toDecember service revenue reached a total of 824 million euros, an increase of1.1% compared to the same period last year, driven by a higher customer base. In a competitive market O2 Ireland traded well, with gross and net connectionsat a broadly similar level to the fourth quarter last year. 29,000 net newcustomers were added in total during the quarter, taking the total base to 1.6million customers, 1.9% higher than at the same time last year. O2 Ireland added a total of 17,000 net new contract customers in the quarter. 12month rolling ARPU of 1,020 euros was 53 euros lower than the fourth quarterlast year and 20 euros lower than the previous quarter, reflecting the impact ofthe termination rate regulation. A total of 12,000 pre-pay customers were added in the quarter, and 12 monthrolling ARPU was 353 euros, down 7 euros on the same period a year ago and 3euros compared to the previous quarter. 12 month rolling data ARPU was 117 euros, 4 euros higher than the fourth quarterlast year and 1 euro higher than the previous quarter. Non-SMS data users grewby 53% year on year. Blended ARPU of 542 euros was reduced by approximately 7 euros due to thetermination rate cuts, and was 8 euros lower than the same quarter last year anddown 3 euros quarter on quarter. Quarterly monthly minutes of use increased by 9.8% year on year to 246 minutes,mainly due to the ongoing success of usage stimulation promotions such as 1 centweekends on pre-pay. In addition O2 Ireland launched a number of pricing initiatives and servicesduring the quarter. These included: • Extension of a new device repair programme called Swap Out Service (SOS). From an initial trial in six O2 stores, the programme has been extended to all O2 Retail stores. Under the new service, customers are given an immediate replacement handset if they have a faulty device which is within its warranty period. • The launch of Napster Mobile in Europe on O2 Ireland 3G i-mode handsets. Napster Mobile allows O2 Ireland customers to search, browse, preview and purchase content from Napster's immense music catalogue of over two million songs. O2 Ireland also continued to promote the following offers: • 1 cent calls and texts at weekends for prepay customers, extended until 25 February 2007. • "My Europe" roaming tariff, offering holidaymakers a reduced flat-rate voice roaming rate across the European Union. Using the free opt-in service, O2 customers are charged a flat rate of 59 cent per minute to make or receive a call within the EU, regardless of the mobile network used, at any time O2 IRELANDSELECTED OPERATING DATAUnaudited figures 2005 2006 December March June September December % Chg Cellular customer (thousands) 1,601.8 1,593.0 1,598.6 1,603.0 1,632.0 1.9 Prepaid 1,173.2 1,154.0 1,146.9 1,134.9 1,146.9 (2.2) Contract 428.6 439.0 451.7 468.1 485.1 13.2 4Q 1Q 2Q 3Q 4Q % Chg MOU (minutes) 224 220 237 241 246 9.8 ARPU (EUR) 46.1 44.6 45.8 45.2 45.0 (2.4) Prepaid 30.5 28.9 29.4 29.8 29.6 (3.0) Contract 88.1 87.1 88.2 83.5 81.4 (7.6) Data ARPU 9.6 9.5 9.5 9.9 10.0 4.2 %non-P2PSMS over data revenues 11.8% 13.8% 15.6% 18.4% 19.6% 7.8 p.p.Note: MOU and ARPU calculated as monthly quarterly average. O2 Airwave After the period end, Airwave announced the Welsh Ambulance Service had signed a10 year contract worth 32 million pounds to use its service, as well as acontract with London Underground Limited valued at 115 million pounds to provideAirwave coverage for the emergency services throughout London's undergroundnetwork. Airwave has now contracted with all the "blue light" emergency servicesin the UK to supply a secure digital communications system . In December a 10 year contract was signed with Lancashire Constabulary toprovide a managed mobile data solution based around the Airwave MobileApplications Gateway (MAG) Service and the Airwave network. This groundbreakingdevelopment means that Lancashire Constabulary will become the first UK policeforce to deploy a multi-bearer force-wide mobile data solution. During the quarter Airwave also launched the "Locator" service, a new locationbased service aimed at all Public Safety organisations, including police, thatneed to know the whereabouts of their people and assets. A 2.8 million poundscontract was also signed with Channel Tunnel Rail Limited to provide Airwavecommunications to their UK tunnels and stations. Airwave continues to improveits offering to customers with the development of voicemail and call forwardingadding new functionality to Airwave's telephony features. RESULTS BY BUSINESS LINES Telefonica O2 Europe TELEFONICA O2 CZECH REPUBLIC Telefonica O2 Czech Republic contribution to Telefonica Group revenues in 2006amounted to 2,148 million euros. In local currency, and taking into accountother recurring revenues, this represents an increase of 0.4% year-on-year(+0.1% year-on-year in the fourth quarter alone), in line with the guidance offlat revenues set for 2006. Mobile business was the key driver of this growth,although the rate of decline of revenues from the fixed business slowed duringthe year. Consolidated operating expenses showed an increase in local currency of 2.8%year-on-year in 2006, up by 13.2% in the fourth quarter alone mainly due tore-branding costs and costs related to the launching of the Slovak project(operations actually began on February 2nd 2007), fully reflected in theyear-on-year 12.4% year-on-year increase, in local currency, of costs fromexternal services. Supplies expenses (+2.2% year-on-year in local currency) alsocontributed to the increase in consolidated expenses due to higher activity incarrier transit and growth in mobile off-net traffic from Telefonica O2 CzechRepublic customers. Personnel expenses showed a decrease in local currency of9.4% as a result of one-off items recorded in 2005 and 6.4% headcount reduction(total number of employees at 31 December 2006 is 9,416). The Group's operating income before depreciation and amortization (OIBDA)amounted to 985 million euros, a year-on-year increase of 2.4% in localcurrency, including Slovak operations and accomplishing guidance for the fullyear which was upgraded during third quarter' results. As a result, OIBDA marginwas 45.8% in 2006, 0.9 p.p. higher than in 2005, showing the ongoing path oncost efficiencies on the one hand, and the higher impairment charge registeredin 2005, on the other. Total CapEx for Telefonica O2 Czech Republic Group in 2006 amounted to 229million euros, an increase of 7.0% year-on-year in local currency. While CapExin the fixed segment increased by 40.0% year-on-year in local currency andlargely spent on broadband rollout and IPTV, investments in the mobile segmentdecreased by 16.9% year-on-year in local currency, mainly due to the significantinvestment in mobile broadband networks deployment made in the same period oflast year. CapEx over revenues reached 10.6% in 2006. Cumulative operating free cash flow (OIBDA-CapEx) to December 2006 stood at 755million euros, 1.1% year-on-year higher in local currency than in the sameperiod last year. Fixed Line Business1 Revenues in the fixed line business amounted to 1,057 million euros for the fullyear, showing a decrease of 5.1% year-on-year in local currency, driven by theshift from traditional voice services which has not been fully compensated bythe increase in revenues from broadband Internet, data and value added services.On the positive side, it is worth mentioning the turn around seen in theInternet revenues (Narrowband&Broadband) through the year and the significantimprovement in revenues from IT services.