15th Nov 2006 07:00
Telefonica SA15 November 2006 PART 1 Quarterly results January-September 2006 TABLE OF CONTENTS Telefonica Group Market Size Financial Highlights Consolidated Results Financial Data RESULTS BY BUSINESS LINES Fixed Line Business • Telefonica de Espana Group • Telefonica Latinoamerica Group Telefonica Moviles Group Telefonica O2 Europe • O2 Group • Telefonica O2 Czech Republic • Telefonica Deutschland Other Business • Atento Group • Content and Media Business 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 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. 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 - September 2006 2005 % Chg Final Clients Accesses 193,759.6 145,404.2 33.3 Fixed telephony accesses (1) 42,660.1 41,001.0 4.0 Internet and data accesses 11,774.8 10,278.8 14.6 Narrowband 4,287.5 5,067.9 (15.4) Broadband (2) 7,285.4 5,023.6 45.0 Other (3) 201.9 187.3 7.8 Cellular accesses 138,443.3 93,581.1 47.9 Pay TV 881.4 543.3 62.2 Wholesale Accesses 2,102.5 1,706.4 23.2 Unbundled loops 790.6 365.7 116.2 Shared UL 438.5 228.9 91.6 Full UL 352.2 136.9 157.3 Wholesale ADSL (4) 1,167.4 1,285.3 (9.2) Other (5) 144.4 55.4 160.9 Total Accesses 195,862.1 147,110.6 33.1 (1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access; 2/6 Access x30. Company's accesses for internal use included. (2) ADSL, satelite, optical fibre, cable modem and broadband circuits. (3) Remaining non-broadband final client circuits. (4) Includes T. Deutschland connections resold on a retail basis. (5) Circuits for other operators. Note: Cellular accesses, Fixed telephony accesses and Broadband accesses include MANX customers and Colombia Telecom. TELEFONICA GROUP Financial Highlights The most relevant facts of Telefonica Group results for the January-September2006 period are the following: • Once more Telefonica Group offers the best combination of growth and returns: • Revenues grew 43.1% year-on-year boosted by the solid performance of the business in Spain, the differential growth that Latin America offers and the consolidation and growth of the European activities • The success in the commercial policy carried out is reflected in the higher broadband revenues (+33.9% year-on-year), services revenues from the mobile business (+12.4% year-on-year) and the extension of the bundling products (around 2.5 millions as of September 30th) • OIBDA up year-on-year 35.9% • Net income increased year-on-year 59.4% to top 5,185.7 million euros (considering 639.0 million euros of amortization of assets related with the O2 Group Purchase Price Allocation) and the basic earnings per share achieved 64.0% growth to 1.091 euros. • Group diversification by geographies and business continues: • 45.9% of the consolidated OIBDA is generated in Spain, 33.8% in Latin America and 19.7% in Europe • 47.5% of the total OIBDA is originated in the fixed businesses while 51.2% is generated in the mobile businesses (including Telefonica O2 Czech Republic and Telefonica Deutschland) • The integrated management of operations resulted in organic growth rates above peers and in a higher operating free cash flow: • The organic1 growth of revenues, OIBDA and OI is 7.5%, 7.6% and 6.2% year-on-year, respectively • Operating free cash flow (OIBDA-CapEx) totalled 9,587.3 million euros and increased 25.9% vs. January-September 2005 ---------------------------------------------------------------------------- 1 Assuming constant exchange rates and including the consolidation of TelefonicaO2 Czech Republic in January -September 2005 and O2 Group in February-September2005. Excluding the consolidation of Colombia Telecom in May-September 2006 andIberbanda in July-September 2006. • The emphasis on the client is materialized in the outstanding growth of the total accesses (195.9 million; +33.1% vs. September 2005) due to the good results of the commercial campaigns and the incorporation of the operations in Europe: • Cellular accesses reached 138.4 million accesses by the end of September and grew 47.9% year-on-year • Retail Internet Broadband connections amounted to 7.3 million, 45.0% more than in September 2005 • Pay TV customers totalled 0.9 million (+62.2% year-on-year) • Guidance upgrade for full year 2006 2: • Revenue growth higher than 37% from the initial range of +34%/+37% • OIBDA growth will be in the high end of the range communicated (+26%/ +29%). ---------------------------------------------------------------------------- 2 2006 guidance assumes constant exchange rates as of 2005. Base reportednumbers include six months of Telefonica O2 Czech Republic (consolidated sinceJuly 2005) and include TPI as a discontinued operation. All figures excludechanges in consolidation, other than O2 (Feb-Dec 06 included). In terms ofguidance calculation, OIBDA and OI exclude other exceptional revenues/expensesnot foreseeable in 2006. Personnel Restructuring and Real Estate Programs areincluded as operating revenues/expenses. For comparison, the equivalent otherexceptional revenues/expenses registered in 2005 are also deducted from reportedfigures. The assignment of O2's goodwill is not included in OI guidancecalculation. 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 businesses, which basicallyimplies that each business line participate in the companies that the Groupholds in the corresponding business, independently of the legal structure. 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 de Espana Group and the Telefonica LatinoamericaGroup include the results from Terra Networks operations as of 1st January 2005.Hence, Terra Espana, Azeler and Maptel results are included in the Telefonica deEspana Group, whereas the Terra results in Latin America are included in theTelefonica Latinoamerica Group. As of 1st February 2006, the results of the O2 Group are consolidated intoTelefonica O2 Europe business line. This business line is integrated by theassets of O2 Group, Telefonica O2 Czech Republic (during the July-December 2005period it was an independent business line) and Telefonica Deutschland (in 2005it was included in Other companies of the Telefonica Group). As of 1st May 2006, the results of Colombia Telecom are consolidated intoTelefonica Latinoamerica Group. As of 1st July 2006, the results of Iberbanda are consolidated into Telefonicade Espana Group. Due to Telefonica's disposal of TPI, the Telefonica Group's 2005 and 2006results include the Directories Business as a discontinued operations, in linewith International Financial Reporting Standards (IFRS). The results of Telefonica Group's corresponding to the first nine months of 2006keep demonstrating the Company's growth profile and the value of thediversification, as the revenues register strong year-on-year growth (43.1%),which is supported by the solid evolution of the businesses in Spain, the stronggrowth in Latin America as well as the consolidation and the organic growth fromoperations in Europe. It should be highlighted the net income level achieved(5,185.7 million euros; +59.4% year-on-year) and the basic earnings per share(1.091 euros; +64.0% year-on-year). Efficiency in integrated operationsmanagement has permitted the OIBDA to grow 35.9% year-on-year and operating freecash flow (OIBDA-CapEx) 25.9% year-on-year, reaching 9,587.3 million euros. This positive evolution of the results has permitted to upgrade the consolidatedrevenue1 growth target for 2006 to over 37% from the initial range of +34%/+37%while the 2006 OIBDA1growth is expected to be at the top-end of the communicatedrange (+26%/+29%).-------------------------------------------------------------------------------- 1 2006 guidance assumes constant exchange rates as of 2005. Base reportednumbers include six months of Telefonica O2 Czech Republic (consolidated sinceJuly 2005) and include TPI as a discontinued operation. All figures excludechanges in consolidation, other than O2 (Feb-Dec 06 included). In terms ofguidance calculation, OIBDA and OI exclude other exceptional revenues/expensesnot foreseeable in 2006. Personnel Restructuring and Real Estate Programs areincluded as operating revenues/expenses. For comparison, the equivalent otherexceptional revenues/expenses registered in 2005 are also deducted from reportedfigures. The assignment of O2's goodwill is not included in OI guidancecalculation. Telefonica Group's total accesses reached 195.9 million, a year-on-year increaseof 33.1% , as a result of the successful commercial policies developed ingrowing businesses, mainly mobile and broadband. It's important to mention thesuccessful commercial campaigns developed in the third quarter, which werecharacterised by the expansion of bundles offers for voice, broadband and TV.Accesses in Spain totalled 43.4 million (+5.3% year-on-year), 110.1 million inLatin America (+17.3% year-on-year) and 38.2 million in Europe (8.3 million on30th September 2005). The Group's cellular accesses reached 138.4 million compared with 93.6 millionin September 2005. From this figure, 21.0 million originate in Spain, 78.8million in Latin America, 34.4 million in Europe and 4.2 million in Morocco. Thecustomer base for Telefonica Moviles Group stands at 104.0 million, with ayear-on-year increase of 16.8%. The acquisition of the value customers has beenmantained in the three regions, after recording net adds in the third quartergains of 365,000 in Spain, 2.6 million in Latin America and 812,000 in Europe. Retail broadband Internet accesses continue to record high growth rates,totalling 7.3 million at the end of September, 45.0% above the figure ofSeptember 2005, highlihgting the levels reached in Spain (3.4 million vs. 2.4million twelve months ago) and in Telesp (1.5 million vs. 1.1 million at theclose of the third quarter 2005). In the first nine months of 2006, revenues for the Telefonica Group amounted to38,704.4 million euros, representing year-on-year growth of 43.1%, with positiveincrease in all business lines. The positive effect of the exchange rates isreduced and contributes with 3.2 percentage points to the growth compared with5.4 percentage points in the first half of the year. The incorporation of thenew companies in the perimeter of consolidation has contributed 32.4 percentagepoints to the growth vs. 33.3 percentage points in January-June. Therefore, theorganic2 growth would reach 7.5% (+7.7% in January-June 2006), maintaining ahigh organic percentage of variation, in which the following must behighlighted; i) the contribution of the growth in the customer base in the 02Group and Telefonica Moviles Latin America, ii) the solid growth in servicesrevenues in Telefonica Moviles Espana and iii) the increase of broadband salesin Spain and Latin America. In the third quarter, revenues totalled 13,541.9million euros and have grown 37.2% compared with the same period the previousyear.-------------------------------------------------------------------------------- 2 Assuming constant exchange rates and including the consolidation of TelefonicaO2 Czech Republic in January-September 2005 and the O2 Group in February-September 2005. It excludes the consolidation of Colombia Telecom in May-September 2006 and Iberbanda in July-September 2006. By business lines, Telefonica Moviles Group continues to be the main contributorto the growth and ended the first nine months of the year with 13,537.2 millioneuros of revenues, 12.3% higher than the prior year figure. Excluding the impactof the exchange rates, the year-on-year increase stands at 10.6% compared with9.4% in the first half of the year. In Telefonica Moviles Spain there is anacceleration in the revenue growth (+3.7% vs. +2.9% to June) after increasing5.1% in the third quarter due to higher client revenues (+6.8%). In LatinAmerica, the evolution of Venezuela (+47.5% in local currency), Argentina(+33.9% in local currency), Chile (+16.0% year-on-year) and Mexico (+20.0%year-on-year) must be highlighted. The contribution of revenues from Telefonica O2 Europe (constituted by the O2Group since February 2006 and from Telefonica O2 Czech Republic and TelefonicaDeutschland since the 1st of January 2006) to the consolidated revenues is9,434.3 million euros. The good performance of service revenues in O2 UK in thefirst eight months of the year (+15.0% year-on-year in local currencie) that isdue to the strong growth of the customer base and the ARPU, has led the Companyto upgrade the service revenue growth guidance for 2006 (February-December) to14%-15% from the previously announced (+8%/+11%). In O2 Germany and also in thefirst eight months of the year, the year-on-year increase of service revenueshas reached 8.1%, changing the target for the end of the financial year(February-December 2006) to the high single digits from the low double digits.In Telefonica O2 Czech Republic, sales register a 0.6% (including otherrecurring revenues) rise in local currency compared to January-September 2005,reaching 1,592.5 million euros. The revenues from the Telefonica de Espana Group in the cumulative period toSeptember stand at 8,893.9 million euros and show a 1.7% growth compared withthe same period of the previous year (+2.3% excluding the impact of the changein the accounting criteria for minute-card revenues as of March 2006), mainlysupported by the strength of Internet and Broadband revenues (+27.0%) because ofthe succesful commercial offers of Duos and Trios, which once again more thanoffset the fall in access sales (-2.0%) and traditional voice (-5.1%). It shouldbe highlighted that in the third quarter alone, the year-on-year growth for therevenues stands at 1.6% (+2.4% ex accounting criteria for minute-card), showingacceleration of the trend registered in the second quarter (+0.3%). The Telefonica Latinoamerica Group reported revenues of 7,050.3 million euros,17.5% higher than those obtained in January-September 2005, showing a slow-downcompared with the first six months of 2006, when it increased by 23.2%. Thisdesaceleration is due to the lower positive impact of the exchange rates (+10.2percentage points vs. +16.2 percentage points up to June) and a lesser increasein Telesp sales (+2.1% vs. +4.5% to June) mainly due to the negative tariffadjustments dated in July 2006. Assuming constant exchange rates and excludingthe Colombia Telecom revenues, the year-on-year growth rate is 3.5% (+4.4% inthe first half), in spite of the negative tariff environment in Argentina andPeru. By geographic areas, a greater diversification has been observed. As ofSeptember 2006, revenues generated in Spain represented 38.5% of the total,compared with 53.1% twelve months ago. Latin America has reduced itscontribution to total revenues by 6.2 percentage points, down to 26.0%. On theother hand,revenues from Europe represented 126.0% of the total Group's revenues(4.6% to September last year). Brazil continues to be the country with thehighest contribution to total revenues, after Spain, (14.7% on the 30thSeptember vs. 18.0% a year ago), followed by United Kingdom (12.5% vs. 0.4% inSeptember 2005), after the incorporation of O2 last February. Although the level of commercial activity in the Group has intensified over thelast three months, the year-on-year increase of the operating expenses (24,519.2million euros) up to September (+47.8%) is slightly lower than the figureobtained in the first half of the year (+48.1%). Nevertheless, the effect of theexchange rates, the changes in the perimeter of consolidation and the highercosts in the Telefonica Moviles Group and O2 Group, explain this growth versusSeptember 2005. The performance of the main expense concepts was as follows: • Supplies expenses (11,984.8 million euros) increased by 69.5% versus the first nine months of 2005 (+66.6% in constant euros) as a consequence of the handsets purchases in the Telefonica Moviles Group and the consolidation of the O2 Group. • Personnel expenses rose in January-September 2006 to 5,201.4 million euros, equivalent to an increase of 26.1% (+23.7% assuming constant exchange rates). The average workforce during the period was 225,879 employees, with a net increase of 40,116 people (+21.6%) due to the changes in the perimeter of consolidation and the significant increase in the Atento Group (excluding the Atento Group, the average workforce number would increase 22.3% up to 127,525 employees). Regarding the Telefonica de Espana 2003-2007 Redundancy Program, during the third quarter of the financial year no additional provision has been recorded to the one accounted for the first six months (391.5 million euros for 1,237 redundancies and 45 from the Terra Espana Remunerated Layoff Plan). During the fourth quarter of the fiscal year, the provision for the rest of the employees joined to the Program in 2006 will be recorded and, in the other hand the incorporation to Redundancy Program in 2007 has been changed to October 2006. • External services increased by 36.8% in comparison with September 2005 (+33.3% eliminating the exchange rate effect), totalling 6,652.1 million euros as a consequence of the higher costs in the Telefonica Moviles Group related to the commercial activity -commercial costs, advertising costs, call centre costs - in a competitive environment in the operations markets and the incorporation of the O2 Group, which also presents a higher level of commercial costs in O2 UK. With respect to the sale of fixed assets in the Telefonica Group, it rose in thefirst nine months of 2006 to 223.5 million euros (+177.9 million euros inJanuary-September 2005). This is mainly explained by two factors: i) the sale ofshares in Sogecable (6.6% of capital share) after the takeover bid presented bythe Prisa Group ii) the capital gain of real state amounted to 85.8 millioneuros in Telefonica de Espana Group. As a result of the evolution of the aforementioned revenues and costs, theoperating income before depreciation and amortization (OIBDA), cumulative toSeptember, totals 14,653.9 million euros, 35.9% higher than that registered inthe same period 2005 (+32.6% in constant euros). In the third quarter, theyear-on-year increase is 28.1% (5,411.5 million euros). In accumulated terms,the organic3 growth rate has reached 7.6%, 0.2 percentage points higher than theone recorded up to June. As far as the OIBDA margin is concerned, in the firstnine months of the year, it stands at 37.9% compared to 39.9% twelve months ago,mainly due to the incorporation of new companies into the perimeter ofconsolidation. The margin on revenues in the third quarter alone has risen to40.0% (42.8% in July-September 2005).