15th Nov 2006 07:00
Telefonica SA15 November 2006 PART 2 RESULTS BY BUSINESS LINES Telefonica O2 Europe The results of Telefonica O2 Europe for the period ended 30 September 2006comprise the results of the O2 Group for the 8 month period ended 30 September2006 and the results of Telefonica O2 Czech Republic and Telefonica Deutschlandfor the 9 month period ended September 2006. The results of O2 Group comprisethe results of O2 UK, O2 Germany, O2 Ireland and O2 Airwave for the 8 monthperiod ended 30 September 2006. It also includes the results of be* from 1 July2006 and Decision Focus from 1 August 2006. At the end of September 2006, thecontribution of Telefonica O2 Europe to Telefonica Group revenues was 9,434.3million euros, and operating income before depreciation and amortisation (OIBDA)reached 2,798.2 million euros. Telefonica O2 Europe CapEx for the period ended 30 September 2006 amounted to1,675.2 million euros. For the 8 month period ended 30 September 2006, O2 Groupcapital expenditure totalled 1,483.1 million euros. During the quarter the major strategic and operational highlights were: • The launch of the O2 brand in the Czech Republic, replacing the existing Cesky Telecom and Eurotel brands. At the same time, a range of new products was launched under the O2 brand, including O2 TV, an IPTV service based on the Imagenio platform developed by Telefonica. • Telefonica O2 Slovakia, a wholly owned subsidiary of Telefonica O2 Czech Republic, was awarded a 20 year licence to operate GSM and UMTS networks in Slovakia. This new operation is an organic expansion of the existing business in the Czech Republic and will take advantage of synergies in areas such as network and back office functions. The Slovak business will use the O2 brand and commercial launch is expected in the first quarter of 2007 • O2 Germany launched its DSL offer. O2 is the only provider of integrated communication services in Germany to offer mobile, fixed voice and fixed internet services. O2 DSL customers get one monthly bill, backed by a single customer service number and competitive monthly charges. Customers can choose from three different DSL packages and will receive a discount if they are also a mobile contract customer of O2. • "High roamer" tariff launched as part of My Europe. After the end of the quarter O2 UK, in conjunction with movistar in Spain, launched a new 'high roamer' service aimed at frequent travellers, which removes charges when receiving calls abroad. The 'high roamer' service has also been introduced by O2 Telefonica Czech Republic and complements the first offering under My Europe, which was launched in the summer and offers holidaymakers reduced flat-rate voice roaming rates throughout the EU across all networks. O2 Group O2 UK Third quarter net service revenue grew by 14.9% year on year and for the eightmonths to September reached a total of 2,785 million pounds, an increase of15.0% compared to the same period last year, driven by continued strong customerand ARPU growth. OIBDA margin for the eight months to September 2006 was 27.6%, reflecting thecurrent high level of customer growth. O2 UK will continue to prioritise growth,where higher value customers can be acquired, for the rest of this year. OIBDAfor the eight months to September 2006 was 837 million pounds. The quarter again saw tough competition in the market, but the businesscontinued to perform well and achieved 15% growth in total gross additions yearon year. A total of 524,000 net new customers were added in the quarter, takingthe base to 17.338 million, maintaining year on year growth at 15%. This figureexcludes the Tesco Mobile customer base. A total of 208,000 net new contract customers were added in the quarter, drivenby higher gross additions as well as lower churn. At the end of the periodcontract customers made up 35.1% of the total base, compared to 34.7% in thesame period last year. 12 month rolling contract ARPU of 515 pounds was down 2pounds quarter on quarter, but 2 pounds ahead of the third quarter last year.12-month rolling contract churn was 24%, compared to 30% for the same periodlast year, the fifth consecutive quarter of decline, reflecting the ongoingstrategy of rewarding customer loyalty. A total of 316,000 net new pre-pay customers were added in the quarter, againdriven by higher gross additions as well as lower churn. 12 month rollingpre-pay ARPU of 142 pounds was 7 pounds higher than the third quarter last yearand 2 pounds higher than the previous quarter. O2 UK's blended 12 month rolling ARPU of 272 pounds was 7 pounds higher than thethird quarter last year, and 1 pound higher than the previous quarter,reflecting the continued growth in data ARPU coupled with broadly flat voiceARPU. O2 UK's own channels accounted for a growing percentage of total grossconnections in the quarter, reaching 61%. O2 UK also completed the acquisitionof The Link's 293 stores during the quarter which, after disposals and there-branding of selected locations, will grow O2's retail channel to around 400stores. Customer acquisition costs (SAC) were stable at a blended level. Quarterly monthly minutes of use were up 11% year on year to 175 minutes amonth, driven by propositions such as 50% extra minutes on 18 month contacts andO2 Long Weekends. 