-------------------------------------------------------------------------------- 1 After the merger of Cesky Telecom and Eurotel into Telefonica O2 CzechRepublic as of 1st July, 2006 all inter-company transactions between fixed andmobile became intra-company. As a result, the financial results of the fixed andmobile segments for 2006, as well as the comparable results from 2005 aredisclosed excluding inter-segment revenues and costs. However, mobile ARPUcalculation includes the full amount of revenues (including revenues from fixedline business). Revenues from traditional access fell by 6.5% year-on-year in local currency,primarily due to the 17.4% decline in the number of fixed telephony accesses toreach 2.4 million accesses at the end of 2006, reflecting a strong fixed tomobile substitution effect, as well as the exclusion of "incoming only lines"from calculation, already reported in September. The increase of residentialmonthly fees from 1st May has impacted positively on this revenue item, showingrates of decline of around 2% in the third and fourth quarter, respectively,compared to a decline of 7.9% in the second quarter. Revenues from traditional voice services (voice traffic and interconnection)declined by 9.6% year-on-year in local currency. Revenues from voice trafficdeclined by 16.2% year-on-year in local currency, as a result of lower voicetraffic generated by end customers, which decreased by 7.0% year-on-year. Theunification of local and long distance rates effective as of 1st April helpedlong distance traffic to remain in 2006 in the same level as the previous year.Interconnection revenues were flat year-on-year in local currency in 2006,mainly due to the decrease in interconnection charges and lower incomingtraffic, being offset by the growth in revenues from international operators, asa result of higher international transit traffic. Revenues from Internet and Broadband services registered a year-on-year increaseof 9.7% in local currency and by 17.9% in the fourth quarter alone, reflectingthe turn around already seen from the first quarter, as Narrowband Internetrepresents a decreasing proportion of Internet revenues with limited downsidepotential. The total number of retail Internet broadband accesses at the end of December,2006 amounted to 405,000 (which represents 86.2% of the total ADSL base),showing a net adds in the year of 179,299 accesses. It is also important to mention that "O2 TV" customers at the end of 2006amounted to 15,600 since the launching of the service, based on the ImagenioIPTV platform, in the beginning of September 2006. Revenues from data services showed a 4.1% year-on-year decrease in localcurrency as the decrease in revenues from leased lines (-10.9%) was partiallyoffset by the increase in revenues from virtual private networks based onbroadband IP connectivity solutions (+6.2%). Mobile Business Revenues for the full year 2006 in the mobile segment increased by 6.1%year-on-year in local currency to reach 1,091 million euros. In the Czech mobile market, while SIM card penetration reached almost 121% at2006 year end, total number of cellular accesses managed by Telefonica O2 CzechRepublic increased by 4.0% year-on-year to reach 4.9 million at the end ofDecember 2006. Net additions for the full year amounted to 188,000, with strongperformance in the fourth quarter alone (93,000 net additions on contract and11,000 on prepay). Further migration of prepaid customers to contract, has leadto a 21.3% year-on-year increase in the number of contract customers who at theend of December totaled 1.9 million, or 38.5% of the total customer basecompared with 33.1% at the end of 2005. The blended monthly average churn ratestood at 1.5% for the full year, up from the 1.3% registered in 2005. Revenues from voice services (monthly fees, customer and interconnectiontraffic) increased in the full year by 4.4% in local currency, with the increasein revenues from monthly fees (+9.0% year-on-year), driven by the largercontract customer base, and helped by the 1.4% year-on year increase in trafficrevenues as a result of traffic stimulation activities. Total mobile trafficgrew by 21.0% year-on-year, reflecting an increased average MOU per subscriberand the increase of incoming traffic (MOU per customer blended resulted in 102minutes in 2006, up from 92 minutes in the last year). In the fourth quarter of 2006, blended ARPU registered a 2.7% year-on-yearincrease in local currency to reach 19 euros on the back of continuing customermigration from the prepaid to the contract segment. Revenues from Value Added services (SMS, MMS and Content) increased by 8.5% inlocal currency, with the non-SMS blended data ARPU as a percentage of data ARPUreaching 41.0%, compared with 39.0% for the same period last year. The number of customers using the Data Express service (CDMA-based broadbandinternet access service) reached 94,000, up by 34.3% year-on-year. This,together with the 10.4% increase in the number of customers using the DataNonstop service (GPRS-based internet access service), which stood at 74,000 atthe end of December, led to a year-on-year increase in revenues from Internetand Data of 24.5% in local currency. Revenues from equipment (including connection fees) showed a 0.6% year-on-yeardecrease in local currency, partially because lower connection fees charged tonew contract customers. TELEFONICA O2 CZECH REPUBLICSELECTED OPERATING DATA CELLULAR BUSINESSUnaudited figures 2005 2006 December March June September December % Chg Cellular customer (thousands) 4,676.0 4,695.0 4,770.2 4,759.7 4,864.5 4.0 Prepaid (1) 3,130.4 3,051.8 3,043.1 2,978.3 2,989.7 (4.5) Contract 1,545.6 1,643.2 1,727.1 1,781.3 1,874.8 21.3 4Q 1Q 2Q 3Q 4Q % Chg MOU (minutes) 97 96 102 102 109 12.4 ARPU (EUR) 17.5 17.1 17.9 18.3 18.8 7.6 Prepaid 8.3 7.9 8.4 8.6 8.8 6.5 Contract 36.8 34.8 34.8 34.9 35.0 (4.9) Data ARPU 3.8 3.7 3.7 3.8 4.0 6.0 %non-P2PSMS over data revenues 40.2% 39.1% 38.7% 43.0% 40.0% (0.2 p.p.)Note: MOU and ARPU calculated as monthly quarterly average.(1) 13 month active customer base. RESULTS BY BUSINESS LINES Telefonica O2 Europe Telefonica Deutschland Telefonica Deutschland revenues in the fourth quarter amounted to 76 millioneuros, 4.8% higher than in the same period last year, and reached a total of 297million euros for the 12 months to December 2006, a year-on-year increase of5.4%. This was primarily due to a significant increase in revenues from voice servicesthat offset the decline in revenues from the Internet narrowband wholesalebusiness. Voice revenues in the twelve months of 2006 amounted to 93 millioneuros, an increase of 82% compared to full year 2005, representing 5.4 billionminutes carried by the Telefonica Deutschland IP network and maintaining thecompany's lead in the German VoIP wholesale market. Fourth quarter voicerevenues were 23 million euros, an increase of 28% on the same period last year,representing 1.6 billion minutes. Although competition in the German broadband access retail market remainedintense, the total number of equivalent ADSL lines in service increased to about618,000 at the end of full year 2006. Revenues from Internet broadband accessbased on Telefonica Deutschland's own LLU infrastructure amounted to 25 millioneuros for full year 2006, compared to 0.2 million euros in 2005. Fourth