-------------------------------------------------------------------------------- 3 Assuming constant exchange rates and including the consolidation of TelefonicaO2 Czech Republic in January-September 2005 and the O2 Group in February-September 2005. It excludes the consolidation of Colombia Telecom in May-September 2006 and Iberbanda in July-September 2006. The Telefonica Moviles Group, which contributes 32.1% of the Group's OIBDA, inthe January-September period 2006 reached 4,700.3 million euros and has grown11.2% from that obtained in the same period of 2005 (+10.1% in constantcurrency), whilst profitability has remained virtually stable despite the highcommercial activity developed in its markets of operations (OIBDA margin risesto 34.7% with a year-on-year drop of 0.4 percentage points). Noteworthy is theimprovement in the OIBDA margin for the Latin American operators up to September(24.70% vs. 22.0% twelve months ago), whilst the OIBDA margin for TelefonicaMoviles Spain stands at 45.5% vs. 46.7% in January-September 2005. The OIBDA of the Telefonica de Espana Group records 7.6% growth in respect tothe first nine months of 2005, totalling 3,769.5 million euros and representing25.7% of the total OIBDA. The positive evolution of revenues and the costcontrol (-3.2%) along with the lower accounted provision by the employees joinedthe Redundancy Program in 2006 compared to 2005, has contributed to thisperformance. For the 2006 financial year, it has been predicted that OIBDAgrowth4 will surpass 5% without considering the possible provision resultingfrom bringing forward part of the Redundancy Program for 2007 (previously +1.0%/+3.0%). The OIBDA margin to September stands at 42.4% (40.1% inJanuary-September 2005). Excluding the redundancy plan provision, in bothperiods the OIBDA margin has increased to 46.8% (46.1% the previous year).-------------------------------------------------------------------------------- 4 2006 guidance exclude changes in consolidation. Operating Income before D&Aexcludes other exceptional revenues/expenses not foreseeable in 2006. PersonnelRestructuring (E.R.E.) and Real Estate Programs are included as operatingrevenues/ expenses. For comparison, the equivalent other exceptionalrevenues/expenses registered in 2005 are also deducted from reported figures. With regard to Telefonica Latinoamerica Group, the OIBDA (3,198.2 million euros)represents 21.8% of the consolidated OIBDA for the first nine months of thefiscal year and shows a year-on-year growth of 18.8%. Excluding the positiveimpact of the exchange rates (+10.4 percentage points) and the incorporation ofColombia Telecom in May, the rise in the OIBDA is reduced to 4.0%. The OIBDAmargin, excluding the result for disposing of fixed assets in both periods,reached 45.4%, 1.8 percentage points higher than the previous year. Telefonica O2 Europe contributed 2,798.2 million euros or 19.1% to theconsolidated OIBDA, which comprised eight months of O2 Group (2,044.6 millioneuros) and nine months of Telefonica O2 Czech Republic and TelefonicaDeutschland. With regard to Telefonica O2 Czech Republic, the OIBDA reached778.8 million euros and has increased 4.1% compared to January-September 2005,which has led to increase the OIBDA growth target to be around 2% compared tothe flat performance which was previously announced. With respect to the OIBDAmargin, in the February-September 2006, O2 UK stands at 27.6% and O2 Germany at24,2%. By the end of 2006, it is expected that the O2 UK margin for the 11months in 2006 will stand around 1.0 percentage points below than the oneobtained in the same period in 2005.With regard to the breakdown of OIBDA bygeographic areas at the end of the third quarter, 45.9% of the total OIBDA forthe Telefonica Group comes from Spain (-13.7 percentage points compared toSeptember of last year), 33.8% from Latin America (2.0 percentage points lessthan twelve months ago) and 19.7% from Europe (15.7 percentage points more thanin September of the previous year). Depreciation and amortization to September has risen to 7,209.3 million eurosand registers a 50.1% increase over the same period of the previous year. Thisperformance is mainly due to the incorporation of Telefonica O2 Europe, thatincludes eight months of the O2 Group Purchase Price Allocation for 639.0million euros and nine months of amortization associated to the Price PurchaseAllocation of Telefonica O2 Czech Republic which reached 115.8 million euros. Weare not expecting significant variations of the preliminary estimated amount ofthe O2 puchase price allocation incorporated until the end of September once wehave the definitive figure. In organic5 terms, depreciation and amortizationincreased by 9.1%, changing the trend versus June (-1.4%) due to the O2 PPAmentioned before. Excluding this effect, depreciation and amortization woulddecrease, in organic terms, untill 0.9% as a result of the decline ofamortisation in Telefonica de Espana Group (-13.2%). The consolidated operating income (OI) presents year-on-year growth of 24.5% andtotals 7,44.6 million euros in January-June 2006. The organic5 growth ,excluding the effect of the allocated assets in the acquisition proccess of O2would have increased by 15.6%, 1.0 percentage points less than in the first halfof the year. -------------------------------------------------------------------------------- 5 Assuming constant exchange rates and including the consolidation of TelefonicaO2 Czech Republic in January-September 2005 and the O2 Group in February-September 2005. It excludes the consolidation of Colombia Telecom in May-September 2006 and Iberbanda in July-September 2006. The result of associated companies cumulative to September reaches 60.7 millioneuros compared with 9.6 million for the same period of the previous year. Thisimprovement was due to the higher contribution of Portugal Telecom and, to alesser extent, the reduction in losses attributable to IPSE 2000. Net financial expenses amounted to 1,928.7 million euros, 71.5% year-on-year(+804.1 million euros) in respect with the comparable figure of 2005 (1,124.5million euros). This variation is lower than the 88.3% increase in the averagenet debt due to the lower costs than 2005 average related to the debt growth ineuros and pounds for the O2 acquisition. The net free cash flow after CapEx generated by the Telefonica Group in thefirst nine months of 2006 totalled 6,485.6 million euros, of which 2,063.3million euros were assigned to the buyout of treasury stock in Telefonica, S.A.,1,169.2 million euros to the payment of dividend and 616.1 million euros to thecancellation of commitments, mainly headcount reduction program. Since thefinancial investments in the period (net of the sale of real state and the cashflow of O2, Colombia Telecom and TPI in the moment of the acquisition/disposal)reached 21,872.2 million euros, mainly because the O2 take over (purchases of O2shares in the stock market began in 2005), the net financial debt has beenincreased by 18,641.2 million euros. Telefonica's Group net financial debt at the end of September 2006 stood at52,238.7 million euros. Along with the aforementioned effect (increase of18,641.2 million euros), another effects have to be added: i) increase of4,146.6 million euros due to the changes in the perimeter of consolidation andother effects over the financial statements, mainly the incorporation of O2 andColombia Telecom gross debt and ii) reduction of 616.1 million euros as aconsequence of the effects of the exchange rates on net financial debt nondenominated in euros. This results in an increase of the net financial debt of22,171.7 million euros versus the fiscal year 2005 net financial debt figure(30,067.0 million euros). The tax provision accrued in the first three quarters of the year reached1,714.0 million euros, which implies a tax rate of 31% in the period, althougthe cash outflow for the Telefonica Group will be further reduced as negativetax bases are compensated for. The effective tax rate stood at 39% in the thirdquarter impacted by the O2 Group Purchase Price Allocation, higher than the 20%rate accounted in the second quarter which was affected by the deductions(allowances for export activities) that were pending to record. The result from discontinued operations stands at 1,596.0 million in the firstnine months of the financial year after registering the net capital gain in thethird quarter of the year corresponding to the sale of Telefonica'sparticipation in TPI for 1,564 million euros. The results attributed to minority interests subtract 273.0 million euros fromthe net income cumulative to September and grows 6.6% year-on-year. Thisvariation is mainly due to minority shareholder participation in the higher netincome of Telefonica O2 Czech Republic, Telesp, Endemol (IPO in November 2005). As a consequence of the performance of the aforementioned parties, the netincome from the Telefonica Group increased in the first nine months of the yearto 5,185.7 million euros, 59.4% higher than the one obtained inJanuary-September 2005, after registering a net income of 2,611.7 million eurosin the third quarter (1,418.2 million euros in July-September 2005). The consolidated CapEx for the first nine months of 2006 reached 5,066.6 millioneuros, a year-on-year increase of 59.9%. In organic6 terms, growth would havebeen 6.1%, explained basically by the higher investments in the fixed business,broadband and new businesses, both in Spain and in Latin America and in themobile business in Europe due to the deployment of the third generation networkin UK and Germany and additional investments in the second generation network.However, it should be noted that there is a cyclical component of theinvestments, so that this performance cannot be extrapolated to the full year.-------------------------------------------------------------------------------- 6 Assuming constant exchange rates and including the consolidation of TelefonicaO2 Czech Republic in January-September 2005 and the O2 Group in February-September 2005. It excludes the consolidation of Colombia Telecom in May-September 2006 and Iberbanda in July-September 2006. FINANCIAL TARGETS ( 7 ) Regarding the financial targets established for 2006 the Telefonica Groupexpects that: • The consolidated growth of the revenues for the 2006 fiscal year is now expected to be above 37% compared with the initial range of +34/+37%. • The 2006 OIBDA growth is expected to be at the top-end of the range previously comunicated (+26%/+29%) • The OI growth in 2006 is expected to be in the range (+26%/+30%) previously announced. • CapEx is expected to be around the 7,200 million euros previously announced. -------------------------------------------------------------------------------- 7 2006 guidance assumes constant exchange rates as of 2005. Base reportednumbers include six months of Telefonica O2 Czech Republic (consolidated sinceJuly 2005) and include TPI as a discontinued operation. All figures excludechanges in consolidation, other than O2 (Feb-Dec 06 included). In terms ofguidance calculation, OIBDA and OI exclude other exceptional revenues/expensesnot foreseeable in 2006. Personnel Restructuring and Real Estate Programs areincluded as operating revenues/ expenses. For comparison, the equivalent otherexceptional revenues/expenses registered in 2005 are also deducted from reportedfigures. The assignment of O2's goodwill is not included in OI guidancecalculation. TELEFONICA GROUP SELECTED FINANCIAL DATA Unaudited figures (Euros in millions) January - September 2006 2005 % Chg Revenues 38,704.4 27,054.1 43.1 Operating income before D&A (OIBDA) 14,653.9 10,782.4 35.9 Operating income (OI) 7,444.6 5,980.1 24.5 Income before taxes 5,576.7 4,865.2 14.6 Net income 5,185.7 3,253.3 59.4 Basic earnings per share 1.091 0.665 64.0 Weighted average number of ordinary shares outstanding during the period (millions) 4,754.0 4,890.7 (2.8) Note: For the basic earnings per share calculation purposes, the weighted average number of ordinary shares outstanding during the period have been obtained applying IFRS rule 33 "Earnings per share". Thereby, there are not taking into account as outstanding shares the weighted average number of shares held as treasury stock during the period nor the shares assigned to the stock options plans for employees. Furthermore, in line with IFRS rule 33, the weighted average number of shares outstanding during every period, has been adjusted for these operations that had implied a difference in the number of outstanding shares, without a variation associated in the equity, as if those have taken place at the beginning of the first period presented. It consists on the distribution of the paid-in capital reserve by means of delivery of shares in the proportion of 1 share to every 25 shares, approved by the AGM as of May 31, 2005. TELEFONICA GROUP RESULTS BY COMPANIES Unaudited figures (Euros in millions) REVENUES OIBDA OPERATING INCOME January - September January - September January - September 2006 2005 % Chg 2006 2005 % Chg 2006 2005 % Chg Telefonica de Espana Group (1) 8,893.9 8,744.5 1.7 3,769.5 3,503.0 7.6 2,355.9 1,875.4 25.6 Telefonica Latinoamerica Group (1) 7,050.3 6,000.9 17.5 3,198.2 2,692.9 18.8 1,737.7 1,378.0 26.1 Telefonica Moviles Group 13,537.2 12,050.0 12.3 4,700.3 4,226.5 11.2 2,875.1 2,546.7 12.9 Telefonica O2 Europe (2) 9,434.3 717.7 n.c. 2,798.2 253.8 n.c. 320.7 99.7 n.c. Atento Group 758.0 608.6 24.6 102.3 82.6 23.9 81.3 61.9 31.3 Content & Media Business 1,124.9 878.7 28.0 270.1 167.1 61.6 248.8 146.7 69.7 Other companies (3) 511.4 439.6 16.3 (69.2) (128.3) (46.1) (102.6) (165.4) (37.9) Eliminations (2,605.7) (2,385.8) 9.2 (115.5) (15.2) n.m. (72.3) 37.2 c.s. Total Group 38,704.4 27,054.1 43.1 14,653.9 10,782.4 35.9 7,444.6 5,980.1 24.5 (1) Telefonica de Espana Group and Telefonica Latinoamerica Group results consolidates the results from Terra Networks operations from 1 January 2005 (2) Telefonica O2 Europe includes in 2006 O2 Group (February-September), Telefonica O2 Czech Republic y T. Deutschland. In 2005 Telefonica O2 Europe includes Telefonica O2 Czech Republic since July and T. Deutschland since January (3) OIBDA and Operating Income exclude the variation in investment valuation allowances and the capital gain obtained for the sale of TPI accounted for by Telefonica S.A. parent company and that are eliminated in consolidation TELEFONICA GROUP CAPEX BY BUSINESS LINES Unaudited figures (Euros in millions) January - September 2006 2005 % Chg Telefonica de Espana Group (1) 1,049.3 919.8 14.1 Telefonica Latinoamerica Group (1) 736.6 578.0 27.4 Telefonica Moviles Group 1,301.1 1,384.6 (6.0) Telefonica O2 Europe (2) 1,675.2 55.9 n.c. Atento Group 19.2 24.2 (20.5) Content & Media Business 37.0 13.9 165.9 Other companies & Eliminations 248.3 191.4 29.7 Total Group 5,066.6 3,167.8 59.9 Note: Group CapEx in 2006 at cumulative average exchange rate. For comparative purposes, 2005 Capex has been recalculated at the cumulative average exchange rate for the corresponding period (1) Telefonica de Espana Group and Telefonica Latinoamerica Group results consolidates the results from Terra Networks operations from 1 January 2005 (2) Telefonica O2 Europe includes in 2006 O2 Group (February-June), Telefonica O2 Czech Republic y T. Deutschland. In 2005 Telefonica O2 Europe only includes Telefonica O2 Czech Republic since July and T. Deutschland since January TELEFONICA GROUP CONSOLIDATED INCOME STATEMENT Unaudited figures (Euros in millions) January - September July - September 2006 2005 % Chg 2006 2005 % Chg Revenues 38,704.4 27,054.1 43.1 13,541.9 9,867.6 37.2 Internal expenditure capitalized in fixed assets (1) 523.9 338.1 54.9 182.2 112.9 61.3 Operating expenses (24,519.2) (16,590.6) 47.8 (8,346.2) (5,668.9) 47.2 Supplies (11,984.8) (7,072.1) 69.5 (4,245.7) (2,534.6) 67.5 Personnel expenses (5,201.4) (4,126.0) 26.1 (1,611.8) (1,261.4) 27.8 Subcontracts (6,652.1) (4,863.0) 36.8 (2,250.8) (1,688.0) 33.3 Taxes (680.9) (529.6) 28.6 (237.9) (184.9) 28.7 Other net operating income (expense) (264.4) (184.8) 43.1 (34.1) (96.4) (64.6) Gain (loss) on sale of fixed assets 223.5 177.9 25.7 71.6 13.6 n.m. Impairment of goodwill and other assets (14.2) (12.2) 16.6 (3.9) (5.4) (27.5) Operating income before D&A (OIBDA) 14,653.9 10,782.4 35.9 5,411.5 4,223.5 28.1 Depreciation and amortization (7,209.3) (4,802.3) 50.1 (2,863.8) (1,721.4) 66.4 Operating income (OI) 7,444.6 5,980.1 24.5 2,547.7 2,502.1 1.8 Profit from associated companies 60.7 9.6 n.s. 21.4 4.3 n.m. Net financial income (expense) (1,928.7) (1,124.5) 