12 month rolling data ARPU of 83 pounds was 9 pounds higher than the same periodlast year and 2 pounds higher than the previous quarter. CapEx in the eight months to September (excluding capex related to theacquisition of be*and The Link) was 350 million pounds, with continuedexpenditure on rolling out coverage of the 3G network as well as investment inthe existing 2G network to ensure a high level of service. O2 UK launched a number of new products and services during the quarter, aimedat acquisition and retention of customers and revenue growth. These included: • "My Europe" roaming tariff, offering holidaymakers a reduced flat-rate voice roaming rates across the European Union. Using the free opt-in service, O2 customers are charged a flat rate of 35 pence per minute to make or receive a call within the EU, regardless of the mobile network used, at any time. • The "Long Weekends" promotion, offering free on net calls from Saturday to Monday for new and existing O2 Pay and Go customers and free calls to any network in the UK for new Pay Monthly and upgrading customers. • "Be Heard" campaign, promoting the 24/7 availability of UK based business advisors for Business customers, as well as a new Best for Business tariff "Unlimited Off-Peak", offering free calls to all UK mobiles and fixed lines during evenings or weekends. • Two new own brand devices, ICE and Jet. Jet is a tri-band, low-cost handset with a simplified user interface, offering 540 hours of standby time and 9.9 hours of talk time, beating its nearest competitor by over 67%. O2 UK SELECTED OPERATING DATA Unaudited figures 2006 2005 2006 September % Chg September December March June Cellular customer (thousands) 17,337.7 14.9 15,086.0 15,980.9 16,340.6 16,814.3 Prepaid 11,255.8 14.2 9,858.3 10,479.2 10,654.4 10,940.5 Contract 6,081.9 16.3 5,227.7 5,501.6 5,686.2 5,873.8 3Q % Chg 3Q 4Q 1Q 2Q MOU (minutes) 175 10.8 158 165 162.0 169 ARPU (EUR) 34.0 1.7 33.4 33.3 32.3 33.1 Prepaid 17.9 4.5 17.1 17.2 16.8 17.3 Contract 63.9 (1.0) 64.5 63.7 61.6 62.7 Data ARPU 10.6 12.5 9.4 10.0 9.8 10.0 % non-P2P SMS over data revenues 13.1% 0.7 p.p. 12.4% 12.2% 12.5% 13.3% Note: MOU and ARPU calculated as monthly quarterly average. O2 Germany Service revenue grew by 6.1% in the third quarter, and for the eight months toSeptember reached a total of 2,033 million euros, an increase of 8.1% comparedto the same period last year, driven by the continued growth of the customerbase, which partly offset ARPU weakness in the German market. Third quarterservice revenue was reduced by almost 4% due to the termination rate cut inDecember 2005. OIBDA margin for the eight months to September was 24.2%, higher than expectedmainly due to the slower rate of post-pay gross additions. OIBDA for the eightmonths to September 2006 was 531 million euros. In this competitive environment, O2 Germany continued to trade well. A total of294,000 net new customers were added in the quarter, taking the base to 10.629million, 19% higher than at the same time last year. Over the last 12 monthsthere has been a rapid growth in the pre-pay customer base, resulting in pre-paycustomers making up over 50% of the total base for the first time. The TchiboMobile customer base grew to 772,000 by the end of the quarter. O2 Germany added a total of 96,000 net new contract customers in the quarter. 12month rolling contract ARPU of 481 euros was 7 euros lower than the previousquarter, and 35 euros lower than the same quarter last year. This reflected theimpact of the approximately 17% termination rate cuts in December 2004 and 2005,as well as increasing competition in the German market and the introduction ofnew customer offers. A total of 198,000 net new pre-pay customers were added in the quarter. 12 monthrolling pre-pay ARPU of 111 euros was 6 euros lower than the previous quarterand 22 euros lower than the third quarter last year, reflecting the impact ofthe termination rate cuts, increasing competition, the growth in multiple SIMownership and the consequent lower minutes of use..lower minutes of use. Blended 12 month rolling ARPU is expected to remain the highest in the Germanmarket at 299 euros, down from 308 euros in the previous quarter and 343 eurosin the same quarter last year. This trend reflects the ongoing impact of thetermination rate cuts, the higher proportion of pre-pay customers in the totalbase, and the increasingly competitive market environment. Termination rate cutsreduced 12 month rolling ARPU in the quarter by approximately 13 euros. However,average monthly ARPU in the third quarter rose 1 euro quarter on quarter to 25euros. Customer acquisition costs (SAC) were stable at a blended level, but fellby around 20% year on year. Quarterly monthly minutes of use grew by 5% year on year, to 124 minutes, drivenby new propositions such as Genion flat rate. O2 Germany now has a total of 3.8million Genion customers (72% of the post-pay base), with 51% of all newpost-pay customers opting for Genion. 