quarterLLU revenues were 14 million euros. Telefonica Deutschland continues to provideservices to nearly all the major ISPs in Germany, maintaining its strong marketposition. Telefonica Deutschland registered a negative operating income beforedepreciation and amortization (OIBDA) of 50 million euros in the 12 months toDecember 2006, compared to negative OIBDA of 3 million in the 12 months toDecember 2005, mainly due to start up losses relating to its nationwide ULLrollout. By the end of 2006 42% of households were covered, with a target of 60%by the end of august 2007. The fourth quarter of 2006 resulted in a negativeOIBDA of 25 million euros, compared to a negative OIBDA of 4 million euros inthe fourth quarter of 2005. RESULTS BY BUSINESS LINES Telefonica O2 Europe O2 GROUPCONSOLIDATED INCOME STATEMENTUnaudited figures (Euros in millions) February - December 2006Revenues 10,733Internal expenditure capitalized in fixed assets (1) 187Operating expenses (8,069)Other net operating income (expense) (67)Gain (loss) on sale of fixed assets (10)Impairment of goodwill and other assets 0Operating income before D&A (OIBDA) 2,773Depreciation and amortization (1,770)Operating income (OI) 1,003(1) Including work in process. TELEFONICA O2 CZECH REPUBLICSELECTED FINANCIAL DATAUnaudited figures (Euros in millions) January - December October - December 2006 2005 % Var 2006 2005 % Var Revenues 2,148 1,035 n.c. 555 526 5.6 Operating income before D&A (OIBDA) 985 457 n.c. 206 204 0.9 OIBDA margin 45.8% 44.1% 1.7 p.p. 37.1% 38.8% (1.7 p.p.)Note: In 2005 Telefonica O2 Czech Republic includes the results from July. In 2006 costs from start up operations inSlovakia are included. TELEFONICA DEUTSCHLANDSELECTED FINANCIAL DATAUnaudited figures (Euros in millions) January - December October - December 2006 2005 % Chg 2006 2005 % Chg Revenues 297 281 5.4 76 73 4.8 Operating income before D&A (OIBDA) (50) (3) n.m. (25) (4) n.m. OIBDA margin (16.8%) (1.1%) (15.7 p.p.) (32.1%) (5.7%) (26.4 p.p.) TELEFONICA O2 EUROPEACCESSESUnaudited figures (Thousands) 2005 2006 December March June September December % Chg Final Clients Accesses 35,730.1 36,361.9 37,055.8 37,566.3 38,311.1 7.2 Fixed telephony accesses (1) 3,021.6 2,971.4 2,894.9 2,598.3 2,462.9 (18.5) Internet and data accesses 613.5 596.5 572.7 564.6 607.1 (1.0) Narrowband 366.9 292.4 224.3 178.6 143.7 (60.8) Broadband 233.7 291.5 335.9 373.9 451.9 93.4 Other 12.8 12.6 12.5 12.1 11.6 (9.7) Cellular accesses 32,095.0 32,794.0 33,588.2 34,400.7 35,225.4 9.8 Pay TV 0.0 0.0 0.0 2.8 15.6 n.m. Wholesale Accesses (2) 597.3 573.0 527.2 620.0 881.7 47.6Total Accesses 36,327.4 36,934.8 37,583.0 38,186.3 39,192.8 7.9 (1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primaryaccess; 2/6 Access x30. Company's accesses for internal use included. (2) Includes T. Deutschland connections resold on a retail basis. Note: Cellular accesses, Fixed telephony accesses and Broadband accesses include MANX customers. TELEFONICA O2 EUROPECONSOLIDATED INCOME STATEMENTUnaudited figures (Euros in millions) January - December 2006Revenues 13,159Internal expenditure capitalized in fixed assets (1) 219Operating expenses (9,570)Other net operating income (expense) (83)Gain (loss) on sale of fixed assets (8)Impairment of goodwill and other assets (9)Operating income before D&A (OIBDA) 3,708Depreciation and amortization (3,399)Operating income (OI) 309(1) Including work in process.Note: Telefonica O2 Europe includes O2 Group (February-December), Telefonica O2 Czech Republic y T. Deutschland(January-December). RESULTS BY BUSINESS LINES Others Business Atento Group Atento Group net turnover reached 1,027 million euros by the end of 2006, a19.9% growth year on year. The evolution of Group revenues was motivated by theincreased activity of its main clients, as well as the addition of new clientsin all countries, primarily Brazil, Mexico, Venezuela, Chile and Spain. The ratio of revenues generated by clients outside the Telefonica Groupincreased year on year by 2.2 percentage points to stand at 47.0% as of the endof December 2006. The main clients to have contributed to this growth are: • In Brazil: Increased activity primarily in the financial sector with Banco IBI, Badresco, Itau and the addition of new clients such as Santander and Aon. • In Mexico: Growth in sales with BBVA, particularly in the Telecobranza Hipotecaria, Seguros Zodiaco and Finanzia services • In Venezuela: Growth in revenues due to new clients in the financial sector, such as: Banco de Venezuela, Banpro and Sicobank and increased management with Grupo CANTV and Movilnet. • In Chile: Increased activity with the client VTR Interamericana. • In Spain: Growth in revenues in Servicios 012 Cataluna, Repsol, Agencia Estatal de Administracion Tributaria and BBVA. In terms of the geographic distribution of revenues, Brazil accounts for 38.7%of the total and Spain for 29.1%, as a whole representing 1.8 percentage pointsless than in December 2005. Atento Mexico continued with its significant growthrate to stand at 10.2% of revenues compared with 8.7% the previous year. Chilerepresented 6.3% compared with 6% twelve months ago and Venezuela totalled 3.9%in comparison with 2.5% in December 2005. Operating costs grew 18.9% year on year to 882 million euros, mostly due toincreased personnel expenses (+19.6% year on year) as a result of the Group'sactivity growth. The OIBDA of the Atento Group totalled 142 million euros, equivalent to a 21.8%year-on-year growth generated by increased activity and by savings in structuralcosts. In terms of profitability, the OIBDA margin stood at 13.8% to improve themargin recorded the previous year by 0.2 percentage points. Atento Brasilcontributed to OIBDA with 62 million euros, representing 44.0%. The remainingoperations contributing the most to the Consolidated OIBDA were Mexico with13.5% (19 million euros), Chile with 9.8% (14 million euros), Spain with 9.2%(13 million euros), Venezuela with 8.3% (12 million euros) and Peru with 6.5% (9million euros). The operating result to December amounted to 113 million euros to give ayear-on-year growth of 28.2%. Capex at December 2006 stood at 35 million euros compared with 40 million eurosthe previous year, primarily centred on Brazil, Mexico, Venezuela and Spain. Operating free cash flow (OIBDA - Capex) improved substantially in relation tothe figure accumulated to December 2005 to stand at 106 million euros, a 39.9%increase as a result of improved management and lower investments. In terms of operations, the Atento Group had 46,847 positions in place at 31stDecember 2006, 18.0% more than one year ago. The average number of occupiedpositions for 2006 stood at 35,343. Financial productivity stood at 77.6%, a 2.2percentage point drop in comparison with December 2005. ATENTO GROUPCONSOLIDATED INCOME STATEMENTUnaudited figures (Euros in millions) January - December October - December 2006 2005 % Chg 2006 2005 % ChgRevenues 1,027 856 19.9 269 248 8.3Internal exp capitalized in fixed assets (1) 0 0 n.m. 0 0 n.m.Operating expenses (882) (742) 18.9 (228) (214) 6.6Other net operating income (expense) (3) 1 c.s. (2) (1) n.m.Gain (loss) on sale of fixed assets (0) 0 c.s. 0 0 34.3Impairment of goodwill and other assets 0 0 n.m. 0 0 n.m.Operating income before D&A (OIBDA) 142 116 21.8 39 34 16.5Depreciation and amortization (28) (28) 1.4 (7) (7) (0.2)Operating income (OI) 113 88 28.2 32 27 21.1(1) Including work in process. RESULTS