71.5 (738.0) (394.0) 87.3 Income before taxes 5,576.7 4,865.2 14.6 1,831.1 2,112.5 (13.3) Income taxes (1,714.0) (1,409.5) 21.6 (712.3) (620.5) 14.8 Income from continuing operations 3,862.6 3,455.7 11.8 1,118.7 1,491.9 (25.0) Income (Loss) from discontinued operations 1,596.0 53.7 n.m. 1,576.6 37.9 n.m. Minority interest (273.0) (256.2) 6.6 (83.6) (111.7) (25.1) Net income 5,185.7 3,253.3 59.4 2,611.7 1,418.2 84.2 Weighted average number of ordinary shares outstanding during 4,754.0 4,890.7 (2.8) 4,828.1 4,877.9 (1.0) the period (millions) Basic earnings per share 1.091 0.665 64.0 0.541 0.291 86.1 (1) Including work in process. Note: For the basic earnings per share calculation purposes, the weighted average number of ordinary shares outstanding during the period have been obtained applying IFRS rule 33 "Earnings per share". Thereby, there are not taking into account as outstanding shares the weighted average number of shares held as treasury stock during the period nor the shares assigned to the stock options plans for employees. Furthermore, in line with IFRS rule 33, the weighted average number of shares outstanding during every period, has been adjusted for these operations that had implied a difference in the number of outstanding shares, without a variation associated in the equity, as if those have taken place at the beginning of the first period presented. It consists on the distribution of the paid-in capital reserve by means of delivery of shares in the proportion of 1 share to every 25 shares, approved by the AGM as of May 31, 2005. TELEFONICA GROUP CONSOLIDATED BALANCE SHEET Unaudited figures (Euros in millions) September 2006 2005 % Chg Non-current assets 90,832.1 57,982.2 56.7 Intangible assets 21,042.1 6,872.5 206.2 Goodwill 22,752.5 9,394.4 142.2 Property, plant and equipment and Investment property 33,671.1 27,961.5 20.4 Long-term financial assets and other non-current assets 5,981.4 5,546.5 7.8 Deferred tax assets 7,385.0 8,207.3 (10.0) Current assets 19,128.3 13,905.5 37.6 Inventories 1,052.2 903.8 16.4 Trade and other receivables 9,709.1 7,459.1 30.2 Current tax receivable 1,468.1 1,561.5 (6.0) Short-term financial investments 1,788.3 1,415.0 26.4 Cash and cash equivalents 5,101.1 2,548.9 100.1 Non-current assets classified as held for sale 9.4 17.1 (44.9) Total Assets = Total Equity and Liabilities 109,960.4 71,887.6 53.0 Equity 19,087.0 14,924.8 27.9 Equity attributable to equity holders of the parent 16,298.9 12,265.0 32.9 Minority interest 2,788.1 2,659.8 4.8 Non-current liabilities 64,446.1 34,750.8 85.5 Long-term financial debt 51,647.0 23,884.2 116.2 Deferred tax liabilities 5,275.5 1,999.9 163.8 Long-term provisions 6,535.1 7,632.4 (14.4) Other long-term liabilities 988.4 1,234.3 (19.9) Current liabilities 26,427.3 22,212.1 19.0 Short-term financial debt 8,974.7 9,094.8 (1.3) Trade and other payables 8,781.9 6,061.9 44.9 Current tax payable 2,494.5 2,345.8 6.3 Short-term provisions and other liabilities 6,176.2 4,709.6 31.1 Liabilities associated with non-current assets classified as held for sale 0.0 0.0 n.s. Financial Data Net Financial Debt (1) 52,238.7 28,676.1 82.2 (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 - September 2006 2005 % Chg I Cash flows from operations 13,729.9 9,303.8 47.6 II Net interest payment (1) (1,711.4) (934.7) III Payment for income tax (879.0) (1,017.1) A=I+II+III Net cash provided by operating activities 11,139.5 7,352.0 51.5 B Payment for investment in fixed and intangible assets (4,981.5) (3,074.3) C=A+B Net free cash flow after CAPEX 6,158.0 4,277.7 44.0 D Net Cash received from sale of Real Estate 24.0 84.2 E Net payment for financial investment (21,302.2) (4,854.6) F Net payment for dividends and treasury stock (2) (3,521.0) (2,277.9) G=C+D+E+F Free cash flow after dividends (18,641.2) (2,770.6) H Effects of exchange rate changes on net financial debt (616.1) 1,240.6 I Effects on net financial debt of changes in consolid. 4,146.6 970.5 and others J Net financial debt at beginning of period 30,067.0 23,694.4 K=J-G+H+I Net financial debt at end of period 52,238.7 28,676.1 (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 - September 2006 2005 % Chg OIBDA 14,653.9 10,944.5 33.9 - CapEx accrued during the period (EoP exchange rate) (5,066.6) (3,330.6) - Payments related to commitments (616.1) (665.4) - Net interest payment (1,711.4) (934.7) - Payment for income tax (879.0) (1,017.1) - Results from the sale of fixed assets (223.6) (177.7) - Invest. in working cap. and other deferred income and expenses 0.7 (541.3) = Net Free Cash Flow after CapEx 6,158.0 4,277.7 44.0 + Net Cash received from sale of Real Estate 24.0 84.2 - Net payment for financial investment (21,302.2) (4,854.6) - Net payment for dividends and treasury stock (3,521.0) (2,277.9) = Free Cash Flow after dividends (18,641.2) (2,770.6) n.m. Note: At the Investor Conference held in October 2003, the concept expected "Free Cash Flow" 2003-2006 was introduced to reflect the amount of cash flow available to remunerate Telefonica S.A. Shareholders, to protect solvency levels (financial debt and commitments), 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 Cash Flow" being calculated before payments related to commitments (workforce reductions and guarantees) and after dividend payments to minoritaries, due to cash recirculation within the Group. Jan-Sep 2006 Jan-Sep 2005 Net Free Cash Flow after CapEx 6,158.0 4,277.7 + Payments related to cancellation of commitments 616.1 502.9 - Ordinary dividends payment to minoritaries (288.5) (262.7) = Free Cash Flow 6,485.6 4,517.9 TELEFONICA GROUP NET FINANCIAL DEBT AND COMMITMENTS Unaudited figures (Euros in millions) September 2006 Long-term debt 51,970.8 Short term debt including current maturities 8,974.7 Cash and Banks (5,101.1) Short and Long-term financial investments (1) (3,605.8) A Net Financial Debt 52,238.7 Guarantees to IPSE 2000 365.5 Guarantees to Newcomm 74.0 B Commitments related to guarantees 439.5 Gross commitments related to workforce reduction (2) 5,123.5 Value of associated Long-term assets (3) (723.1) Taxes receivable (4) (1,765.9) C Net commitments related to workforce reduction 2,634.4 A + B + C Total Debt + Commitments 55,312.6 Net Financial Debt / OIBDA (5) 2.62x Total Debt + Commitments/ OIBDA (5) 2.78x (1) Short term investments and certain investments in financial assets with a maturity profile longer than one year, whose amount is included in the caption "Investment" of the Balance Sheet. (2) Mainly in Spain. This amount is detailed in the caption "Provisions for Contingencies and Expenses" of the Balance Sheet, and is the result of adding the following items: "Provision for Pre-retirement, Social Security Expenses and Voluntary Severance", "Group Insurance", "Technical Reserves", and "Provisions for Pension Funds of Other Companies". (3) Amount included in the caption "Investment" of the Balance Sheet, section "Other Loans". Mostly related to investments in fixed income securities and long-term deposits that cover the materialization of technical reserves of the Group insurance companies. (4) Net present value of tax benefits arising from the future payments related to workforce reduction commitments. (5) Calculation based on 12 months accumulated OIBDA, including Telefonica O2 Czech Republic, O2 and Colombia Telecom. TELEFONICA GROUP EXCHANGES RATES APPLIED P&L and CapEx (1) Balance Sheet (2) Jan - Sep 2006 Jan - Sep 2005 % Chg September 2006 September 2005 United States (Dolar USA/Euro) 1.243 1.261 1.266 1.204 United Kingdom (Sterling/Euro) 0.685 - 0.678 - Argentina (Peso Argentinean/Euro) 3.821 3.661 3.930 3.504 Brazil (Real Brasileno/Euro) 2.714 3.131 2.753 2.676 Rep. Checa (Corona Checa/Euro) 28.441 29.682 28.330 29.550 Chile (Peso Chileno/Euro) 660.066 719.424 679.810 636.943 Colombia (Peso Colombiano/Euro) 2,949.853 2,941.176 3,030.303 2,754.821 El Salvador (Colon/Euro) 10.880 11.038 11.078 10.536 Guatemala (Quetzal/Euro) 9.462 9.639 9.649 9.217 Mexico (Peso Mexicano/Euro) 13.543 13.805 13.945 13.065 Nicaragua (Cordoba/Euro) 21.707 20.986 22.510 20.396 Peru (Nuevo Sol Peruano/Euro) 4.093 4.117 4.111 4.027 Uruguay (Peso Uruguayo/Euro) 29.898 31.192 30.257 28.843 Venezuela (Bolivar/Euro) 2,673.797 2,645.503 2,724.796 2,590.674 (1) These exchange rates are used to convert the P&L and CapEx accounts of the Group foreign subsidiaries from local currency to euros. (2) Exchange rates as of 30/09/06 y 30/09/05. RESULTS BY BUSINESS LINES Fixed Line Business Telefonica de Espana Group Telefonica de Espana Group's results for the first nine months of 2006 confirmthe success of the commercial strategy by showing a 1.7% growth in revenues,supported by the positive evolution of the Internet and Broadband business,which increased by 27.0%. As a result from the commercial campaigns developed, net gain of Retail InternetBroadband accesses in the third quarter posted a 27.1% growth compared to thatof same quarter 2005, surpassing 190.000 net adds. This success of Telefonica de Espana is based on product bundling through theDuos and Trios offers, which amounted to over 2.3 millions by September end, andon the higher usage of VAS, which contributed to the increase of global ARPU to63 euros, being 4.3% higher than that of the first nine months of 2005. It is also noteworthy the fixed telephone line loss contention in thetraditional business, showing a year-on-year decline of just 1.3%. This goodperformance is due, on one side, to Telefonica's bundling strategy andcommercial and promotional actions, and on the other, to the fixed line marketgrowth in Spain, that according to Company's estimates reaches a 1.8%year-on-year growth by September 2006. The cost contention results, together with top line growth, have resulted in anOIBDA growth, for the January-September 2006 period, of 7.6%. This growth iseven more meaningful once taken out one-off effects, such as the lower E.R.E.provision in 2006, the Real State program, or public subventions, leading to anunderlying OIBDA growth of 3.7%. All in one has led to an upgrade of the 2006OIBDA guidance to higher than 5%. Following with commercial details, next, most relevant products launched duringthe third quarter of the year are mentioned: • Expansion of the Duos range aimed primarily at SMEs, which include the most advanced ADSL modalities: Class (2 Mbps/320 Kbps), Advanced (4 Mbps/512 Kbps), Premium (8 Mbps/640 Kbps), TOP (10 Mbps/320 Kbps) and Premium Plus (20 Mbps/800 Kbps). • Launch of the new "Actuaciones Lan" (LAN Operations) service to manage the local area networks of our clients and the "Escritorio PYME" (SMEs Desktop) service: The grouping of outsourced functions and services to create an on-line desktop in the company (virtual intranet) where all company staff share resources and information and are connected 24 hours a day from anywhere, inside and outside the office. • The new modality of contracting theme channels through the Imagenio Service to customize the range of TV programmes, adding channel packages known as "Favoritos" (Favourites) or independent channels "a la carta" (a la carte). From among the former it is possible to choose packages containing theme channels of Series, Music, Cinema, Documentaries or Sports from €3.00 a month. The "a la carte" channels are available from €1.70 a month. Significant efforts have also be made in terms of marketing campaigns: • The free subscription campaign between 18th September and 2nd October. • The marketing campaign undertaken during the summer months regarding the combined offers, Duos and Trios, which, among other discounts, offered free monthly subscription fees until September and that have contributed towards a quarterly net gain in this type of products of over 278,000 units, despite the summer season. • The inclusion of 120-minute vouchers a month in Duos and Trios (promotion valid from 20th August until 15th October) for fixed-to-mobile traffic at any time of day free of charge for 6 months. The success of this offer can be seen in the total number of these vouchers, which exceeded 140,000 through the end of September. Also worth noting is the renewed agreement signed with Buenavista Internationalfor an initial three-year period for the video-on-demand distribution of titlesfrom the Walt Disney Studios, Touchestone Pictures and Miramax Films through theImagenio service. In terms of regulatory matters, the decision published by the CMT last Septemberin relation to the new RUO, Reference Unbundling Offer (OBA, Oferta de Acceso alBucle de Abonado: Offer for Access to the Subscriber Loop) is worth noting. Thisdecision established significant new issues in comparison with the previous RUOin force, including: • The 14.4% reduction in the fully unbundled loop rental price to 9.72 euros per month, the price of the shared loop remaining unaltered. • Creation of a planning and monitoring system for requests for work associated with loop unbundling, trying to solve problems due to delays over the established completion terms when requests were presented in large numbers and without prior planning. • The reduction of the period established for alternative operators to use the space reserved in central offices to six months as of its availability. • The introduction of a new procedure for shared loops to disable the basic telephone service on request by the end customer. The loop will be treated as fully unbundled loop to bill the alternative operator and Telefonica de Espana will no longer charge the end customer the PSTN line monthly fee. • The imposition of a gap of no shorter than 30 calendar days for Telefonica to launch a new ADSL retail service as of the availability of the same wholesale service for alternative operators. • The inclusion of new quality parameters for the unbundled loop services, wholesale ADSL services (GigADSL and ADSL-IP) and the end services it provides for itself, PSTN, ADSL line and Imagenio, and for companies in the Group. In August, the CMT also published a new decision in which it established themaximum average prices applicable to voice termination interconnection serviceson mobile networks. In this regulation, the CMT established a period of threeyears between October 2006 and September 2009 to set a half-yearly path to cutthe average prices of the three operators so that, by the end of the period,they will all stand at 0.07 euros/minute, leading to a reduction of between 42%and 47% in comparison with current prices. The first cut proposed, madeeffective as of 16th October, represents a reduction of between 7% and 8% inrelation to the previous prices in force. Revenues of Telefonica de Espana Group amounted to 8,893.9 million euros duringthe first nine months of 2006, a year-to-year growth of 1.7%. Revenues totalled2,972.7 million euros in the third quarter of the year, a 1.6% increase that, asin the previous quarter, was affected by the change in accounting criteria fortraffic-card revenues as of March 2006. Revenues growth, taking out the effectof the traffic cards revenues accounting criteria change, would stand at 2.3%(2.4% for the third quarter alone). Through September, Telyco's contribution to revenues amounted to 311.0 millioneuros, down 8.6% compared to the previous year. The performance of Telyco took0.4 percentage points from Telefonica de Espana Group growth during January toSeptember 2006. TTP contributed to the Group's growth with 81.3 million euros, a12.3% year-to-year decline. Iberbanda's contribution, since it is being firstlyconsolidated as of July 1st 2006 , amounts to 8.9 million euros. On 1st July 2006, Terra Espana was merged with Telefonica de Espana, S.A.,retroactively to 1st January 2006. As such, Telefonica de Espana parentcompany's operating revenues for the third quarter 2006 included 15.7 millioneuros of Terra Espana revenues from the January to September 2006 period. Theseadditional revenues are mostly attributed to the retail internet and broadbandbusiness; revenues from wholesale and IT services provided during the period bythe Telefonica de Espana Parent company to Terra Espana are eliminated inconsolidation. As a result, over the first nine months of the year, the Telefonica de EspanaParent Company's revenues totalled 8,568.8 million euros, a 2.5% growth year toyear, which amounted to 2.4% during the third quarter. A detailed analysis of the Telefonica de Espana Parent Company's revenuesfollows: • Revenues for traditional access fell by 2.0% in relation to those obtained during the first nine months of 2005 to stand at 2,078.7 million euros. In relation to the third quarter of the previous year, the 1.7% decline was due to the reduction in the number of fixed telephony lines and the freezing of monthly fee of PSTN lines in 2006. The launch of the free subscription fee campaign fuelled the fixed telephony market in Spain, which increased by 1.8% year-on-year to September end, in comparison with the 1.5% growth by June end or the 1.3% increase by September of the previous year. Telefonica de Espana recorded a net loss of 41,571 lines, 25.4% less than that recorded in the third quarter of the previous year. Telefonica de Espana's total number of lines stood at 16.0 million, with an estimated market share of 83.4%. The total number of Telefonica de Espana accesses where, along with fixedtelephony accesses, data and internet accesses were accounted for, as well aspay television and wholesale accesses, increased by 3.6%. The total combinedfigure amounted to 22.3 million accesses. • Revenues from traditional voice services amounted to 3,665.6 million euros to September this year, with a year-on-year reduction of 5.1%. Excluding the effect of the traffic cards revenues accounting criteria change, revenues decrease would be 3.8%. Revenues from outgoing voice traffic amounted to 2,274.6 million euros over the first nine months of the year, with a year-to year reduction of 6.9%. This reduction amounted to 7.5% in the third quarter. Moreover, this decline in revenues does not reflect the better performance of outgoing voice traffic in minutes seen as a result of the launch of Duo and Trio offers, which improved from the 7.2% drop in 2005 to a decrease of only 1.5% over the first nine months of the year 2006. This effect can also be seen in the performance of the fixed voice market in Spain which, from January to September, fell by an estimated 1.0% compared with the 3.1% drop of the previous year. The estimated market share of Telefonica de Espana remained fairly stable throughout the year at around 66%. Telefonica de Espana's outgoing voice traffic during the first nine months of the year amounted to 32,170 million minutes, leading to a 1.5% fall, substantially below that recorded during the first nine months of the previous year (7.9% year-on-year reduction). Through September, domestic voice traffic fell slightly by 1.4% in comparison with the previous year, with a total of 24,483 million minutes. The significant growth of DLD traffic -interprovincial- is worth noting (10.9% to September), heavily encouraged by the new rates schemes. International long-distance traffic increased by 4.3% to 1,543 million minutes. Fixed-to-mobile traffic continued to drop by 4.9% to stand at 4,091 million minutes. With regard to service packages, it is worth noting that the total number of combined plans and flat rates amounted to 4,157,841 at September 2006, 7.3% up on that of June 2006. Moreover, by the end of September, there were 2,025,370 pre-selected lines, a drop of 74,322 over the third quarter, with the accumulated reduction over the first nine months of the year amounting to 259,220 lines. • According to our estimates, the fixed Internet Broadband access market in Spain amounted to around 6.1 million accesses by the end of September, recording an estimated net gain over the quarter of 280,000 accesses, 9% up on that estimated for the same period of the previous year. Telefonica ADSL connections as a whole (wholesale plus retail, including accesses providing only the Imagenio service) accounted for 4,086,690 connections by the end of September 2006. Revenues from Internet and Broadband services totalled 1,762.6 million euros during the first nine months of the year, 27.0% up compared with the previous year, more than offset by the reduction in revenues from the traditional access and voice businesses. During the third quarter of the year, the growth in these revenues stood at 28.1%. The incorporation of Terra into the Telefonica de Espana Parent Company perimeter led to 24.8 million euros of additional revenues in relation to the previous year. Within this caption, broadband revenues from both internet access and pay television grew 33.2% over the year to reach 1,645.0 million euros, of which 1,368.8 million euros are from the retail business. Growth stood at 32.7% over the third quarter. Telefonica's client base of retail Internet broadband accesses (ADSL, Optical fibre and other technologies, excluding accesses only providing the Imagenio service) recorded a net gain of 191,184 connections over the third quarter. With this, the total number of Telefonica retail Internet broadband lines stood at 3,411,322 by September 2006. The Broadband market share remained at around 55% in September. The new bundles of products and the reductions in prices included in the promotions have led to a year-on-year reduction in the ADSL connectivity ARPU of close to 8.9% that, partially offset by the growth of almost 21.7% in the value added service ARPU, led to an overall 4.8% drop in ADSL Line ARPU. Finally, to be noted for the purposes of analysing revenues, the lower ARPU recorded was offset by the increase in the number of clients. It must be highlighted that 65.5% of Telefonica de Espana retail Internet broadband accesses have the Internet connectivity service with some kind of double or triple-offer package. The net gain of unbundled loops during the third quarter amounted to 96,511 new loops, of which 78% correspond to migrations from the Telefonica de Espana wholesale ADSL service. By the end of the third quarter, the total number of unbundled loops stood at 774,805 to represent, according to our estimates, 13% of the total number of fixed broadband accesses on the Spanish market and 16% of ADSL lines. Of this total, 438,484 (57%) were shared access loops. In terms of net gain for the third quarter, fully unbundled loops represented 46% of the total. The wholesale ADSL service was affected by the migration to unbundled loops and, therefore, recorded a loss of 59,192 accesses during the third quarter to leave its total plant at 625,239. Value-added services (VAS) provided over Telefonica de Espana broadband accesses remained a fundamental factor in the commercial portfolio of Telefonica de Espana. The number of operative services amounted to 2.9 million. ADSL Solutions is noteworthy among these services, a total of 328,967 solutions being operational by the end of the third quarter to give a 2.0% increase in relation to last June. The net increase in Imagenio customers during the third quarter of the year stood at 36,880, around 35% of the total estimated net gain for the pay TV market in Spain. This figure places the total number of Imagenio clients at 304,353, a market share of over 8%. • Revenues from data services grew by 4.8% in relation to the first nine months of the previous year to reach 806.0 million euros. Growth stood at 7.3% over the third quarter. Over this third quarter, wholesale data revenues recorded a 17.4% growth, basically promoted by leased circuits and transport capacity to other telephony operators. Retail services grew by 1.7% over the quarter in relation to the previous year. • Lastly, information technology services contributed towards Telefonica de Espana revenues with a total of 255.8 million euros, a 17.1% year-on-year increase. Growth stood at 17.2% over the third quarter. There are currently 213 client management centres operated by Telefonica de Espana and 156 contracts with clients who are outsourcing their communications service/systems. These figures have grown by 23% and 37% respectively year-on-year. The number of servers devoted to clients amounted to 3,526, a 25% increase versus the previous year. The number of desktop positions/workstations managed stood at 87,633, of which 43.0% include high added value solutions such as managed LAN or the helpdesk service. Telefonica de Espana Group's operating expenses recorded a year-on-year decreaseof 3.2% to 5,260.9 million euros, whereas this decline stood at 1.3% for thethird quarter. Excluding the effect of the provisions for workforcerestructuring, expenses in the January-September 2006 period expenses would havedropped by 0.8%. This good performance is due to the reduction in supplies andexternal services expenses. • Personnel expenses fell by 5.6% in relation to the same period of the previous year to reach 1,991.7 million euros. Over the third quarter, however, this expense item increased slightly by 0.6%. 45 redundancies were recorded during the first nine months of the year from the Terra Espana Remunerated Layoff Plan and 1,237 from the Telefonica de Espana Redundancy Program (E.R.E.). The provision for this item amounts to 392 million euros. Excluding the effect of Redundancy Plan provisions in the first nine months of 2005 (524.3 million euros including actuarial reviews) and in 2006, personnel expenses would have grown by 1%. In relation to the Redundancy Plan (E.R.E.), it must be noted that, in view of the foreseeably large number of applications expected for the last year of the programme, the start date of the subscription period for the incorporation of staff to the 2007 programme has been moved forward from January 2007 to October 2006. Bearing in mind that the provision for the Redundancy Plan is based on employees that have subscribed to the programme, the fact that the provision initially foreseen for 2007 has been brought forward to this year may affect the OIBDA for 2006. Telefonica de Espana Parent Company workforce at the end of September amounted to 32,837 employees, of who 222 employees come from the integration of Terra Espana. This represents a net reduction of 442 employees since the start of the year. The average Telefonica de Espana Group workforce in the first nine months of the year stood at 34,657 employees, a 4.4% reduction in comparison with the average workforce in the same period of 2005. • Supplies expenses fell by 1.7% over the year to stand at 2,175.0 million euros. This reduction amounted to 3.8% during the third quarter. Lower interconnection expenses (-10.9%) as a result of the reduction in international traffic delivery costs and the reduction in fixed-to-mobile traffic and termination interconnection rates have notably contributed to this good performance. • External services expenses recorded a drop of 2.6% to stand at 942.5 million euros, mainly as a consequence of the change in the accounting criteria for traffic cards. The combined effort made by the Company with regard to the growth in revenuesand efficiency has led to operating income before depreciation and amortization(OIBDA) of 3,769.5 million euros in the first nine months of the year, a 7.6%year-on-year growth and a 7.7% growth in the third quarter. This growth wasaffected by the profits recorded from the Real State assets for a value of 85.8million euros. For comparison purposes with the announced financial guidance, exceptionalrevenues/expenses not foreseen in the January-September period of 2005 and 2006must be excluded from OIBDA. Once this adjustment has been made, the growth inOIBDA would stand at 8.6%, positively affected by the difference between theprovisions made by the Redundancy Plan in the January-September 2006 periodcompared with the same period of 2005. Excluding one-off effects, such as the lower E.R.E. provision in 2006, the RealState program, or public subventions, the underlying OIBDA would have grown by3.7%. The OIBDA margin stood at 42.4% during the January-September period, 2.3percentage points above that recorded the previous year. Excluding the effect ofthe provision for the Redundancy Program (E.R.E.), and the actuarial review in2005 and 2006, the margin would have improved year-on-year by 0.7 percentagepoints to reach 46.8%. The OIBDA for the Telefonica de Espana Parent company amounted to 3,761.1million euros, up 8.9% year-on-year. Lastly, CapEx for Telefonica de Espana Group totalled 1,049.3 million euros overJanuary-September 2006 period, showing a 14.1% increase in comparison with thesame period previous year. FINANCIAL GUIDANCE1 In relation with the financial guidance communicated for 2006, Telefonica deEspana expects: • Revenues growth shall stand between the 0.5% - 2.0% range initially estimated • OIBDA growth is upgraded form the previously announced range of between 1.0% - 3.0% to exceed the 5% mark, without considering the possible provision for bringing forward part of the Redundancy Plan scheduled for 2007. • CapEx will stand at around the initially foreseen 1,500 million euros. -------------------------------------------------------------------------------- 1 2006 guidance exclude changes in consolidation. Operating Income before D&Aexcludes other exceptional revenues/expenses not foreseeable in 2006. PersonnelRestructuring (E.R.E.) and Real Estate Programs are included as operatingrevenues/ expenses. For comparison, the equivalent other exceptionalrevenues/expenses registered in 2005 are also deducted from reported figures. TELEFONICA DE ESPANA GROUP ACCESSES Unaudited figures (Thousands) 2006 2005 2006 September % Chg September December March June Final Clients Accesses 20,931.3 2.2 20,484.3 20,742.7 20,901.7 20,821.7 Fixed telephony accesses (1) 15,978.1 (1.3) 16,180.8 16,135.6 16,108.5 16,019.7 Internet and data accesses 4,648.8 10.4 4,211.4 4,400.6 4,542.9 4,534.6 Narrowband 1,177.7 (32.5) 1,745.7 1,614.9 1,437.4 1,254.0 Broadband (2) 3,411.3 42.3 2,397.7 2,720.8 3,042.7 3,220.1 Other (3) 59.8 (12.1) 68.0 64.9 62.8 60.4 Pay TV 304.4 230.4 92.1 206.6 250.3 267.5 Wholesale Accesses 1,406.5 30.5 1,077.4 1,164.1 1,260.4 1,369.3 Unbundled loops 774.8 114.5 361.3 434.8 546.7 678.3 Shared UL 438.5 91.6 228.9 279.0 320.3 386.0 Full UL 336.3 154.0 132.4 155.7 226.4 292.3 Wholesale ADSL 625.2 (11.8) 708.6 721.9 706.4 684.4 Other (4) 6.5 (14.2) 7.5 7.4 7.3 6.6 Total Accesses 22,337.7 3.6 21,561.7 21,906.8 22,162.1 22,191.0 (1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access; 2/6 Access x30. Company's accesses for internal use included. (2) ADSL, satelite, optical fiber and broadband circuits. Includes Terra. (3) Leased lines. (4) Wholesale circuits. TELEFONICA DE ESPANA PARENT COMPANY OPERATING REVENUES Unaudited figures (Euros in millions) January - September July - September 2006 2005 % Chg 2006 2005 % Chg Traditional Access (1) 2,078.7 2,122.0 (2.0) 696.3 708.7 (1.7) Traditional Voice Services 3,665.6 3,863.5 (5.1) 1,191.7 1,280.5 (6.9) Domestic Traffic (2) 902.6 996.1 (9.4) 274.6 300.2 (8.5) Fixed to Mobile Traffic 835.6 870.0 (3.9) 275.8 289.5 (4.7) International Traffic 370.0 354.4 4.4 125.7 120.1 4.6 Intel. Network, other cons. and bonusses (3) 166.4 222.5 (25.2) 52.3 77.3 (32.3) Interconnection (4) 696.0 716.9 (2.9) 233.8 263.0 (11.1) Handsets sales and others (5) 695.0 703.7 (1.2) 229.5 230.5 (0.4) Internet Broadband Services 1,762.6 1,388.0 27.0 620.8 484.6 28.1 Narrowband 117.6 153.5 (23.4) 38.6 45.9 (15.8) Broadband 1,645.0 1,234.6 33.2 582.2 438.8 32.7 Retail (6) 1,368.8 939.0 45.8 518.4 335.2 54.6 Wholesale (7) 276.2 295.6 (6.6) 63.8 103.6 (38.4) Data Services 806.0 768.9 4.8 272.4 253.9 7.3 VPN, Leased Circuits and Broadcasting 478.6 497.9 (3.9) 166.1 163.3 1.7 Wholesale 327.4 271.0 20.8 106.3 90.6 17.4 IT Services 255.8 218.4 17.1 85.6 73.0 17.2 Total operating revenues 8,568.8 8,360.8 2.5 2,866.8 2,800.7 2.4 (1) Monthly and connection fees (PSTN, Public Use Telephony, ISDN and Corporate Services) 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 mobile incoming traffic, and transit and carrier traffic. (5) Managed Voice Services and other businesses revenues. (6) Retail ADSL services and other Internet Services. (7) Includes Megabase, Megavia, GigADSL, and local loop unbundling. Note: On 1st July 2006, Terra Espana merged with Telefonica de Espana, S.A., retroactively to 1st January 2006. As such, Telefonica de Espana parent company's operating revenues for the third quarter 2006 includes Terra Espana's revenues for the January-September 2006 period. TELEFONICA DE ESPANA GROUP CONSOLIDATED INCOME STATEMENT Unaudited figures (Euros in millions) January - September July - September 2006 2005 % Chg 2006 2005 % Chg Revenues 8,893.9 8,744.5 1.7 2,972.7 2,925.3 1.6 Internal expenditure capitalized 98.2 107.8 (8.9) 31.6 32.8 (3.5) in fixed assets (1) Operating expenses (5,260.9) (5,434.2) (3.2) (1,616.4) (1,638.2) (1.3) Other net operating income (33.5) 30.7 c.s. (8.2) 9.9 c.s. (expense) Gain (loss) on sale of fixed 82.8 59.9 38.2 71.9 15.9 353.0 assets Impairment of goodwill and other (11.1) (5.6) 97.1 (3.8) (1.0) n.m. assets Operating income before D&A 3,769.5 3,503.0 7.6 1,447.7 1,344.7 7.7 (OIBDA) Depreciation and amortization (1,413.6) (1,627.6) (13.2) (457.3) (520.2) (12.1) Operating income (OI) 2,355.9 1,875.4 25.6 990.4 824.5 20.1 (1) Including work in process. Note: Telefonica de Espana Group incorporates the results of Terra Networks operations from 1 January 2005. RESULTS BY BUSINESS LINES Fixed Line Business Telefonica Latinoamerica Group From January 1st 2006, Telefonica Latinoamerica Group's fixed telephony operatoraccounts include the Telefonica Empresas businesses in their respectivecountries. The 2005 results are shown on comparable terms. On the other hand, tofacilitate year-on-year comparisons, the Telefonica Latinoamerica Group figuresinclude the results of the Terra subsidiaries in Latin America since January 1st2005. In addition, from the 1st of May, the Group's results consolidate the results ofColombia Telecom, following the acquisition of 50% plus one share of thatcompany in April. In these five months, Colombia Telecom has contributed 232.1million euros to Telefonica Latinoamerica's revenues and 118.5 million euros toits OIBDA. The currencies of the countries in which the Telefonica Latinoamerica Groupoperates have remained practically stable over the last quarter in relation tothe euro. Year-on-year, the good evolution of exchange rates has had a positive,yet declining effect, on Telefonica Latinoamerica Group's accounts, contributingwith 10.2 percentage points to the growth of revenues (16.2 percentage points toJune) and 10.4 percentage points to the growth of OIBDA (15.6 percentage pointsto June). In the first nine months of the year, Telefonica Latinoamerica Group recordedrevenues of 7,050.3 million euros, 17.5% up on the same period of the previousyear in current euros. Excluding the positive contribution of the exchange ratesand the revenues from Colombia Telecom, the Telefonica Latinoamerica Grouprecorded revenues that were 3.5% higher in constant euros than those of the