BY BUSINESS LINES Others Business Content and Media Business The Contents and Media business ended the last quarter of 2006 with a netturnover (revenues) of 1,608 million euros, 26.7% up from the figure reached inthe same period of the previous year. This increase is due to the positiveevolution of results from the main lines of business. Operating income before depreciation and amortization (OIBDA) in theJanuary-December period amounted to 362 million euros, compared with the 269million euros obtained in the same period of 2005. This significant growth in2006 was primarily due to the revenues obtained from the sale of part of theSogecable stake by the Telefonica Group in the take-over bid launched by thePrisa Group. Endemol NV Endemol enjoyed a strong overall performance in the full year 2006, recording a24.1% growth in turnover, reaching a level of EUR 1,117 million. The companyexperienced turnover growth in all genres, compared to last year. Growth inNon-scripted came in at 22.2% and Scripted grew by 8.5%. Digital Mediaregistered a very strong performance as well, growing by 65.3%. BothNon-scripted and Digital Media were strongly fuelled by the hit format Deal orNo Deal. Organic growth accounted for the vast majority of total growth, with aremarkably high 20.9% out of the 24.1%, in line with the guidance provided togrow over 15% in organic terms. This organic development is mainly due to thestrong performance of Endemol's operating companies in the UK, the US and Italy.While Big Brother remained the top format with very sound ratings across theglobe, the performance of Deal or no Deal was especially remarkable, triggeringan increasing appetite for game shows, one of the core elements of Endemol'sproduct portfolio. This higher demand was leveraged by closing a number of dealsin various territories on other game shows such as 1 vs 100, Show me the Moneyand Set For Life. EBITDA in 2006 reached a level of EUR 177 million, a +15.9% increase compared tolast year, when it amounted to EUR 153 million. In terms of EBITDA margin,Endemol has moved from 17.0% of turnover in 2005 to 15.9% in 2006, almost in themiddle of the guide EBITDA range (15-17%). ATCO The advertising market in Argentina (Capital and Gran Buenos Aires regions) grewby 10.8% over the year with respect to the previous year. This figure differsfrom the 20.7% increase recorded in the same period of 2005, which reflected themarket recovery recorded over 2004 and 2005. In this market context, Telefe maintained its leadership in terms of audienceover the last quarter, ending 2006 as the leader in audience share that reached38.8% compared with the 30.3% obtained by Canal 13, its main competitor. Themarket share accumulated by Telefe to December 2006 end stood at 41.6%, slightlyup from that reached in the same period of 2005 and, once again, followed byCanal 13 with 38.1%. CONTENT AND MEDIA BUSINESSCONSOLIDATED INCOME STATEMENTUnaudited figures (Euros in millions) January - December October - December 2006 2005 % Chg 2006 2005 % ChgRevenues 1,608 1,269 26.7 483 390 23.8Internal expenditure capitalized in fixed assets (1) 0 0 n.m. (0) 0 n.m.Operating expenses (1,411) (1,052) 34.1 (404) (325) 24.5Other net operating income (expense) 24 6 n.m. 15 (3) c.s.Gain (loss) on sale of fixed assets 143 47 n.m. (0) 40 c.s.Impairment of goodwill and other assets (2) (1) 159.0 (2) (1) 169.1Operating income before D&A (OIBDA) 362 269 34.4 92 102 (10.1)Depreciation and amortization (26) (29) (9.2) (5) (8) (40.4)Operating income (OI) 336 240 39.6 87 94 (7.4)(1) Including work in process. ADDENDA Companies included in each Financial Statement Based on what was indicated at the start of this report, the results breakdownof Telefonica Group are detailed according to the business in which the Grouphas a presence. The main differences between this view and the one that wouldapply attending to the legal structure, are the following • Telefonica O2 Europe results up to December 31st 2006 include O2 Group results from February 1st 2006 to December 31st 2006, and Telefonica O2 Czech Republic and Telefonica Deutschland results from January 1st 2006 to December 31st 2006. As of December 31st 2005 include Telefonica O2 Czech Republic for the six months July 1st 2006 to December 31st 2006 and the Telefonica Deutschland results for the twelve months January 1st 2006 to 31st December 2006. Telefonica Group 69.4% stake in Telefonica O2 Czech Republic is legally dependent upon Telefonica S.A.. • Telefonica, S.A. directly participates in the share capital of Endemol Entertainment Holding, N.V., which has been included in Content and Media Business. The accounting effects from the Sogecable S.A. stake have been also assigned to Content and Media Business, including the partial divestiture that took place in the first quarter 2006, even though a part of the investment is legally dependent upon Telefonica, S.A.. • Telefonica Holding Argentina, S.A. holds a minority stake of Atlantida de Comunicaciones, S.A. (ATCO) which, for those purposes, is considered to be part of Telefonica de Contenidos, consolidating 100% share capital of ATCO in the Content and Media Business. • Telefonica International Wholesale Services Group (TIWS) financial results has been assigned to Telefonica Latinoamerica Group, even though is legally dependent upon Telefonica, S.A. (92.5%) and Telefonica Data Corp (7.5%). • Terra Networks Espana S.A. has merged with Telefonica de Espana S.A. with economic effects from January 1st 2006. The 2005 results also has been assigned to the Telefonica de Espana Group for this presentation. Maptel Networks, S.A.U. and Azeler Automocion, S.A. have been included in Telefonica de Espana Group although as of December 31st 2006, are directly participated by Terra Networks Asociadas, S.L, which are legally dependent upon Telefonica, S.A.. • Latin American companies formerly dependent upon Terra Group have been legally transferred to Telefonica International, S.A. during the second half of 2005, although the results have been assigned to Telefonica Latinoamerica Group from the beginning of 2005. ADDENDA Key Holdings of the Telefonica Group and its Subsidiaries detailed by businesslines TELEFONICA GROUP TELEFONICA DE ESPANA GROUP % Part % PartTelefonica de Espana 100.00 Telyco 100.00Telefonica Moviles (1) 100.00 Telefonica Telecomunic. Publicas 100.00Telefonica Latinoamerica 100.00 Telefonica Soluciones Sectoriales 100.00Telefonica de Contenidos 100.00 T. Soluciones de Informatica y Comunicaciones de 100.00Atento Group 91.35 EspanaTelefonica O2 Europe 100.00 Nota: Terra Networks Espana and Telefonica Empresas (1) Telefonica Moviles has been absorbed by Telefonica S.A. Espana has been absorbed by merger with Telefonica de Espana TELEFONICA LATINOAMERICA GROUP TELEFONICA MOVILES GROUP % Part % PartTelesp (1) 87.95 Telefonica Moviles Espana 100.00 Telefonica del Peru (2) 98.18 Brasilcel (1) 50.00 Telefonica de Argentina 98.03 T. Moviles Argentina 100.00TLD Puerto Rico 98.00 T. Moviles Peru 98.53 Telefonica Chile (3) 44.89 T. Moviles Mexico 100.00Telefonica Telecom (4) 52.03 TM Chile 100.00Terra Networks Peru 99.99 T. Moviles El Salvador 99.08Terra Networks Mexico 99.99 T. Moviles Guatemala 100.00Terra Networks USA 100.00 Telcel (Venezuela) 100.00Terra Networks Guatemala 100.00 T. Moviles Colombia 100.00Terra Networks Venezuela 100.00 Otecel (Ecuador) 100.00Terra Networks Brasil 100.00 T. Moviles Panama 99.99Terra Networks