sameperiod of 2005, reflecting the growth rate of all operators in local currency,particularly in the broadband business. Brazil recorded a 2.1% growth inrevenues in local currency, supported by the strong increase in broadbandconnections; traditional business, despite increasing slightly due to the effectof the tariff increase in 2005 and the positive progress of the public telephonybusiness, slowed down in comparison with previous quarters as a result of thereduction in tariffs approved by Anatel in July 2006 and the downwards trend ofaverage traffic that the operator seeks to offset through the marketing oftraffic packages. Argentina recorded a 12.5% growth in revenues in localcurrency due to the good performance of the traditional business, especiallywholesale businesses, and thanks to the growth in revenues from broadband andnew businesses. The growth in revenues in Peru (+2.5% in local currency), wasmainly due to the growth in broadband and pay TV revenues, offsetting the fallin revenues from the traditional business, which was mostly due to the impact ofthe productivity factor (CPI-10.07%). In Chile, revenues remained stable (+0.4%in local currency) thanks to the progress of Broadband and digital TV launchedin June, which offset the poor performance of traditional business, mostly dueto the effect of competition and of mobile telephony. Operating expenses for Telefonica Latinoamerica Group stood at 3,899.2 millioneuros until September, with a year-on-year growth of 19.7% in current euros.Excluding the contribution of Colombia Telecom and the exchange rate effect,operating expenses recorded a 6.0% growth in constant euros. This growth wasaffected by workforce restructuring costs in Chile and Brazil recorded duringthe first quarter of the year and the recently launched layoff plan inArgentina. Furthermore, greater tax expenses were recorded in Telesp due to thelicence fee on the new concession, higher interconnection costs, particularly inArgentina due to the reclassification of international termination rates tooperating expenses in September, the increase in payroll expenses in Argentinaand higher commercial expenses, especially regarding customer service andadvertising. As a result, Telefonica Latinoamerica Group recorded an operating income beforedepreciation and amortization (OIBDA) of 3,198.2 million euros, 18.8% higheryear-on-year. Excluding the contribution of Colombia Telecom and the positivecontribution of exchange rates, OIBDA recorded a 4.0% increase in constanteuros. This progress was affected by the capital gains recorded in 2005 throughthe sale of Infonet and, in 2006, through the sale of TUMSAC (Peru), with a neteffect of 4.9 million euros on the group's accounts. Eliminating the impact ofresults on sales of fixed assets and the contribution of Colombia Telecom, OIBDAgrowth in constant euros stood at 7.0% (+5.5% in June). The Telefonica Latinoamerica Group's CapEx until September amounted to 736.6million euros, a year-on-year growth of 27.4% (+11.7% in constant terms andexcluding the investment of Colombia Telecom), primarily used for the expansionof broadband and new businesses. The Telefonica Latinoamerica Group's operatingfree cash flow (OIBDA-CapEx) during the first nine months of the year amountedto 2,461.6 million euros, a 16.4% growth (+5.7% in constant euros and excludingthe contribution of Colombia Telecom and the results on sales of fixed assets). By the end of September, the Telefonica Latinoamerica Group managed 31.1 millionaccesses, 11.0% up on September 2005 following the incorporation of ColombiaTelecom with 2.4 million fixed telephone accesses and 42,261 retail broadbandInternet accesses. The Group's retail broadband Internet accesses upheld thestrong growth rate of previous quarters, reaching almost 3.5 million (+43.3%year-on-year), thanks to the commercial efforts of all operators. On the otherhand, fixed telephone accesses amounted to 24.0 million, 10.5% up on September2005 following the incorporation of Colombia Telecom and also thanks to the highgrowth rate of Telefonica del Peru and TASA, which offset the lower plant inservice of Telesp and Telefonica Chile. The Telefonica Latinoamerica Groupalready has 559,900 pay TV clients in Peru and Chile. Telesp By the end of September, Telesp had 15.8 million accesses, a year-on-year growthof 0.8% thanks to the strong growth in the number of retail broadband Internetaccesses that stood close to 1.5 million (+36.1% year-on-year), following a netgain over the first nine months of the year of 271,400 accesses. Fixed telephonyaccesses stood at 12.3 million (-1.2% year-on-year), of which around 20% wereprepaid lines or lines with a consumption limit (18% in September 2005). Voice traffic recorded a 2.8% year-on-year decrease, standing at 52,579 millionminutes as a result of the drop in local traffic (-1.8%), primarily due to lowerusage per line and lower average plant. Long distance traffic, mostlyinter-state, also dropped as a result of the squeeze of this market (-10%year-on-year) due to the growth of the cellular business, and a reduction wasalso recorded in traffic originating from mobiles. Revenues recorded over the first nine months of the year stood at 4,156.7million euros, a year-on-year increase of 2.1% in local currency in comparisonwith the 4.5% growth up to June. This fall in the growth rate is explained bythe deceleration recorded in the traditional business, 1.8 percentage pointslower than the growth recorded in the first half of the year mostly due to thenegative tariff adjustment in July (compared with the 7% increase in tariffs inJuly 2005) and the reduced average fixed telephony plant. Public telephonyrevenues progressed within traditional revenues (+29.7% year-on-year), mostly asa result of higher card sales. The 17.2% growth of Internet revenues in localcurrency (narrowband + broadband) also contributed positively, contributingtowards 8.5% of Telesp turnover (7.4% in the same period of 2005) thanks to thegrowth in broadband revenues (+29.3% in local currency), due to the increase intotal connections. To a lesser extent, a growth in revenues from the data andinformation technology business was also recorded (+5.7% and +34.0% in localcurrency, respectively), providing a combined 3.9% of Company revenues. Operating expenses recorded a 3.8% year-on-year growth in local currency,primarily due to higher tax expenses (+79.7% in local currency) due to the taxestablished in the new concession contract and higher personnel expenses (+9.7%)following the extraordinary charge associated to the workforce restructuringprogramme undertaken during the first quarter of the year that is, however,beginning to bear fruit. Excluding this extraordinary charge, personnel expenseswould increase by 1.9% in local currency, whereas operating expenses wouldreduce their growth rate to 2.8% in local currency. Furthermore, suppliesexpenses dropped 0.6% in local currency due to the slowing down ofinterconnection expenses as a result of less traffic to mobiles. Subcontractingexpenses recorded a growth rate of only 0.4% in local currency, reflecting thecost containment efforts of the operator. Telesp's operating income before depreciation and amortisation (OIBDA) over thefirst nine months of the year stood at 2,001.7 million euros, 7.8% more in localcurrency than the same period of the previous year and positively affected bythe recovery of past taxes (PIS/Cofins) following the favourable judgementissued in September. The OIBDA margin was 48.2%, 2.6 percentage points higherthan that recorded in the same period of 2005. CapEx accumulated to September amounted to 380.0 million euros, a 3.4% growthwith regard to the same period of 2005 in local currency. Accordingly, theoperating free cash flow (OIBDA - CapEx) amounted to 1,621.7 million euros, anincrease of 8.8% year-on-year in local currency. TELESP ACCESSES Unaudited figures (Thousands) 2006 2005 2006 September % Chg September December March June Final Clients Accesses 15,759.0 0.7 15,642.9 15,606.8 15,618.7 15,704.4 Fixed telephony accesses (1) 12,295.1 (1.2) 12,446.4 12,340.3 12,370.4 12,336.1 Internet and data accesses 3,463.9 8.4 3,196.5 3,266.5 3,248.2 3,368.3 Narrowband 1,884.5 (7.5) 2,038.4 1,986.7 1,876.1 1,891.4 Broadband (2) 1,485.2 36.1 1,091.0 1,213.8 1,307.3 1,382.4 Other 94.2 40.2 67.2 66.0 64.8 94.5 Wholesale Accesses 46.4 41.3 32.9 32.6 32.7 46.3 Total Accesses 15,805.4 0.8 15,675.8 15,639.4 15,651.3 15,750.8 (1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access; 2/6 Access x30. Company's accesses for internal use included. (2) Includes ADSL and broadband circuits. Telefonica de Argentina In the third quarter of the year, business in Argentina continues showing apositive trend, supported by the strong growth of revenues from differentcommercial initiatives and despite the lack of tariff indexing since 2001. By the end of the September, TASA managed over 5.6 million accesses (+3.8%compared with the same period in 2005) thanks to the year-on-year increase infixed telephony accesses (+3.0%) to stand at 4.6 million, and the strong growthin the number of retail broadband Internet accesses (+71.4%), enabling thecompany to maintain its position as leader of the broadband market in its areaof influence with 477,912 accesses. Total voice traffic remained stable in relation to 2005 (-0.3% year-on-year),thanks to the slight increase in local, and higher domestic and internationallong-distance traffic, as well as intelligent network traffic, which almostoffset the decrease in public telephony traffic, affected by the expansion ofthe cellular business and the slight drop in incoming interconnection traffic. Revenues amounted to 730.3 million euros, a year-on-year increase of 12.5% inlocal currency affected by international termination expenses that, as ofSeptember, are accounted as operating expenses and no longer netting the line ofrevenues as of 1st January 2006. Even so, eliminating the effect of thereclassification of international termination costs, TASA revenues grew by 10.0%in local currency compared with the 9.6% recorded to June, primarily thanks tothe increased growth recorded by the Internet business (narrowband + broadband),the revenues of which increased by 33.1% in local currency (+31.2% to June) andthat already account for 11.0% of company revenues (1.7 percentage points morethan in the same period of 2005). This growth is in line with the acceleratedgrowth rate of its broadband accesses (whose revenues increased by 53.4% inlocal currency), which recorded a year-on-year increase of 71.4% havingregistered its highest net quarterly gain in the last three months (69,200connections). Moreover, revenues from traditional business increased by 6.3% inlocal currency (+9.3% including the reclassification of internationaltermination costs), thanks to the higher average plant in service (+3.9%) andhigher interconnection revenues. The wholesale and value added servicesbusinesses also performed well, offsetting lower revenues from the publictelephony business, due to greater competition from cellular operators. Highgrowth rates were also maintained in the data and information technologybusinesses (+23.5% jointly in local currency) as a result of higher sales tocompanies, primarily of VPN's and turnkey projects, contributing towards 7.8% ofTASA sales. Operating expenses grew by 24.0% in local currency in comparison with 2005,affected by the aforementioned effect of international termination costs.Excluding this impact, operating expenses increased by 18.5% in local currencycompared with the 19.2% accumulated to June. The main increase in suppliesexpenses (+52.2%; +21.4% excluding the international termination costs effect),was due to the increase in interconnection traffic with other operators and thecost of equipment (associated to higher revenues). Personnel expenses increasedby 23.0% in local currency, affected by the rises in salaries agreed at the endof 2005 and the impact of workforce restructuring expenses recorded in the thirdquarter. Subcontracted services increased by 14.2% in local currency, primarilydue to the growth in service contracts that were also affected by the salaryincreases and greater commercial and customer service activity. The ratio of bad debt provision to revenues remained below 1% thanks to the goodrecovery management and to the volume of pre-paid infrastructure and consumptioncontrol, which remained at around 30% of the total. The significant growth in business revenues enabled TASA to achieve operatingincome before depreciation and amortization (OIBDA) of 364.2 million euros, anincrease of 3.0% in local currency on that obtained in the same period of 2005to give a 42.5% margin over revenues. CapEx stood at 93.5 million euros, 19.1% up year-on-year in local currency.Thus, TASA generated an operating free cash flow (OIBDA-CapEx) of 270.7 millioneuros, similar to that generated in January-September 2005 (-1.6% year-on-yearin local currency). TELEFONICA DE ARGENTINA ACCESSES Unaudited figures (Thousands) 2006 2005 2006 September % Chg September December March June Final Clients Accesses 5,611.3 3.8 5,404.6 5,417.3 5,465.4 5,548.3 Fixed telephony accesses (1) 4,612.4 3.0 4,476.7 4,532.2 4,553.1 4,586.7 Internet and data accesses 998.9 7.6 927.9 885.1 912.3 961.6 Narrowband 504.1 (20.3) 632.5 564.0 548.9 536.1 Broadband (2) 477.9 71.4 278.8 304.3 346.5 408.7 Other 16.8 0.9 16.7 16.8 16.8 16.8 Wholesale Accesses 7.2 9.0 6.6 6.9 7.3 7.2 Total Accesses 5,618.4 3.8 5,411.2 5,424.2 5,472.7 5,555.5 (1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access; 2/6 Access x30. Company's accesses for internal use included. (2) Includes ADSL, optical fiber, broadband circuits and ISP in the North part of the country. Telefonica Chile At the end of the third quarter of 2006, Telefonica Chile managed 2.8 millionaccesses, 2.4% down on September 2005. This drop is basically explained by old,inactive prepaid plant restatement and to the review of line cancellationcriteria communicated in the second quarter of the year. Telefonica Chileremained as the clear leader in the fixed line market. Following the launch of digital TV in June, the sales strategy was supported onthe triple play, with 52,400 digital TV clients being recorded by September. Ahigh level of ADSL sales was maintained during the third quarter, havingrecorded a net gain of 154,100 retail Internet broadband accesses in the firstnine months of the year to give Telefonica 456,000 retail broadband accesses inChile by the end of the quarter, 79.8% up on September 2005. Accumulated voice traffic processed by the Telefonica Chile network by the endof the third quarter amounted to 10,800 million minutes. This figure implies a10.5% fall in relation to 2005, in line with the previous quarter, due to themobile substitution and higher competition. Accumulated revenues at the end of September amounted to 757.9 million euros,which in local currency meant a 0.4% increase in comparison with the previousyear thanks to the growth in Internet business revenues, which offset lowersales from traditional business. Revenues from traditional business dropped 2.6%due to the strong impact of competition and the mobile substitution. However,these lower sales were offset by higher revenues from the Internet business(narrowband + broadband + digital TV), which increased heavily to record a 33.4%year-on-year growth rate in local currency. The weight of the Internet businesson total company revenues increased to 10.1%, 2.5 percentage points up onSeptember 2005. The growth in revenues from data and information technologyservices (basically dealing in the companies segment) amounted to a joint 0.8%in local currency, affected by an environment of intense competition to reach6.2% of Company sales. During the third quarter, Telefonica Chile made a significant effort in terms ofcost containment. As a result, operating expenses decreased their year-on-yeargrowth to 6.4% in local currency (11.7% to June of this year). Personnelexpenses (without taking workforce restructuring expenses into account) droppedby 5.6% in local currency as a result of the measures taken during the first fewmonths of the year. Supplies expenses increased by 8.2% in local currency,mainly due to the increase in interconnection and equipment rental costs,although their growth was slowed down by lower equipment and card costs and bylower consumption of materials. The growth in subcontracted services slowed downto 1.3% (3.3 percentage points below the level recorded at June), despite thestrong increase in activity (launch of TV, growth of ADSL, etc.). Bad debts continued to improve in relation to the previous quarter. Accumulatedbad debt provision at the end of September amounted to 2.8% of revenues,compared with the 3.1% in June. Given the performance of revenues and costs, the accumulated operating incomebefore depreciation and amortization (OIBDA) at September amounted to 314.9million euros, a drop of 1.1% in local currency. Without taking the costsarising from workforce restructuring into account, OIBDA would have grown by3.4% in relation to September 2005 in local currency, compared with the 3.9%drop to June. Accumulated investment at the end of September (CapEx) stood at 109.7 millioneuros. This is a 56.3% increase in local currency year-on-year, primarily due tothe launch of digital TV, the growth of broadband, improved network capacity andnew information systems. Hence, the accumulated operating free cash flow (OIBDA- CapEx) amounted to 205.2 million euros, 17.3% down year-on-year in localcurrency. TELEFONICA CHILEACCESSESUnaudited figures (Thousands) 2006 2005 2006 September % Chg September December March JuneFinal Clients Accesses 2,817.1 (2.3) 2,882.6 2,876.0 2,873.8 2,853.4 Fixed telephony accesses (1) 2,225.9 (9.6) 2,462.2 2,429.1 2,407.0 2,328.0 Internet and data accesses 538.9 28.2 420.4 446.9 466.7 514.9 Narrowband 72.8 (52.1) 152.0 130.5 110.7 95.6 Broadband (2) 456.0 79.8 253.7 302.0 345.4 409.0 Other 10.1 (31.4) 14.7 14.5 10.6 10.3 Pay TV 52.4 n.m. 0.0 0.0 0.0 10.4 Wholesale Accesses 21.9 (20.3) 27.5 25.9 23.9 22.8Total Accesses 2,839.1 (2.4) 2,910.1 2,902.0 2,897.7 2,876.1 (1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access; 2/6 Access x30.Company's accesses for internal use included.