Argentina 99.99 T. Moviles Uruguay 100.00Terra Networks Chile 100.00 Telefonia Celular Nicaragua 100.00Terra Networks Colombia 99.99 Telefonica Moviles Chile 100.00Telefonica Data Argentina 97.92 Group 3G (Germany) 57.20Telefonica USA (5) 100.00 IPSE 2000 (Italy) (2) 45.59T. Intern. Wholesale Serv. (TIWS) (6) 100.00 3G Mobile AG (Switzerland) 100.00(1) Effective participation 88.01%. Medi Telecom 32.18(2) Telefonica Empresas Peru has been absorbed by T.del Peru as Mobipay Espana 13.36of May 1st 2006. Mobipay Internacional 50.00(3) CTC has changed its name. T. Moviles Soluciones y Aplicac. (Chile)100.00(4) Colombia Telecom has changed its name. Tempos 21 43.69(5) Change its name. Before it was Telefonica Data USA (1) Joint Venture which fully consolidates the(6) Telefonica, S.A. owns 92.51% y Telefonica DataCorp owns subsidiary Vivo, S.A., through participation at7.49%. Vivo Participacoes, S.A. (62.94%)Note: Telefonica Empresas Brasil has been absorbed by Telesp (2) Additionally, Telefonica Group holds a 4.08% of IPSE 2000 through Telefonica DataCorp. Note: Radiocomunicaciones Moviles SA (Argentina) has been absorbed by Moviles Argentina ATENTO GROUP TELEFONICA O2 EUROPE % Part % PartAtento Teleservicios Espana, S.A. 100.00 O2 UK 100.00Atento Brasil, S.A. 100.00 O2 Gemany 100.00Atento Argentina, S.A. 100.00 O2 Ireland 100.00Atento de Guatemala, S.A. 100.00 Manx 100.00Atento Mexicana, S.A. de C.V. 100.00 Airwave 100.00Woknal (Uruguay) 100.00 Be 100.00Centro de Contacto Salta 100.00 Telefonica O2 Czech Republic (1) 69.41Mar de Plata Gest y Contactos, S.A. 100.00 (1) Company owned through Telefonica S.A.Atento Peru, S.A.C. 99.46 Note: Telefonica Deutschland absorbed by O2 GermanyAtento Chile, S.A. 77.95Atento Maroc, S.A. 100.00Atento El Salvador, S.A. de C.V. 100.00 TELEFONICA DE CONTENIDOS GROUP OTHER PARTICIPATIONS % Part % PartTelefe 100.00 Lycos Europe 32.10Endemol (1) 99.70 Sogecable (1) 16.76Telefonica Servicios de Musica 100.00 Portugal Telecom (2) 9.84Telefonica Servicios Audiovisuales 100.00 China Netcom Group (3) 5.00Hispasat 13.23 BBVA 1.07(1) Ownership held by Telefonica S.A. Endemol Holding Amper 6.10NV is the parent company of Endemol Group and owns (1) Telefonica de Contenidos, S.A. holds 15.63%75% of Endemol NV, company quoted in the Amsterdam and Telefonica, S.A. holds 1.13%.Stock Exchange. (2) Telefonica Group's effective participation. Telefonica Group participation would be 9.96% if we exclude the minority interests. (3) Ownership held by Telefonica Latinoamerica ADDENDA Significant Events • On February 22nd, 2007, Telefonica, shareholder of Portugal Telecom with a 9.9635% equity stake therein, stated its intention to vote, in the Extraordinary General Meeting of Portugal Telecom to be held on March 2nd, 2007, in favour of approving the amendments to the articles of association and the authorisations proposed to eliminate the voting restrictions, and so that all shareholders may express themselves without hindrance to their capacity to exercise their rights, in the best interest of the company. • On February 12th, 2007, Telefonica stated that has been offered the possibility of acquiring a minority stake in the capital of the Italian corporation Olimpia S.p.A., which is the major shareholder of Telecom Italia. In that sense preliminary contacts have been maintained with Pirelli, which is the major shareholder of the aforementioned company. Finally, it should be mention that no agreement has been reached with Pirelli in relation to this possible investment, its terms or possible conditions. • On January 22nd, 2007, Telefonica's treasury stock position was 79,030,886 shares representing 1.606% of its current share capital. • On December 15th, 2006, Telefonica announced its intention to explore all strategic options in relation to O2's holding in the share capital of Airwave O2 Ltd., including total or partial disinvestments in that company (sale). To that end Telefonica has appointed JP Morgan Cazenove. ADDENDA Changes to the Perimeter and Accounting Criteria of Consolidation In the period January-December of 2006, the main changes have occurred in theconsolidation perimeter were the following TELEFONICA GROUP • On the 31st of October 2005, Telefonica, S.A. announced a Binding Offer for the purchase of all the shares in the UK company O2 plc. Once the Binding Offer ended and the procedure began for the mandatory sale of O2 shares according to the UK Law, by September Telefonica held 100% of the shares forming the capital of this company that, as of 7th March this year, were no longer listed on the London Stock Exchange. The acquisition cost for the buyout of O2 Group was 26,135 million euros (17,887 million pounds sterling).Telefonica Group financial statements include the results from O2 Group since February 1st, 2006. The company has been included in the consolidation perimeter of the Telefonica Group using the full integration method. • The subsidiary company Comet, Compania Espanola de Tecnologia, S.A., made a capital increase of 0.23 million euros in February this year through an increase in the par value of existing shares. In March Comet made another capital increase. Both were fully subscribed and paid up by its sole shareholder Telefonica. The company continues to be included in the consolidation perimeter of the Telefonica Group using the full integration method. • The Spanish company, Ifigenia Plus, S.A. which was included in Telefonica Group's consolidated financial statements according to the global integration method was dissolved during this financial year, and was thereby removed from the consolidation perimeter. • On the 29th July 2006, the merger contract, relating to Telefonica, S.A.'s absorption of Telefonica Moviles, S.A., was filed in the Madrid Mercantile Register. In order to cover the merger, 4 shares of Telefonica, S.A. with a nominal value of 1 euro, were exchanged for 5 shares of Telefonica Moviles, S.A. with nominal value of 0.5 euros. Telefonica handed over 244,344,012 of their own shares in treasury stock to Telefonica Moviles, S.A. shareholders which represented, approximately, 7.08% of the capital stock. The merger also bore extraordinary dividends of a total of 0.435 euros per share, which when added to the dividend of 0.205 euros, related to the 2005 results, made a total of 0.64 euros gross per share, which was paid on 21st July. The acquired company, Telefonica Moviles, S.A., which was consolidated by the global integration method, was removed from perimeter of consolidation. • During the month of July, Telefonica, S.A. dealt with the takeover bid formulated by Yell Group Plc, relating to 100% of the shares of Telefonica Publicidad e Informacion, S.A. (TPI), and accepted Yell's offer for the 216,269,764 shares, representing 59.905% of the company's share capital, which Telefonica owned. • After the sale and under the "Results for discontinued operations" heading in Telefonica Group's consolidated results account, the result from the disposal are included as well as the results from the TPI Group up to the 30th June of the present financial year. In addition, and for comparison purposes, the consolidated financial statements have been modified for the Telefonica Group in the 2005 financial year to present the TPI Group results under the same heading. TELEFONICA DE ESPANA GROUP • In February, the Spanish company Telefonica Cable, S.A. acquired 15% of the share capital of Telefonica