(2) Includes ADSL, optical fiber and broadband circuits. TELEFONICA DEL PERU At the end of the third quarter, Telefonica del Peru recorded a total of 3.5million accesses, 11.6% up on the same period of the previous year thanks to thecommercial campaigns and assistance developed over the year. Total Internetretail broadband accesses recorded the greatest growth (+40.2% year-on-year) tostand at 435,700 in September. The total number of telephone accesses continuedto reflect the strength of demand, having reached a number in service of almost2.5 million lines (+7.2% year-on-year). The pay TV business also maintained itsstrong growth rate, exceeding the half-million clients level (507,500) and up16.1% following the July launch of satellite TV in addition to the cable TValready offered by the company to cover areas where cable TV has no coverage. Total voice traffic remained at the same level of September 2005 (+0.1%year-on-year), favoured by the strong increase in long distance andfixed-to-mobile traffic, which offset the drop over the year in public telephonytraffic. Revenues show a year-on-year growth of 2.5% in local currency to stand at 819.0million euros until September. The intense growth in local currency in Internetbusiness revenues (narrowband + broadband + television) in relation to 2005 mustbe noted, which stood at 21.4% as a result of the good performance of broadbandrevenues (+30.2% in local currency) and the growth of television revenues, whichwere up 17.4% on 2005 in local currency. Thus, revenues from the Internetbusiness contributed towards 19.7% of company revenues, compared to the 16.6% inthe same period of 2005. Revenues from traditional business recorded a 1.9% dropin local currency year-on-year, for two main reasons: the impact of theproductivity factor applied since September 2004 that affects revenues from feesand traffic (CPI- 10.07%), and the lower revenues from public telephony as aresult of the increased use of mobile telephony. Lastly, revenues from data andinformation technology services recorded a combined growth of 7.6% in localcurrency, contributing to 5.4% of company sales. Accumulated operating expenses in the first nine months recorded a year-on-yeargrowth of 2.5% in local currency, as a result of an increase in suppliesexpenses (+1.1% in relation to September 2005), personnel expenses thatincreased by 6.1% and subcontracted services that increased by 4.1%. Increasedsales of both traditional lines and ADSL, as well as of the TV business led tohigher equipment and materials and plant maintenance expenses and to highercommercial expenses. Bad debt provisions recorded a 29.7% fall in local currency, favoured by thegrowth in the prepaid and consumption control lines, which amounted to 59% ofthe plant in service. Operating income before depreciation and amortization (OIBDA) stood at 359.6million euros, up 9.3% on the same period in 2005 in local currency thanks tothe good progress of revenues, the control of operating expenses and to lowerextraordinary contingencies, primarily relating to labour and tax issues, andcapital gains from the sale of TUMSAC. The OIBDA margin in relation to revenuesstood at 43.9%, 2.7 percentage points up year-on-year. In terms of CapEx, 82.4 million euros were invested up till September that,compared with the previous year, represented 3.4% less investments in localcurrency. The operating free cash flow (OIBDA-CapEx) generated by the companyamounted to 277.2 million euros, a 13.7% increase in local currency with regardto 2005 thanks to the increased OIBDA obtained and the lower investmentrecorded. TELEFONICA DEL PERUACCESSESUnaudited figures (Thousands) 2006 2005 2006 September % Chg September December March June Final Clients Accesses 3,469.9 11.6 3,108.9 3,211.0 3,277.9 3,374.2 Fixed telephony accesses (1) 2,468.2 7.2 2,302.1 2,347.6 2,388.2 2,434.0 Internet and data accesses 494.2 33.7 369.6 401.2 414.9 449.8 Narrowband 49.6 (3.8) 51.5 52.5 47.6 52.0 Broadband (2) 435.7 40.2 310.7 341.1 359.8 389.3 Other 8.9 20.3 7.4 7.6 7.5 8.4 Pay TV 507.5 16.1 437.2 462.2 474.7 490.4 Wholesale Accesses 0.5 (48.3) 0.9 0.5 0.6 0.5Total Accesses 3,470.4 11.6 3,109.8 3,211.6 3,278.5 3,374.7 (1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access; 2/6 Access x30.Company's accesses for internal use included.(2) Includes ADSL, optical fiber, cable modem and broadband circuits. TELEFONICA INTERNATIONAL WHOLESALE SERVICES (TIWS) By the end of September, TIWS accumulated revenues of 167.8 million euros. Thisfigure represents a strong growth (+24.6% in constant euros) in relation to thesame period of the previous year, thanks to the good performance of all companybusiness lines. Revenues from International IP (which represented around 54% oftotal revenues) grew by 20.0% year-on-year in constant euros. Revenues frombandwidth capacity sales increased by 28.8% in constant euros, whereas sales ofinternational virtual private networks increased by 19.6% in constant euros. The good performance of revenues determined a significant growth in theoperating income before depreciation and amortization (OIBDA), which atSeptember amounted to 56.7 million euros, a year-on-year increase of 35.8% inconstant currency. FINANCIAL TARGETS 1 Regarding financial targets announced for 2006, Telefonica Latinoamerica Groupexpects that: • Revenue growth will be around the lower end of the range announced (4%-6%), including the reclassification of international termination rates in Brazil, Argentina and Peru and public telephony commissions in Brazil into operating expenses (till now these items were recorded as a negative revenue), retroactive to January 1st 2006. These reclassifications will contribute 0.7 percentage points to revenue growth for the whole fiscal year. • The growth in OIBDA in 2006 will be at the higher end of the 3%-5% range announced at the start of the year. • CapEx is expected to stand at around the previously announced 1,200 million euros. -------------------------------------------------------------------------------- 1 2006 guidance assumes constant exchange rates as of 2005, and excludeschanges in consolidation perimeter, namely Colombia Telecom. Operating Incomebefore D&A exclude other exceptional revenues/expenses not foreseeable in 2006.For comparison, the equivalent other exceptional revenues/expenses registered in2005 are also deducted from reported figures. TELEFONICA LATINOAMERICA GROUP ACCESSES Unaudited figures (Thousands) 2006 2005 2006 September % Chg September December March June Final Clients Accesses 31,064.6 11.0 27,981.0 28,086.8 28,231.4 30,713.0 Fixed telephony accesses (1) 23,964.2 10.5 21,687.4 21,649.1 21,718.8 23,895.5 Internet and data accesses 6,540.5 11.7 5,856.4 5,975.4 6,037.9 6,316.6 Narrowband (2) 2,931.2 (11.8) 3,322.2 3,185.1 3,030.6 3,005.7 Broadband (3) (4) 3,479.3 43.3 2,428.3 2,685.4 2,907.5 3,180.9 Other 130.0 22.7 106.0 105.0 99.8 130.0 Pay TV 559.9 28.1 437.2 462.2 474.7 500.9 Wholesale Accesses 76.0 12.0 67.8 66.0 64.5 76.8 Total Accesses 31,140.6 11.0 28,048.8 28,152.7 28,295.9 30,789.8 (1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access; 2/6 Access x30. Company's accesses for internal use included. (2) Includes narrowband ISP of Terra Brasil and Terra Colombia. (3) Includes broadband ISP of Terra Brasil, Telefonica de Argentina, Terra Guatemala y Terra Mexico. (4) Includes ADSL, optical fiber, cable modem, broadband circuits and ISP in the North part of the country. Note: Fixed telephony and Internet and Data accesses from Colombia Telecom as of September 2006 are included. TELEFONICA LATINOAMERICA GROUP SELECTED OPERATING DATA Unaudited figures (Euros in millions) January - September 2006 2005 % Chg % Chg Local Cur Telesp Revenues 4,156.7 3,529.6 17.8 2.1 OIBDA 2,001.7 1,609.6 24.4 7.8 OIBDA margin 48.2% 45.6% 2.6 p.p. Telefonica de Argentina Revenues 730.3 677.5 7.8 12.5 OIBDA 364.2 369.2 (1.4) 3.0 OIBDA margin (1) 42.5% 46.7% (4.2 p.p.) Telefonica Chile Revenues 757.9 692.7 9.4 0.4 OIBDA 314.9 292.0 7.8 (1.1) OIBDA margin 41.5% 42.2% (0.6 p.p.) Telefonica del Peru Revenues 819.0 794.6 3.1 2.5 OIBDA 359.6 327.2 9.9 9.3 OIBDA margin 43.9% 41.2% 2.7 p.p. Colombia Telecom (2) Revenues 232.1 - n.c. n.c. OIBDA 118.5 - n.c. n.c. OIBDA margin 51.1% - n.c. n.c. TIWS Revenues 167.8 134.0 25.2 24.6 OIBDA 56.7 41.5 36.5 35.8 OIBDA margin 33.8% 31.0% 2.8 p.p. Note: From January 1st 2006, Telefonica Latinoamerica Group's fixed telephonyoperator accounts include the Telefonica Empresas businesses in their respectivecountries. The 2005 results are shown on comparable terms. OIBDA is presented before management fees. Data for Telefonica de Argentinainclude the ISP business of Advance, while those of Telefonica del Peru includesCableMagico. (1) Margin over revenues includes fixed to mobile interconnection. (2) Data for Colombia Telecom only include results for May-September 2006 period. TELEFONICA LATINOAMERICA GROUP CONSOLIDATED INCOME STATEMENT Unaudited figures (Euros in millions) January - September July - September 2006 2005 % 2006 2005 % Chg Chg Revenues 7,050.3 6,000.9 17.5 2,390.1 2,219.6 7.7 Internal expenditure capitalized 35.5 31.7 11.9 12.3 12.9 (4.7) in fixed assets (1) Operating expenses (3,899.2) (3,257.6) 19.7 (1,309.1) (1,195.4) 9.5 Other net operating income 13.0 (166.2) c.s. 49.6 (70.7) c.s. (expense) Gain (loss) on sale of fixed 0.0 77.7 n.m. 4.1 (3.3) c.s. assets Impairment of goodwill and other (1.5) 6.5 c.s. 0.0 1.3 n.m. assets Operating income before D&A 3,198.2 2,692.9 18.8 1,147.1 964.4 18.9 (OIBDA) Depreciation and amortization (1,460.5) (1,314.8) 11.1 (494.0) (468.6) 5.4 Operating income (OI) 1,737.7 1,378.0 26.1 653.2 495.8 31.7 (1) Including work in process. Note: Telefonica Latinoamerica Group incorporates the results of Terra Networks operations from 1 January 2005. RESULTS BY BUSINESS LINES Telefonica Moviles Group The Telefonica Moviles Group has registered a high level of commercial activityin the third quarter of 2006, which was determined both by the high growth rateand by intense competition in its main operations markets As of September 2006the total managed customer base for Telefonica Moviles exceeded 104 million,with a year-over-year increase of 16.8%. Total net adds in the third quarter of 2006, reached 3.0 million, of newcustomers, with the Latin American operators contributing 2.6 million. In thefirst nine months of the year, net adds in Latin America rose to 10.1 million,reaching a base of 78.8 million clients as of September 2006 (+20.0% vs.September of 2005). Telefonica Moviles Espana recorded net adds of 365,000 clients (+45.2% vs. thirdquarter 2005), in line with the previous two quarters and bringing the customerbase as of September above 21 million clients (+7.1% vs. September of 2005). Consolidated revenues reached 13,537.2 million euros by September, withyear-over-year growth of 12.3% in the first nine months of 2006, contributingthe exchange rates 1.7 percentage points to this growth. In the third quarter,the revenue stood at 4,744.0 million euros, showing an improvement of 10.6% onthe third quarter of 2005. By geographic region, Telefonica Moviles Espana has accelerated its revenuegrowth up to 3.7% over the first nine months of 2006 (+5.1% year-over-year inthe third quarter). The revenues coming from the consolidated Latin Americanoperators increased 22.9% compared to September 2005 (19.0% excluding the impactof the exchange rates), supported by the better performance in Venezuela, Peru,Argentina and Chile. Consolidated OIBDA reached 4,700.3 million euros in September 2006, up 11.2% inthe first nine months of the year vs. 2005. Excluding the impact of the exchangerates, the year-over-year growth of the consolidated OIBDA would stand at 10.1%compared with the first nine months of 2005. In the third quarter of 2006 theOIBDA totalled 1,801.5 million euros, 9.3% more than in the same period of theprevious year. Despite the increase in commercial activity, the improvement in revenues and thecontrol of unitary commercial costs allow the consolidated OIBDA margin in thethird quarter of 2006 to reach 38.0% (-0.4 percentage points compared to thethird quarter of 2005), and 34.7% until September 2006 (-0.4 percentage pointscompared to the same period in 2005). OIBDA for Telefonica Moviles Spain until September exceeded 3,125.4 millioneuros, with an annual growth of 1.1%. In the third quarter OIBDA reached 1,149.2million euros, with year-over-year growth of 0.5%. In the nine months toSeptember, the margin stands at 45.5%, 1.2 percentage points below the marginobtained a year ago. In Latin America, consolidated OIBDA rose a 37.7% in euros (+33.8% excluding theimpact of exchange rates) in the first nine months of 2006 vs. the previousyear, tolalling 1,653.6 million euros. In the third quarter the OIBDA for theregion reached 672.1 million euros, a 29.9% increase in euros. Likewise,consolidated Latin America subsidiaries contributed 35.2% to consolidated OIBDA1 (+6.8 percentage points vs. the previous year).-------------------------------------------------------------------------------- 1 Consolidated data before rest and intragroup eliminations. The higher GSM customer base weight and the change from red to black in Mexico,which records a positive OIBDA of almost one million euros in the quarter, havehad a determining effect on the region's positive evolution, leading to a 2.9percentage points progress in the margin compared to the third quarter of 2005,up to the 29.2%, and 2.6 percentage points compared with the first nine monthsof 2005 (24.7%). The operating cash flow (OIBDA-CapEx) obtained in Latin America region as ofSeptember 2006 reached 765 million euros, with a year-over-year growth of137.9%. TELEFONICA MOVILES GROUP TOTAL CUSTOMERS Unaudited figures (Euros in millions) September 2006 2005 % Chg Spain and Morocco 25,265.3 23,471.5 7.6 Prepaid 13,401.8 13,007.1 3.0 Contract 11,862.3 10,464.4 13.4 Fixed Wireless 1.2 0.0 n.m. Latin America 78,777.4 65,620.7 20.0 Prepaid 63,501.6 52,149.5 21.8 Contract 14,075.4 12,479.2 12.8 Fixed Wireless 1,200.4 992.0 21.0 Total 104,042.6 89,092.1 16.8 FINANCIAL TARGETS2 Financial Guidance communicated for 2006 by Telefonica Moviles Group registersno changes: • Revenues growth is expected to be in the +9%/+12% range. • OIBDA growth is expected to be in the +9%/+12% range. • CapEx is expected to be lower the one registered in 2005. -------------------------------------------------------------------------------- 2 2006 guidance assumes constant exchange rates as of 2005, and excludeschanges in consolidation perimeter. Operating Income before D&A exclude otherexceptional revenues/expenses not foreseeable in 2006. For comparison, theequivalent other exceptional revenues/expenses registered in 2005 are alsodeducted from reported figures. Spain The key factor behind Telefonica Moviles Espana results is the positiveperformance of the commercial actions taken both in customer acquisition andretention, that has led to customer base growth, churn containment and finallyrevenue growth. Thus, the net adds in the third quarter 2006 reach 365,000 lines, a 45.2% higherthan in the third quarter 2005, on the back of the favourable monthly churnevolution and in particular of the contract segment, which is below 1% in thequarter. Therefore customer revenues grow around 7% in the January-September 2006 period,at the same pace as the customer base, offsetting the price cuts which areincreasing usage. The Spanish wireless market exceeded 46 million customers by the end of thethird quarter of 2006, an estimated 10% up on September 2005 as a result ofgreater commercial activity by operators due to a highly competitiveenvironment. Hence, the estimated penetration rate of the market stood at 103%,8.6 percentage points up on the previous year. The continued commercial efforts of Telefonica Moviles Espana over the quartermust be noted, carrying out more than 2.6 million commercial actions, higherthan that of the same quarter in 2005, to give a yearly accumulate of 8.4million commercial actions (+5.1% vs. the same period in 2005). The companycontinues to record a high level of gross adds, amounting to almost 1.5 millionduring the third quarter of 2006 and over 20% higher than during the samequarter of 2005. Gross adds totalled 4.4 million to September 2006, 16.4% up onthe same period of the previous year. Along these lines, Telefonica Moviles Espana recorded net adds of 365,000 linesin the third quarter of 2006, 45.2% higher than the 251,000 net adds recorded inthe same quarter of 2005 and exceeding 21 million customers by September end(+7.1% vs. September 2005). Net adds exceed 1.1 million during the first ninemonths of the year (+72.3% vs. the same period of 2005). The net gain of portability contributed