Cable Galicia, S.A. Through this purchase, Telefonica Cable became the sole shareholder of the company. The company continues to be included in the consolidation perimeter of the Telefonica Group using the full integration method. • In June, Telefonica Cable, S.A. took over its subsidiary company Sociedad General de Cablevision Canarias, S.A.U. Following this operation, the company taken over was removed from the Telefonica Group perimeter of consolidation in which it was included using the full integration method. • In the month of July, Telefonica de Espana, S.A. absorbed Terra Networks Espana, S.A. and Telefonica Data Espana, S.A. Both companies, which were included in Telefonica Group's consolidation perimeter using the full integration method, have been removed from it. • In the month of July, Telefonica de Espana, S.A. paid 37 million euros for 51% of the capital stock in the Spanish company Iberbanda, S.A. The company has been included in the Telefonica Group consolidation perimeter using the full integration method. • In the month of July, the Guatemalan company Telefonica Sistemas Ingenieria de Productos Guatemala, S.A went into liquidation. The company, which was included in the Telefonica Group's consolidation perimeter by the full integration method, has now been removed from it. TELEFONICA LATINOAMERICA GROUP • The Brazilian company Santo Genovese Participacoes Ltda., a holding company that owned all of the capital stock of the Brazilian Atrium Telecomunicacoes Ltda., was liquidated during the first quarter of 2006 after taking over its subsidiary Atrium. Both companies, which were included in the consolidated accounts of the Telefonica Group using the full integration method, have been removed from the consolidation perimeter. • In April, Telefonica Internacional, S.A. purchased 50% plus one share in the Colombian company Colombia de Telecomunicaciones, S.A. ESP. In December, the Colombian company absorbed Telefonica Data Colombia, S.A., that has been removed from the consolidation perimeter, where it was included using the full integration method. As a result of the merger by absorption, Telefonica Group has increased its stake to 52.03%. The company has been incorporated in the Telefonica's Group perimeter of consolidation using the full integration method. • Telefonica del Peru, S.A.A. took over its subsidiary Telefonica Empresas Peru, S.A.A. in June. The company, which was included in the financial statements of the Telefonica Group using the full integration method, has been removed from the perimeter of consolidation. • On the 29th of July this current financial year, the Brazilian company, Telecomunicacoes de Sao Paulo, S.A. (Telesp), absorbed its subsidiary Telefonica Data Brasil Holding. The company, which was included in the perimeter of consolidation using the full integration method, has now been removed from it. • The companies Telefonica Finance, Ltd. and Telefonica Venezuela Holding, B.V. have merged with Telefonica International Holding, B.V.. Both companies, that were included in the consolidation perimeter of Telefonica Group using the full integration method, have been removed from it. • The spanish company Telefonica Soluciones de Informatica y Comunicaciones, S.L. was absorved by the spanish company Telefonica Datacorp, S.A.. The company, which was incorporated using the full integration method, has been removed from it. • As a consequence of amortizing its treasury stock, which Telesp did during the financial year, and the purchase of the Telefonica Data Brazil minority shareholders and their later merger with Telesp, the percentage of Telefonica Group's participation in Telesp's capital has increased to 88.01%. The company continues to be included in Telefonica Group's consolidation perimeter by the full integration method. • The Mexican companies Katalyx Mexico S.A. de C.V. and Telefonica Empresas Mexico S.A. de C.V., wholly-owned subsidiaries of the Telefonica Internacional Group, were sold in 2006. Both companies, which were included in the financial accounts of the Telefonica Group using the full integration method, have been removed from the perimeter of consolidation. TELEFONICA MOVILES GROUP • On the 22nd of February 2006, the Shareholders' Meetings of Telesp Celular Participacoes S.A. ("TCP"), Tele Centro Oeste Celular Participacoes S.A., ("TCO"), Tele Sudeste Celular Participacoes S.A. ("TSD"), Tele Leste Celular Participacoes, S.A. ("TBE") and Celular CRT Participacoes S.A. ("CRTPart") approved corporate restructuring in order to exchange TCO shares for TCP shares to become a wholly-owned TCP subsidiary and the take-over of TSD, TBE and CRT Part by TCP. • In June 2006 VIVO Paticipacoes made a capital increase by asset contribution for a total of 194 million reais. Once the capital increase was completed, Brasilcel, N.V. stake in VIVO Participacoes stood at 62.77%. • In June 2006 Telefonica Moviles Group increased its participation in Telefonica Moviles Peru (TMP), from 98.03% to 98.40%, through the buyout of minorities. The company continues to be included in the consolidation perimeter of the Telefonica Group using the full integration method. • During the financial year, the El Salvadorian company, Telefonica Moviles El Salvador Holding, S.A. de C.V., acquired 2,220 shares in Telefonica Moviles El Salvador, S.A. de C.V., also from El Salvador, increasing their participation in this company to 99.08%. The company continues to be included in the Telefonica Group consolidation perimeter through the full integration method. • The Argentinean company, Telefonica Moviles Argentina, S.A., has absorbed Compania de Radiocomunicaciones Moviles, S.A., Radio Servicios, S.A. and Compania de Telefonos del Plata, S.A, which are also Argentinean companies. After this operation, these companies were removed from the consolidation perimeter, where they had been included using the full integration method. • In November 2006 the Telefonica Group's affiliated companies in Uruguay went through restructuring. Ablitur SA, Redanil SA and T. Moviles Uruguay, 100% subsidiaries of the Group, went into liquidation. Thus, companies currently affiliated with the Telefonica Group, corresponding to the cellular market, are as follows: Wireless Network Ventures Ltd has become a 100% subsidiary of Telefonica Moviles Holding Uruguay S.A. and Telefonica Moviles Uruguay SA (before Abiatar) has become a 68% affiliate of LACH BV. Both companies continue to be included in the Telefonica Group's consolidation perimeter according to the global integration method. • The American company Panama Cellular Holdings, LLC has gone into liquidation. The company, which was included in Telefonica Group's financial statements according to the global integration method, has been removed from the consolidation perimeter. • The Mexican company Telecomunicaciones Punto a Punto Mexico, S.A. de C.V. was sold in 2006 accruing capital gains of 10.4 million euros which were recorded under the sub-section "Gains from the sale of affiliated companies" in the Telefonica Group's consolidated results. The company, which was included in the Group's consolidation perimeter, according to the global integration method, has now been removed. • 2006 saw a restructuring of Venezuelan companies affiliated to Comtel Comunicaciones Telefonicas, S.A., also from Venezuela, and the following companies have been liquidated: Promotions 4222. C.A., S.T. Merida, C.A., S.T. Ciudad Ojeda, C.A., S.T. San Cristobal, S.T. Maracaibo, C.A., S.T. Punto Fijo, C.A., S.T. Valera, C.A., S.T. Valencia, C.A., SyRed, T.E.I., C.A., Servicios Telcel Acarigua, C.A., Servicios Telcel Barquisimeto, C.A., Servicios Telcel Charallave, S.T. Cumana, C.A., S.T. Guarenas, C.A., S.T. Los Teques, C.A., S.T. Maracay, C.A., S.T. Margarita, C.A., S.T. Maturin, C.A., S.T. Puerto Ordaz, C.A., S.T. Puerto la Cruz, CA, S.T. La Guaira, C.A. All these companies have been removed from Telefonica Group's consolidation perimeter where they were included according to the global integration method. TELEFONICA O2 EUROPE • The 1st of July, 2006, the Czech company Eurotel Praha, spol. s r.o. (Eurotel) was taken over by its parent company Telefonica O2 Czech Republic, a.s. to give the new integrated operator Telefonica O2 Czech Republic, a.s.. Following this operation, Eurotel, which was included in the financial statements of the Telefonica Group using the full integration method, was removed from the perimeter of consolidation. • In June, O2 UK Ltd. purchased 100% of the British internet service provider Be Un Limited (Be). The operation involved a total payment of 50 million pounds sterling (approximately 73.5 million euros). Be is now included in the perimeter of consolidation using the full integration method. • In 2006, Telefonica Deutschland GMBH, was sold to the German company, owned by O2 Group, Interkom, to later merge both companies in order tos et up the new company Telefonica Deutschland GMBH, that is incorporated to Telefonica Group financial statements using the full integration method. • During the third quarter of the 2006 financial year, the Telefonica, O2 Czech Republic, a.s., subsidiary company, Telefonica O2 Slovakia, s.r.o., obtained the third mobile telephone licence in Slovakia. The Slovakian company is included in Telefonica Group's perimeter of consolidation by the full integration method. • In the month of October, the British group, O2, acquired the remaining 60% of the share capital in the British company The Link Stores, Ltd. With this acquisition, the Telefonica Group now controls all of this company. The Link Stores, Ltd., which was included by the equity method until the month of September, will now be consolidated by the full integration method from the month of October. ATENTO GROUP • In 2006 Atento NV set up the Argentinean companies Atento Mar del Plata, S.A. (later called Mar de Plata Gestiones y Contactos, S.A.) and Atento Salta, S.A. (later called Centro de Contacto Salta, S.A.) with a share capital totalling 0.1 million Argentinean pesos. Both companies have been included in the Telefonica Group's financial statement by the full integration method. • In May, Atento Chile Holding purchased the percentage shareholding of Publiguias Chile in Atento Chile, S.A. Following this operation, the shareholding of the Atento Group in Atento Chile increased from 69.99% to 71.16%. The company continues to be included in the perimeter of consolidation of the Telefonica Group using the full integration method. • In May, the Argentinean company Atento Microcentro, S.A. was set up (later denominated Microcentro de Contacto, S.A.) with a share capital totalling 0.05 million Argentinean pesos. The company has been included in Telefonica Group's financial statements using the full integration method. • In June, Atento, N.V. purchased the 100% shareholding in the Uruguayan company Woknal, S.A., with an initial share capital of 0.4 million uruguayan pesos, around 0.01 million euros. The company has been included in the financial statements of the Telefonica Group by the full integration method. • In August, the Argentinean company Atento Cordoba, S.A. (later called Cordoba Gestiones y Contactos, S.A.) with a share capital totalling 0.05 million Argentinean pesos. The company has been included in Telefonica Group's financial statements using the full integration method. TELEFONICA CONTENIDOS GROUP • In March, Prisa launched a partial take-over bid for the 20% of Sogecable, S.A. The Telefonica Group sold shares representative of 6.57% of the company's share capital, reducing its stake from 23.83% to 17.26%. Later in March, Sogecable made a capital increase although without Telefonica Group taking part, thus diluting its stake in the company's share capital to the present 16.84%. In April, Sogecable once again increased its capital to cover the options plans for company directors, executives and managers and turned Class B and series B2005 callable shares into ordinary Class A shares, leading to another decrease in the Telefonica Group shareholding, currently standing at 16.80%. In December, Sogecable turned 405.000 B2006 collable shares to ordinary class A shares, diluting once more the stake of Telefonica Group that was 16.75% as of 31st of December. As a consequence of this reduction as of 31st December 2006, the investment in Sogecable is registered under the heading "Other participations". Telefonica Group continues consolidating Sogecable into the financial statements by the equity method. • The Telefonica de Contenidos Group sold all of its shares held in the Argentine company Patagonik Film Group, S.A. in May 2006. The company, which was included in the financial statements of the Telefonica Group using the equity method, has been removed from the perimeter of consolidation. • Andalucia Digital Multimedia, S.A. made a capital increase with the participation of Telefonica de Contenidos, S.A., which subscribed enough shares to enable it to increase its shareholding to 24.20%. The company continues to be included in the consolidation perimeter of the Telefonica Group using the full integration method. ADDENDA Consolidated Statements by Regional Business Units TELEFONICA SPAINCONSOLIDATED INCOME STATEMENTUnaudited figures (Euros in millions) 2006 Jan - Mar Apr - Jun Jul - Sep Oct - Dec Jan - DecRevenues 4,772 4,893 5,055 5,030 19,750Operating income before D&A (OIBDA) 2,205 2,074 2,585 1,783 8,647Operating income (OI) 1,545 1,442 1,962 1,164 6,113 TELEFONICA LATIN AMERICACONSOLIDATED INCOME STATEMENTUnaudited figures (Euros in millions) 2006 Jan - Mar Apr - Jun Jul - Sep Oct - Dec Jan - DecRevenues 4,317 4,390 4,535 4,847 18,089Operating income before D&A (OIBDA) 1,528 1,474 1,809 1,761 6,571Operating income (OI) 591 583 884 841 2,900 TELEFONICA EUROPECONSOLIDATED INCOME STATEMENTUnaudited figures (Euros in millions) 2006 Jan - Mar Apr - Jun Jul - Sep Oct - Dec Jan - DecRevenues 2,409 3,418 3,607 3,725 13,159Operating income before D&A (OIBDA) 756 1,001 1,041 910 3,708Operating income (OI) 229 346 (254) (12) 309Note: In the third quarter is registered the accumulated effect of the PPA for the February-September period. ADDENDA Corporate Responsability Telefonica: spirit of progress TELEFONICA's VISION: "We want to enhance people's lives, the performance of businesses and theprogress of the communities where we operate, by delivering innovative servicesbased on information and communication technologies". BUSINESS PRINCIPLES In December 2006, the Board of Directors of Telefonica, S.A. unified its EthicalBusiness Principles throughout the world. These principles are based on thehighest standards and the best practices in business ethics. They are the resultof the combination of the Codes of Ethics of Telefonica, S.A. and TelefonicaMoviles and the Business Principles of O2. Furthermore, they reaffirmTelefonica's vision and