significantly towards this positiveresult, standing at 62,500 net adds, the highest figure recorded in a thirdquarter in the company's history and 63.3% up on the third quarter of 2005,giving an accumulated net balance of 113.000 compared with a negative netbalance over the first nine months of 2005. Hence, Telefonica Moviles Espana wasthe operator to experience the greatest progress from one year to the next interms of its net portability balance. It is worth highlighting that the goodperformance in terms of portability has been on contract customers , recording apositive balance of 72,000 lines in the third quarter of 2006. This positiveperformance of the contract segment, almost 200,000 prepaid to contractmigrations during the third quarter, a higher volume of contract gross adds andthe good evolution of the churn rate led the contract segment to represent 55.8%of the total customer base by September 2006, 3.3 percentage points up year onyear. Monthly churn rates for the third quarter of 2006 amounted to 1.76%, in linewith that of the same period in 2005 (1.64%). It must be noted that this slightincrease in the churn rate is due to the prepaid segment and its lower-valuecustomers, with excellent monthly churn performance in the contract segment thatremained below 1%. Churn containment in the contract segments is partly due tothe good results achieved in customer retention activities, which continue toreward customer loyalty, offering extremely favourable conditions for handsetupgrades in exchange for signing commitment contracts. In terms of the main traffic and consumption indicators, the company networkscarried during the third quarter a total of 14,690 million minutes, 5.9% up yearon year. On-net traffic recorded a year-on-year increase of 3.7% due to the goodperformance of the different campaigns that strengthened the community effectand promoted internal traffic among company customers. Thus, MOU in the thirdquarter of 2006 amounted to 158 minutes, in line with that obtained in the sameperiod of 2005. Accumulated MOU stood at 156 minutes, a 4.5% increase year onyear. Voice ARPU totalled 29.3 euros in the third quarter, 1.4% down on the sameperiod of the previous year primarily due to the cut in interconnection rates inthe forth quarter 2005. Accumulated voice ARPU over the year stood at 28.5euros, limiting its fall to 0.9% compared to the 2005 accumulated one due to alower incoming ARPU. Accumulated outgoing voice ARPU increased by 1.2% incomparison with the first nine months of 2005. In terms of interconnection rates, in September, the CMT published a newresolution in which it established the maximum average prices applicable tovoice termination interconnection services over mobile networks. In thisregulation, the CMT established a period of three years between October 2006 andSeptember 2009 to set a half-yearly path to lower the average prices of thethree operators so that, by the end of the period, they all stand at €0.07/minute. The first cut proposed, made effective as of 16th October, represents areduction for Telefonica Moviles Espana of 7% in relation to the previous pricesin force, establishing the price at 0.111 euro/min . Data ARPU for the third quarter of 2006 totalled 4.6 euros, a 1.3% year-on-yeargrowth. This increase was fuelled by data connectivity traffic and, moreparticularly, by the data semi flat-rates (5Gb, 1Gb and 30 Mb packages), forwhich over 80,000 customers have already signed up. Accumulated data ARPUamounted to 4.4 euros (+1.9% vs. September 2005). The company now has over785,000. UMTS customers. Thus, total ARPU for the third quarter 2006 stood at 33.9 euros, slightly downto the one recorded in the third quarter of 2005 (-1.1%) but 2.7% higher thanthat of the previous quarter. ARPU stood at 32.9 euros in the first nine monthsof the year, a slight 0.5% drop in comparison with the September 2005accumulate. The following must be noted in terms of the financial results for the thirdquarter of the year: Revenues from Telefonica Moviles Espana amounted to 2,446.3 million euros in thethird quarter of 2006, a year-on-year growth of 5.1%. The positive financialresults obtained are due on one hand to the strong service revenue performancethat increased by 4.2% in relation to the third quarter of 2005, reflecting anincrease in Telefonica Moviles Espana customer traffic, and, on the other, tothe good performance of the revenues from handset sales as a result of thestrong commercial drive, which amounted to 272.5 million euros (+13.1%). The positive performance of service revenues was backed by customer revenues(+6.8% up on the third quarter of 2005), which offset lower roaming andinterconnection revenues (-3.7%). Notable within the roaming business is thelaunch of initiatives with Group 02 mobile operators, such as the recentintroduction of a new roaming rate in My Europe to eliminate charges forreceiving calls abroad, offering customers tangible benefits and an example ofthe progress in obtaining combined synergies. Accumulated revenues totalled 6,866.8 million euros, a 3.7% increase incomparison with the first nine months of 2005. In this context, Telefonica Moviles Espana obtained an OIBDA of 1,149.2 millioneuros in the third quarter of the year, 0.5% up on that recorded one year ago.Commercial expenses (acquisitions, retention and advertising) represented 14% ofgross service revenue during third quarter 2006, 1 percentage point up on thethird quarter of 2005 as a result of greater commercial activity and partlyoffset by lower unit commercial costs. Hence, Telefonica Moviles Espana recordeda 47.0% OIBDA margin over the quarter. Accumulated OIBDA amounted to 3,125.4 million euros, 1.1% higher than thatobtained in the first nine months of 2005 to reach an OIBDA margin of 45.5%, 1.2percentage points down on that recorded in the first nine months of 2005 due tothe greater commercial activity recorded and the slight increase in customer andnetwork management expenses. Accumulated investment stood at 408.8 million euros, showing the progress in theUMTS network rollout where the company already has over 5,700 base stations andoffers coverage in areas housing over 80% of the population. It is worthhighlighting, that Telefonica Moviles Espana offers already HSDPA coverage inall cities with more than 100,000 inhabitants and in the 180 more relevantmunicipalities of the other Spanish cities, showing the company commitment todevelop new technologies. Thus, the company obtained an accumulated operating cash flow of 2,716.6 millioneuros over the year, higher than that reached in the same period of 2005. TELEFONICA MOVILES ESPANA SELECTED FINANCIAL DATA Unaudited figures (Euros in millions) January - September July - September 2006 2005 % Chg 2006 2005 % Chg Revenues 6,866.8 6,621.5 3.7 2,446.3 2,326.7 5.1 OIBDA 3,125.4 3,089.9 1.1 1,149.2 1,143.3 0.5 OIBDA margin 45.5% 46.7% (1.2 p.p.) 47.0% 49.1% (2.2 p.p.) TELEFONICA MOVILES ESPANA SELECTED OPERATING DATA Unaudited figures 2006 2005 2006 September % Chg September December March June Cellular customer (thousands) 21,019.7 7.1 19,632.9 19,889.9 20,276.8 20,655.0 Prepaid 9,290.7 (0.4) 9,330.0 9,186.4 9,231.9 9,261.2 Contract 11,729.0 13.8 10,302.9 10,703.5 11,044.9 11,393.8 3Q % Chg 3Q 4Q 1Q 2Q MOU (minutes) 157.9 (0.3) 158.4 151.5 153.1 156.0 Prepaid 70.9 (11.8) 80.4 66.6 65.7 64.5 Contract 227.7 (1.5) 231.2 226.0 227.3 231.3 ARPU (EUR) 33.9 (1.1) 34.2 33.2 31.8 33.0 Prepaid 17.6 (6.6) 18.9 16.7 15.7 16.4 Contract 46.9 (3.4) 48.5 47.7 45.5 46.6 Data ARPU 4.6 1.3 4.5 4.7 4.4 4.2 % non-P2P SMS over data revenues 43.9% 5.8 p.p. 41.5% 41.1% 43.6% 42.5% Note: MOU and ARPU calculated as monthly quarterly average. TELEFONICA MOVILES ESPANA REVENUES Unaudited figures September 2006 2005 Customer revenues 68.9% 66.4% Interconnection 16.4% 17.5% Handset sales 11.4% 12.1% Roaming - In 3.0% 3.3% Other 0.3% 0.7% FINANCIAL OBJECTIVES The financial objectives of Telefonica Moviles Espana announced on 28th Februaryremain unchanged: • Revenue growth is estimated to stand between +3% and+6% • OIBDA margin below that of 2005 (46.7%) • CapEx will stand below 800 million euros Morocco At the end of September 2006, Medi Telecom's customer base stood at 4.25million, a 10.6% year over-year increase. Regarding financial results, revenues in the January-September period totalled322 million euros (+7.7% in local currency vs. the first nine months of 2005),on the back of the good performance of service revenues. OIBDA to September 2006 increases 24% in local currency to reach 145 millioneuros standing the margin in the first nine months of the year at 45% (+6percentage point vs. the margin at September 2005). MOROCCO SELECTED OPERATING DATA: CELLULAR CUSTOMERS Unaudited figures (Thousands) 2006 2005 2006 September % Chg December March June MEDI TELECOM 4,245.6 10.6 3,838.6 4,023.3 4,185.6 4,167.9 Prepaid 4,111.0 11.8 3,677.1 3,873.4 4,040.5 4,029.8 Contract 133.3 (17.4) 161.5 149.9 145.1 137.7 Fixed Wireless 1.2 n.m. 0.0 0.0 0.0 0.4 Latin america Brazil During the third quarter 2006, Vivo results have shown an improvement as aconsequence of the action plan implemented, although they also continue toreflect the impact of the high level of competition existing on the market. Throughout the third quarter, Vivo carried out some of the initiatives definedin its action plan for resolving problems and improving the performance of thecompany, obtaining positive results in reducing cloning through the Zero Fraudproject. Reductions were seen in 84% of cases in implemented regions. Executionin all regions is planned for the fourth quarter of this year. During thirdquarter of 2006, Vivo launched campaigns aimed at increasing service usage andprepaid traffic. The company will also continue to focus on its high-valueclients with aggressive pricing campaigns that will be complemented with thelaunch of new plans in the fourth quarter. These will be based on loyalty andretention plans, which are increasingly efficient. In this context, at the end of third quarter of 2006, customer base for Vivototalled 28.7 million clients in a market surpassing 53% penetration and withgrowth compared to the third quarter 2005 of 7 percentage points. Commercialactivity for the quarter is in line with previous quarters, although a reboundin churn rate of up to 2.6% in the third quarter of 2006 (+0.6 percentage pointscompared to the third quarter in 2005) leave net adds for the quarter at 201.000clients. Usage and traffic reaped the positive effects of campaigns carried out in thirdquarter which focused on boosting consumption (talk 45 minutes and pay for 3minutes; bonus variable according to the top-up for on-net traffic; etc.). TheMOU in the third quarter of 2006 was 78 minutes, showing a recovery with regardsto the same period last year of 1.7%, an effect that transfers to the ARPU,which was 29.2 Brazilian reais (+2.7% vs. third quarter 2005). Regarding financial results, total revenues in the first nine months of the yearreached 1,488.5 million euros (-3.1% compared to the same period in 2005 inlocal currency). Service revenues in local currency during the first nine monthsof the year dropped by 1.5% vs. the same period in 2005, while this same figurefor the third quarter of 2006 increased by 3.2% with respect to the same periodlast year, due to greater revenues from interconnection (+15.7%), which was theconsequence of the removal of the Bill & Keep rule. If the impact of regulatorychange were eliminated, service revenues would be reduced by 8.8% compared tothe same period of the previous year. In line with focusing Company efforts on the most relevant operational regions,it should be highlighted the positive development of outgoing revenues in theRio de Janeiro area (both voice and data), a result of increased outgoingtraffic. The revenue evolution along with the containment of operating expensestranslates into a recovery of OIBDA levels with respect to the last quarter. In2006, the OIBDA fell 23.4% in local currency to finish at 335.3 million euros,registering a margin of 22.5%, whilst looking at the third quarter solely; itshrank by 6.8% in local currency compared to 2005, obtaining an OIBDA margin of26.9% for the quarter. Regulatory changes to Bill & Keep rule have had apositive impact on the OIBDA of around 6 million euros in the quarter. BRASIL SELECTED FINANCIAL DATA Unaudited figures (Euros in millions) January - September July - September 2006 2005 % Chg % Chg Local Cur 2006 2005 % Chg Revenues 1,488.5 1,331.7 11.8 (3.1) 516.5 495.4 4.3 OIBDA 335.3 379.2 (11.6) (23.4) 139.2 143.3 (2.8) OIBDA margin 22.5% 28.5% (5.9 p.p.) 26.9% 28.9% (2.0 p.p.) BRAZIL SELECTED OPERATING DATA: CELLULAR CUSTOMERS Unaudited figures (Thousands) 2006 2005 2006 September % Chg September December March June VIVO 28,725.7 (0.4) 28,840.5 29,804.6 30,137.7 28,524.7 Prepaid 23,481.5 1.3 23,190.3 24,060.8 24,377.2 23,256.5 Contract 5,244.1 (7.2) 5,650.2 5,743.8 5,760.5 5,268.1 At the close of 1H06, an adjustment of 1.8 million inactive lines in Brazil was made. Northern Region Mexico During the third quarter of 2006, Telefonica Moviles Mexico continued toincrease its commercial activity, in line with the initiatives developed in thefirst semester to improve its competitive positioning, boosting the improvementof the sales network in the third quarter in coverage and quality, as well ascustomer service and network quality. As of September 2006, penetration in the Mexican market surpassed 49% (+8percentage points year-on-year). In this context, Telefonica Moviles Mexico exceeded 7.4 million clients, whichinvolves a growth of 24.5% with respect to the third quarter of 2005. This goodperformance is based on the development and improvement of the sales network,which allowed adds to surpass 1.2 million in the third quarter of 2006, 50%higher than the numbers recorded in the same period last year. In turn, churnrate continued to show positive trends, improving 3.1% showed in the thirdquarter of 2006 (compared to 3.9% in both the third quarter of 2005 and thesecond quarter 2006) as a consequence of the measures adopted, which was aimedat increasing the quality of the customer base acquisition. In this way,Telefonica Moviles Mexico obtained net adds in the third quarter 2006 of 578,000clients (more than four times the net adds of third quarter 2005), almostreaching 1.1 million in the first nine months of the year. In the third quarter of 2006, the contract segment showed favourabledevelopments, reaching net adds of 66,000 clients (+128.1% with respect to thethird quarter 2005), due to both a greater number of new customers and acontainment of churn in this segment, which continued to drop, finishing at 1.6%in the third quarter of 2006. Regarding operating indicators, traffic growth obtained during the third quartershould be mentioned. MOU in the third quarter 2006 reached 87 minutes (+84.3%with respect to the third quarter 2005) and lead the ARPU, up to 123.4 Mexicanpesos (+16.2% vs. the third quarter 2005). In the accrued year, the MOU is 70minutes (+36.0% with respect to the first nine months of 2005) and the ARPU is115.7 Mexican pesos (+8.0% with respect to the same period last year). The goodperformance of these indicators is supported by the warm welcome the newcommercial offer, launched in prior quarters, is receiving with plans such as'Fixed Rate per Call' or the 'Fixed Rate Plan', which are fostering the usage. As a result of the good commercial performance of the Company, revenues duringthe first nine months of 2006 reach 689.1 million euros and show a growth of20.0% in local currency with respect to the same period in 2005, based onservice revenues that grew 25.9% in local currency with respect to the firstnine months of 2005, higher than the growth of the total client numbers(+24.5%), reflecting the better quality of clients. This good performance inservice revenues is due to the development of outgoing revenues (+36.1% in localcurrency) and to a lesser degree on incoming revenues (+7.6% in local currency),which continue to show the drop in interconnection rates at the beginning of theyear. The good performance of service revenues in third quarter 2006 is worthemphasising, showing growth of 38.4% vs. the third quarter of 2005. Despite the intense commercial activity of third quarter, the good performanceof revenues and greatly improved efficiency have led to OIBDA for first time, at0.7 million euros in third quarter 2006. However, in the first nine months of2006, OIBDA reached negative 32.3 million euros. The improved OIBDA evolution translates into the negative operating cash flow,which in the first nine months of 2006 reduced its losses in local currency by52% compared to the previous year, at 129 million euros. It is noteworthy the delay of the entry into force of the 'El que llama paganacional '(National CPP') system, initially planned for the 10th of October. Onthe 11th of October, Telcel, Telmex, Iusacell, Unefon and Movistar operatorsagreed upon the entry into force of this system for the 4th of November,although the interconnection rates currently in force shall be respected untilthe 31st of December. MEXICO SELECTED FINANCIAL DATA Unaudited figures (Euros in millions) January - September July - September 2006 2005 % Chg % Chg Local Cur 2006 2005 % Chg Revenues 689.1 563.4 22.3 20.0 244.8 192.2 27.4 OIBDA (32.3) (130.5) (75.3) (75.7) 0.7 (33.6) c.s. OIBDA margin -4.7% -23.2% 18.5 p.p. 0.3% -17.5% 17.7 p.p. MEXICO SELECTED OPERATING DATA: CELLULAR CUSTOMERS Unaudited figures (Thousands) 2006 2005 2006 