values. The Business Principles inspire and define the way in which the TelefonicaGroup's more than 200,000 employees carry out their activities and interact withcustomers, shareholders, professionals, suppliers and the different communitiesin which they work. To ensure their implementation, the company has set up itsBusiness Principles Office, which comprises the corporate areas of the GeneralOffice of the Secretary to the Chairman, the General Office of the LegalSecretary and the Internal Auditing and Human Resources departments, as well asTelefonica's three geographical areas. Based on the said principles, Telefonica builds its reputation as a company,gains the trust of its stakeholders and maximises its long-term value for itsshareholders and society in general. DRIVING FORCE FOR ECONOMIC DEVELOPMENT In 2006, Telefonica once again demonstrated its commitment to the development ofits economies, contributing to the generation of an average of 1.5% of the GDPof the main countries in which it operates. The number of suppliers who havesuccessfully bid for contracts with the Telefonica Group in the world exceedsthe figure of 19,000 and special mention must be made of the fact that anaverage of 85% of the total purchasing volume is awarded to local suppliers. Furthermore, Telefonica is an important redistributor of the wealth it generatesamong all its stakeholders, where approximately 44% is redistributed among itssuppliers, 11% is allocated to the various public administrations and 7% isdirected to its employees' salaries. In 2006, it is significant to highlightthat 31% of these resources were channelled to new investments. DRIVING FORCE FOR TECHNOLOGICAL DEVELOPMENT According to the criteria laid down by the OECD, the year 2006 saw Telefonicaallocate more than 3,100 million euros to technological innovation all over theworld. Of this amount, R&D activities count for more than 588 million euros. Technological innovation has focused mainly on the deployment of new-generationnetworks for both fixed lines and mobile phones. By countries, Spain stands outwith 49% of the total, together with Brazil, which has 23%. DRIVING FORCE FOR SOCIAL DEVELOPMENT The 1st Latin American Forum on the United Nations Millennium Development Goalsand Information and Communications Technologies, organised by the General Officeof the Ibero-American Secretary and AHCIET, showed the potential of the servicesoffered by Telefonica to enable social development. Throughout 2006, Telefonica has shown signs of its commitment to society in allthe countries in which it works. The areas in which it showed greater commitmentincluded the following: • Responsible use of services: throughout 2006, Telefonica has developed various programmes to encourage the responsible use of technology by its Spanish and European customers in collaboration with public and social players. As a result of this experience, an adapted terminal for minors was launched in Spain. • Digital social inclusion: with a view to incorporating collectives that are suffering the digital divide as customers, Telefonica develops geographical, economic and educational inclusion programmes. In particular, in Latin America, the company offers a controlled cost services at 30% of its fixed access base price and maintains more than 536,000 public terminals. • Social and cultural action: in 2006, Fundacion Telefonica dedicated more than 30.7 million euros to social and cultural action activities, most of which were developed in the area of education. The number of individuals who benefited from the various programmes is in excess of 30.6 million. In particular, special mention must be made of the Pronino project, which is dedicated to the eradication of child labour and has enabled more than 25,000 children in the region to attend school. • Accessibility: the aim of the Telefonica Accesible programme, developed in collaboration with CERMI (the Spanish Committee of Representatives of the Disabled), is to enable the social integration of the disabled using new technologies. This project makes good use of the more than 30 years' experience of ATAM (Telefonica Association for the Care of the Disabled), which involves the collaboration of more than 60,000 of the group's employees and an allocation in 2006 of over 4.7 million euros. In addition, the company complemented this amount with a further 8.7 million euros. • Environment: the levelling-up of Telefonica's environmental management systems has enabled the certification of mobile telephone operations in Ecuador and Peru as compliant with the ISO 14001 standard and has increased those in existence in Spain, Mexico, United Kingdom, Ireland and Germany. In particular, O2 Germany is developing a pioneer programme to become the first mobile telephone operator to become carbon neutral as a response to the growing concern for the climatic change. The corporate responsibility report will be published at the end of April 2007at: www.telefonica.es/responsabilidadcorporativa DISCLAIMER This document contains statements that constitute forward looking statements inits general meaning and within the meaning of the Private Securities LitigationReform Act of 1995. These statements appear in a number of places in thisdocument and include statements regarding the intent, belief or currentexpectations of the customer base, estimates regarding future growth in thedifferent business lines and the global business, market share, financialresults and other aspects of the activity and situation relating to the Company.The forward-looking statements in this document can be identified, in someinstances, by the use of words such as "expects", "anticipates", "intends","believes", and similar language or the negative thereof or by forward-lookingnature of discussions of strategy, plans or intentions. Such forward-looking statements are not guarantees of future performance andinvolve risks and uncertainties, and other important factors that could causeactual developments or results to differ materially from those expressed in ourforward looking statements. Analysts and investors are cautioned not to place undue reliance on thoseforward looking statements which speak only as of the date of this presentation.Telefonica undertakes no obligation to release publicly the results of anyrevisions to these forward looking statements which may be made to reflectevents and circumstances after the date of this presentation, including, withoutlimitation, changes in Telefonica's business or acquisition strategy or toreflect the occurrence of unanticipated events. Analysts and investors areencouraged to consult the Company's Annual Report as well as periodic filingsfiled with the relevant Securities Markets Regulators, and in particular withthe Spanish Market Regulator. The financial information contained in this document has been prepared underInternational Financial Reporting Standards (IFRS). This financial informationis unaudited and, therefore, is subject to potential future modifications. For additional information, please contact. Investor Relations Gran Via, 28 - 28013 Madrid (Spain) Phone number: +34 91 584 4700 Fax number: +34 91 531 9975 Email address: Ezequiel Nieto - [email protected] Diego Maus - [email protected] Dolores Garcia - [email protected] Isabel Beltran - [email protected] [email protected] www.telefonica.es/accionistaseinversores This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
TDE.L