September % Chg September December March June TEM Mexico 7,443.3 24.5 5,976.6 6,368.1 6,559.4 6,865.6 Prepaid 6,950.7 22.1 5,692.5 6,047.7 6,189.1 6,439.0 Contract 490.9 72.9 283.9 319.9 369.3 425.3 Fixed Wireless 1.6 n.m. 0.1 0.6 0.9 1.2 NORTHERN REGION SELECTED OPERATING DATA: CELLULAR CUSTOMERS Unaudited figures (Thousands) 2006 2005 2006 September % Chg September December March June TEM Mexico 7,443.3 24.5 5,976.6 6,368.1 6,559.4 6,865.6 Prepaid 6,950.7 22.1 5,692.5 6,047.7 6,189.1 6,439.0 Contract 490.9 72.9 283.9 319.9 369.3 425.3 Fixed Wireless 1.6 n.m. 0.1 0.6 0.9 1.2 TEM Guatemala 1,385.6 50.0 923.9 1,040.7 1,149.1 1,281.4 Prepaid 1,175.8 58.5 741.6 864.4 965.8 1,078.8 Contract 88.9 21.5 73.2 69.9 71.2 82.1 Fixed Wireless 120.9 10.9 109.1 106.3 112.1 120.6 TEM Panama 948.7 20.4 788.2 849.4 904.8 889.4 Prepaid 872.1 20.6 723.0 781.5 836.2 815.9 Contract 76.7 17.6 65.2 67.9 68.5 73.5 TEM El Salvador 743.6 50.5 494.0 537.8 626.4 693.9 Prepaid 607.3 53.5 395.6 435.3 513.6 568.8 Contract 86.2 11.0 77.7 79.0 79.9 82.5 Fixed Wireless 50.0 140.8 20.8 23.5 32.9 42.6 TEM Nicaragua 486.9 44.5 336.9 371.6 414.7 458.7 Prepaid 423.7 53.2 276.6 310.4 354.6 397.2 Contract 43.2 (3.4) 44.7 45.3 43.4 43.2 Fixed Wireless 20.0 28.1 15.6 15.9 16.7 18.3 Total Acceses 11,008.1 29.2 8,519.6 9,167.6 9,654.3 10,188.9 Andean Region Venezuela The mobile telephony market in Venezuela continued to show solid growth, with anestimated penetration of 61%, a 22 percentage points leap from the figure forSeptember 2005. Telefonica Moviles Venezuela obtained net adds in third quarter 2006 of 205.300lines, 69% up on the third quarter of 2005, surpassing 8 million clients at theend of September, which represents an year-on-year increase of 51%. The growth in the client base, the promotion of plans with "on net" minutepackages and ongoing improvement of data revenues translated into a growth inservice revenues of 48.0% year-on-year in third quarter 2006 (+50.0% in accrued2006 vs. the first nine months of 2005). This good performance of servicerevenues transferred to total revenues, which recorded an increase of 45.5% inlocal currency year-on-year and 47.5% in the year to date, totalling 1,450.0million euros in the first nine months of the year. Despite increased commercial activity in the third quarter 2006 compared to thesame period in 2005 (+78.5%), greater efficiency and cost controls allowed theOIBDA to record a growth of 43.5% in local currency compared to the first ninemonths of 2005, surpassing 579.2 million euros (+60% year-on-year for the thirdquarter). Thus, the OIBDA margin was 47.5%, 4.7 percentage points above themargin for the third quarter last year. For the first nine months of the year,the margin stood at 39.9%. VENEZUELA SELECTED FINANCIAL DATA Unaudited figures (Euros in millions) January - September July - September 2006 2005 % Chg % Chg Local Cur 2006 2005 % Chg Revenues 1,450.0 993.4 46.0 47.5 497.9 358.1 39.0 OIBDA 579.2 407.9 42.0 43.5 236.5 153.2 54.3 OIBDA margin 39.9% 41.1% (1.1 p.p.) 47.5% 42.8% 4.7 p.p. VENEZUELA SELECTED OPERATING DATA: CELLULAR CUSTOMERS Unaudited figures (Thousands) 2006 2005 2006 September % Chg September December March June TEM Venezuela 8,025.9 50.9 5,319.0 6,160.3 6,683.3 7,820.6 Prepaid 6,813.6 55.1 4,393.2 5,203.7 5,659.0 6,665.7 Contract 431.6 26.9 340.0 347.8 371.7 399.2 Fixed Wireless 780.7 33.3 585.8 608.8 652.7 755.7 Colombia The Colombian mobile market has maintained its strong growth trend in recentquarters, surpassing 29.3 million clients, a growth of 59% year-on-year, as aconsequence of strong competition. Penetration reached 71.1% (+31.1 percentagepoints with respect to September 2005). During third quarter 2006, commercial activity, mainly in GSM, registers a 38.4%year-on-year. Thus, there were net adds in third quarter 2006 of 212,972 lines,totalling 1.7 million as of September 2006, 11.7% less than that obtained in thefirst nine months of the year 2005, affected by an increasing churn. Therefore,total numbers in September 2006 almost reached 7.7 million clients (+48.7%year-on-year), with 55% of clients on GSM (+6.0 percentage points vs. secondquarter 2006). Regarding the financial results, revenues in local currency show a 11.9% growthcompared to third quarter 2005, which in the year to date totals 9.2%, or atotal of 584.0 million euros. The evolution in service revenues (+5.6% in localcurrency with respect to third quarter 2005) has been affected by reductions ininterconnection rates and accelerated growth in the customer base. Cumulativeservice revenues shows progress of 5.9% in local currency with respect to thefirst nine months of 2005. Increased commercial initiatives in third quarter 2006 compared to the sameperiod in 2005 affected the OIBDA, which recorded a drop in local currency of16.4% year-on-year. Nevertheless, in the year to date, the OIBDA has registereda growth of 40.9% in local currency, reaching a margin of 14.5% (+3.2 percentagepoints compared to the first nine months of 2005). COLOMBIA SELECTED FINANCIAL DATA Unaudited figures (Euros in millions) January - September July - September 2006 2005 % Chg % Chg Local Cur 2006 2005 % Chg Revenues 584.0 536.2 8.9 9.2 191.8 188.3 1.8 OIBDA 84.4 60.1 40.5 40.9 34.5 43.2 (20.1) OIBDA margin 14.5% 11.2% 3.2 p.p. 18.0% 23.0% (4.9 p.p.) COLOMBIA SELECTED OPERATING DATA: CELLULAR CUSTOMERS Unaudited figures (Thousands) 2006 2005 2006 September % September December March June Chg TEM Colombia 7,687.0 48.7 5,170.6 6,033.0 6,817.8 7,474.0 Prepaid 5,883.5 48.0 3,976.7 4,657.9 5,283.6 5,721.4 Contract 1,803.5 51.1 1,193.9 1,375.1 1,534.1 1,752.7 Peru The Peruvian market has shown greater dynamism during the third quarter of 2006than in previous quarters, increasing penetration by more than 10 percentagepoints in order to reach 27.5% as of September 2006. During this quarter, more competitive intensity was observed based on lowerentry barriers and increased traffic discounts. Telefonica Moviles Peru has beenable to counteract these aggressive commercial activity by relying on thestrength of the sales channels and the improvements of the commercial offers andadded value services, which have permitted it to more than double commercialactivity levels of the third quarter of 2005. Thus, the company has obtained netadds of 464,890 clients, more than triple that reached in the third quarter of2005. Therefore, total customer base at the close of September 2006 surpassed4.5 million clients (+41% year-on-year), with 28% of clients already on GSM. The company continues to show strong revenue growth. Revenues in local currencyincreased by 32% in third quarter 2006 year-on-year and 20.1% compared to thefirst nine months of last year, reaching 318.6 million euros. The development ofservice revenues is worth mentioning. These showed a year-on-year growth of30.4% in the third quarter and 16.9% in the year to date, both in localcurrency, due to the excellent performance of prepaid outgoing revenues thatshow an accrued growth through September 2006 in local currency of 99%year-on-year, lead by increased traffic promotions. Despite increased commercial activities in third quarter, good revenueperformance and greater operating efficiency have led an OIBDA growth of 27%compared to third quarter 2005, and 7.2% with respect to the first nine monthsof the year, reaching 91.7 million euros. Quarterly margins reached 31.1% and28.8% for the nine months to September (-3.5 percentage points to thatregistered in the first nine months of 2005). PERU SELECTED FINANCIAL DATA Unaudited figures (Euros in millions) January - September July - September 2006 2005 % Chg % Chg Local Cur 2006 2005 % Chg Revenues 318.6 263.8 20.8 20.1 117.8 92.2 27.8 OIBDA 91.7 85.0 7.8 7.2 36.6 29.7 23.1 OIBDA margin 28.8% 32.2% (3.5 p.p.) 31.1% 32.2% (1.2 p.p.) PERU SELECTED OPERATING DATA: CELLULAR CUSTOMERS Unaudited figures (Thousands) 2006 2005 2006 September % Chg September December March June TEM Peru 4,513.8 41.1 3,199.3 3,455.0 3,680.9 4,048.9 Prepaid 3,749.7 46.6 2,557.7 2,804.3 3,007.6 3,331.1 Contract 691.9 21.4 569.8 579.5 603.3 648.1 Fixed Wireless 72.2 0.6 71.8 71.1 70.1 69.8 ANDEAN REGION SELECTED OPERATING DATA: CELLULAR CUSTOMERS Unaudited figures (Thousands) 2006 2005 2006 September % Chg September December March June TEM Venezuela 8,025.9 50.9 5,319.0 6,160.3 6,683.3 7,820.6 Prepaid 6,813.6 55.1 4,393.2 5,203.7 5,659.0 6,665.7 Contract 431.6 26.9 340.0 347.8 371.7 399.2 Fixed Wireless 780.7 33.3 585.8 608.8 652.7 755.7 TEM Colombia 7,687.0 48.7 5,170.6 6,033.0 6,817.8 7,474.0 Prepaid 5,883.5 48.0 3,976.7 4,657.9 5,283.6 5,721.4 Contract 1,803.5 51.1 1,193.9 1,375.1 1,534.1 1,752.7 TEM Peru 4,513.8 41.1 3,199.3 3,455.0 3,680.9 4,048.9 Prepaid 3,749.7 46.6 2,557.7 2,804.3 3,007.6 3,331.1 Contract 691.9 21.4 569.8 579.5 603.3 648.1 Fixed Wireless 72.2 0.6 71.8 71.1 70.1 69.8 TEM Ecuador 2,393.1 47.3 1,624.2 1,884.6 2,328.4 2,554.7 Prepaid 1,984.0 55.7 1,273.9 1,517.5 1,948.3 2,161.7 Contract 406.9 17.0 347.8 364.7 377.7 390.6 Fixed Wireless 2.2 (9.3) 2.5 2.4 2.4 2.3 Total Acceses 22,619.8 47.7 15,313.1 17,532.8 19,510.5 21,898.2 southern Cone Region Argentina During third quarter 2006, the Argentinean mobile market continued showingremarkable growth, reaching an estimated penetration of 69%, 21 percentagepoints above September 2005. Telefonica Moviles Argentina recorded a growth in its commercial activities inthe third quarter 2006 vs. the same period in 2005. Net adds in the thirdquarter of 2006 totalled 664,181 new clients, in line with the third quarter2005, surpassing 1.8 million in the year to date. Therefore, customer baseincreased by 37.3% to total 10.15 million, with a 70% out of the total base inGSM (42% in third quarter 2005). Regarding financial results in local currency, revenues maintained the solidgrowth registered in previous quarters, presenting a 33.9% growth in the ninemonths to September 2006 vs. the same period in 2005, which translates into906.6 million euros in local currency (+32% year-on-year in third quarter).Service revenue grew a 30.6% in third quarter 2006 year-on-year, driven by thegood performance of outgoing revenues, and especially prepaid revenues.Cumulative service revenues had a growth of 33%. The good evolution of datarevenue is worth mentioning, which more than doubled with respect to the figuresas of September 2005, reaching 184 million euros. Good revenue performance, coupled with increased commercial activity associatedwith lower unit acquisition subsidies, have led to an increase in OIBDA of111.5% in local currency (+61.2% in the third quarter year-on-year), up to 217.2million euros in the cumulative through September 2006. Thus, the OIBDA marginimproved by 8.8 percentage points compared to last year, to finish at 24.0%(27.0% for the third quarter). ARGENTINA SELECTED FINANCIAL DATA Unaudited figures (Euros in millions) January - September July - September 2006 2005 % Chg % Chg Local Cur 2006 2005 % Chg Revenues 906.6 706.6 28.3 33.9 316.0 265.3 19.1 OIBDA 217.2 107.2 102.7 111.5 85.4 57.5 48.6 OIBDA margin 24.0% 15.2% 8.8 p.p. 27.0% 21.7% 5.4 p.p. ARGENTINA SELECTED OPERATING DATA: CELLULAR CUSTOMERS Unaudited figures (Thousands) 2006 2005 2006 September % Chg September December March June TEM Argentina 10,150.2 37.3 7,395.2 8,335.0 8,914.4 9,486.1 Prepaid 6,498.1 50.7 4,312.2 5,035.8 5,535.2 5,951.4 Contract (1) 3,499.4 20.8 2,896.7 3,119.2 3,210.0 3,373.8 Fixed Wireless 152.7 (18.0) 186.3 179.9 169.2 160.8 Chile The Chilean market has continued showing sustained growth as a consequence ofextreme market competition. Therefore, estimated penetration as of September2006 reached 78.3%, with an advance of 10 percentage points year-on-year. Total customer base for Telefonica Moviles Chile surpassed 5.6 million clientsat the end of September (+7.4% with respect to the third quarter of 2005),driven by new GSM clients with 69% of the total base already using thistechnology. It should be highlighted the 28% increase in the contract base (1.1million), representing 20% of the customer base. Net adds in the third quarterof 2006 totalled 103,000 new clients, compared to negative net adds in the thirdquarter 2005, as a consequence of the increased commercial activity and a betterperformance, with regards to the churn rate. Cumulative net adds totalled342,000 clients, 28.5% below the figure for the same period last year, althoughwith a greater contract weight. Revenues to September 2006, show good performance with a 16.0% growth in localcurrency year-on-year, totalling 580.6 million euros. This was due to the goodevolution of service revenues (+20.9% in 2006 year to date compared to the sameperiod in 2005; +20.5% in third quarter 2006 vs. third quarter 2005 both inlocal currency), and in particular to the outgoing revenues that weresignificantly above the growth of the client base, reflecting the positivedevelopment of the ARPU (+11.6% with respect to the nine months to September2005). This good performance of revenues transferred to the OIBDA, which recorded a4.6% growth in year-on-year third quarter and 15.0% in local currency comparedto the first nine months of last year, reaching 186.9 million euros. Thecumulative OIBDA margin as of September 2006 reached 32.2%, in line with thatobtained in the same period in 2005, despite increased commercial efforts takendue to initiatives arising from technological migrations and plans. The OIBDAmargin in the third quarter of 2006 reached 35.6%. CHILE SELECTED FINANCIAL DATA Unaudited figures (Euros in millions) January - September July - September 2006 2005 % Chg % Chg Local Cur 2006 2005 % Chg Revenues 580.6 459.2 26.4 16.0 196.5 171.6 14.5 OIBDA 186.9 149.1 25.4 15.0 70.0 66.5 5.3 OIBDA margin 32.2% 32.5% (0.3 p.p.) 35.6% 38.8% (3.1 p.p.) CHILE SELECTED OPERATING DATA: CELLULAR CUSTOMERS Unaudited figures (Thousands) 2006 2005 2006 September % Chg September December March June TEM Chile 5,618.1 7.4 5,230.2 5,275.8 5,335.0 5,515.1 Prepaid 4,491.6 3.3 4,350.0 4,384.1 4,396.0 4,501.9 Contract (1) 1,126.5 28.0 880.1 891.7 938.9 1,013.2 SOUTHERN CONE SELECTED OPERATING DATA: CELLULAR CUSTOMERS Unaudited figures (Thousands) 2006 2005 2006 September % Chg September December March June TEM Argentina 10,150.2 37.3 7,395.2 8,335.0 8,914.4 9,486.1 Prepaid 6,498.1 50.7 4,312.2 5,035.8 5,535.2 5,951.4 Contract (1) 3,499.4 20.8 2,896.7 3,119.2 3,210.0 3,373.8 Fixed Wireless 152.7 (18.0) 186.3 179.9 169.2 160.8 TEM Chile 5,618.1 7.4 5,230.2 5,275.8 5,335.0 5,515.1 Prepaid 4,491.6 3.3 4,350.0 4,384.1 4,396.0 4,501.9 Contract 1,126.5 28.0 880.1 891.7 938.9 1,013.2 TEM Uruguay 655.4 103.5 322.1 418.9 500.4 584.4 Prepaid 569.8 114.1 266.1 356.5 434.7 511.9 Contract 85.6 52.9 56.0 62.4 65.6 72.5 Total Acceses 16,423.8 26.8 12,947.5 14,029.7 14,749.8 15,585.6 (1) Includes costumers with an "Ahorro" contract, who prepay a monthly fee. TELEFONICA MOVILES GROUP SELECTED FINANCIAL DATA Unaudited figures (Euros in millions) January - September 2006 2005 % Chg Spain Revenues 6,866.8 6,621.5 3.7 OIBDA 3,125.4 3,089.9 1.1 OIBDA margin 45.5% 46.7% (1.2 p.p.) Latin America Revenues 6,695.3 5,445.7 22.9 OIBDA 1,653.6 1,200.7 37.7 OIBDA margin 24.7% 22.0% 2.6 p.p. Brazil Revenues 1,488.5 1,331.7 11.8 OIBDA 335.3 379.2 (11.6) OIBDA margin 22.5% 28.5% (5.9 p.p.) Northern Region Revenues 1,092.7 909.7 20.1 OIBDA 94.6 (23.8) c.s. OIBDA margin 8.7% -2.6% 11.3 p.p. Andean Region Revenues 2,573.0 2,009.9 28.0 OIBDA 809.3 584.0 38.6 OIBDA margin 31.5% 29.1% 2.4 p.p. Southern Cone Revenues 1,541.1 1,194.4 29.0 OIBDA 414.4 261.3 58.6 OIBDA margin 26.9% 21.9% 5.0 p.p. Rest and intragroup Revenues (24.9) (17.1) 45.5 OIBDA (78.7) (64.1) 22.8 OIBDA margin n.m. n.m. n.c. TOTAL Revenues 13,537.2 12,050.0 12.3 OIBDA 4,700.3 4,226.5 11.2 OIBDA margin 34.7% 35.1% (0.4 p.p.) TELEFONICA MOVILES GROUP CONSOLIDATED INCOME STATEMENT Unaudited figures (Euros in millions) January - September July - September 2006 2005 % Chg 2006 2005 % Chg Revenues 13,537.2 12,050.0 12.3 4,744.0 4,290.2 10.6 Internal expenditure capitalized in fixed assets (1) 87.8 85.8 2.4 29.9 33.7 (11.2) Operating expenses (8,738.8) (7,785.3) 12.2 (2,941.4) (2,607.9) 12.8 Other net operating income (expense) (185.0) (122.7) 50.8 (30.8) (68.2) (54.8) Gain (loss) on sale of fixed assets (0.9) (1.2) (25.6) (0.2) 0.0 c.s. Impairment of goodwill and other assets 0.0 0.0 n.m. 0.0 0.0 n.m. Operating income before D&A (OIBDA) 4,700.3 4,226.5 11.2 1,801.5 1,647.7 9.3 Depreciation and amortization (1,825.2) (1,679.8) 8.7 (606.6) (585.7) 3.6 Operating income (OI) 2,875.1 2,546.7 12.9 1,194.9 1,062.0 12.5 (1) Including work in process. TELEFONICA MOVILES GROUP CAPEX BY GEOGRAPHIC REGIONS Unaudited figures (In Million Euros) January - September 2006 2005 % Chg Spain 408.8 504.7 (19.0) Latin America 889.0 879.3 1.1 Brazil 196.0 212.5 (7.7) Northern Region 170.4 192.4 (11.4) Mexico 97.1 133.1 (27.0) Guatemala 27.1 15.0 80.0 El Salvador 20.0 14.2 41.0 Panama 19.8 16.4 20.8 Nicaragua 6.5 13.7 (52.7) Andean Region 329.7 290.6 13.5 Venezuela 112.8 79.7 41.6 Colombia 152.0 155.9 (2.4) Peru 43.4 19.9 118.0 Ecuador 21.5 35.2 (39.0) Southern Cone 192.9 183.9 4.9 Argentina 67.9 82.0 (17.2) Chile 120.6 84.5 42.7 Uruguay 4.4 17.4 n.s. Rest of the World 3.3 0.6 n.m. TOTAL 1,301.1 1,384.6 (6.0) Group Capex in 2006 at cumulative exchange rate. For comparative purposes, 2005 Capex has been recalculated at the cumulative average exchange rate for the corresponding period. MORE TO FOLLOW This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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