12 month rolling data ARPU was 70 euros, 1 euro less than the previous quarterand 9 euros lower than the same period last year due to the higher number oflower spending pre-pay users in the base. Non-SMS data users grew 23% comparedto the same period last year. CapEx in the eight months to September was 745 million euros, with continuedexpenditure on both the 3G and 2G networks. O2 Germany launched a number of new products and services during the quarter,including: • "My Europe" roaming tariff, offering holidaymakers a reduced flat-rate voice roaming rates across the European Union until the end of the year. Using the free opt-in service, O2 customers are charged a flat rate of 59 cents per minute to make or receive a call within the EU, regardless of the mobile network used, at any time. • O2 Loop Alltime. From 1 August until 27 November the cent per minute rate has been reduced from 39 cents to 25 cents. Customers who top up 30 euros a month can enjoy a rate of 15 cents instead of the previous 19 cents per minute for all calls to fixed lines, mobiles and voicemail, as well as SMS at 12 cents per message. • O2 Communication Centre. The Communication Centre enables customers to save data such as phone numbers, notes and calendar items to a secure area on the O2 Germany website. If the customer changes handset or it is lost or stolen, the data can be easily downloaded and restored. E-mail can also be accessed via WAP Push or MMS. • O2 ICE - own branded 3G handset featuring MP3 player, 1.3 megapixel camera and one button access to the O2 Music Shop. A 512 MB Micro SD card is also included, which can store around 500 songs. The O2 ICE costs 9.99 euros on a 24 month Genion contract with Genion flatrate. • "Bonus World", a new bonus program for O2 Genion or Active customers running from 1 September until 27 November. By participating in surveys and through using their phone customers can earn bonus points that can be traded in for free calls, free SMS and other special offers. O2 GERMANY SELECTED OPERATING DATA Unaudited figures 2006 2005 2006 September % Chg September December March June Cellular customer (thousands) 10,628.9 18.8 8,946.9 9,768.8 10,099.0 10,335.3 Prepaid 5,340.7 25.5 4,254.6 4,798.9 4,986.9 5,143.3 Contract 5,288.0 12.7 4,692.3 4,970.0 5,112.1 5,192.1 3Q % Chg 3Q 4Q 1Q 2Q MOU (minutes) 124 5.1 118 124 127.0 128 ARPU (EUR) 25.3 (11.1) 28.5 26.5 24.1 24.2 Prepaid 9.0 (16.8) 10.8 10.4 9.2 8.9 Contract 41.7 (5.3) 44.0 41.4 38.6 39.1 Data ARPU 5.8 (9.4) 6.4 6.1 5.9 5.4 % non-P2P SMS over data revenues 21.4% 0.4 p.p. 21.0% 21.7% 23.0% 21.5% Note: MOU and ARPU calculated as monthly quarterly average. O2 Ireland Service revenue fell by 1.7% in the third quarter due to termination rateregulation, increasing competition and the introduction of new customer offers.The termination rate cut of RPI minus 11% in January impacted third quarterservice revenue growth by approximately 2%. For the eight months to Septemberservice revenue reached a total of 601 million euros, an increase of 2.0%compared to the same period last year, driven by a higher customer base. In a competitive market O2 Ireland traded well, with gross connections at asimilar level to the previous quarter and net contract additions at a higherlevel than in the third quarter last year. 4,000 net new customers were added intotal during the quarter, taking the total base to 1.603 million customers, 2.1%higher than at the same time last year. O2 Ireland added a total of 16,000 net new contract customers in the quarter. 12month rolling ARPU of 1,040 euros was 35 euros lower than the third quarter lastyear and 23 euros lower than the previous quarter, reflecting the impact of thetermination rate regulation. Pre-pay 12 month rolling ARPU was 356 euros, down 3 euros on the same period ayear ago and 4 euros compared to the previous quarter. Blended ARPU of 545 euros was reduced by approximately 10 euros due to thetermination rate cuts, and was 6 euros lower than the same quarter last year anddown 6 euros quarter on quarter. Quarterly monthly minutes of use increased by 9% year on year, mainly due to theongoing success of usage stimulation promotions such as 1 cent weekends onpre-pay. 12 month rolling data ARPU was 116 euros, 3 euros higher than the third quarterlast year and 1 euro lower than the previous quarter. Non-SMS data users grew by45% year on year. In addition O2 Ireland launched a number of pricing initiatives and servicesduring the quarter. These included: • "Free Fiver Fridays" - a 3 month promotion launched on June 1, giving pre-pay customers 25% extra free when they topped up €20 on a Friday using an AIB or Bank of Ireland ATM facility, by text, or online. • Double minutes for 6 months on all Active Life plans for new customers and upgrades. • Trial of a new device repair programme - Swap Out Service (SOS) - in six O2 stores. Customers are given an immediate replacement handset if they have a faulty device which is within its warranty period. O2 Ireland also continued to promote the following offers: • 1 cent calls and texts at weekends for Speakeasy customers was extended until 25 February 2007. • 20% extra inclusive calls & texts every month for life on all online postpay tariffs - Online Active life, Online Easy life and Online Text life. • "My Europe" roaming tariff, offering holidaymakers a reduced flat-rate voice roaming rates across the European Union. Using the free opt-in service, O2 customers are charged a flat rate of 59 cents per minute to make or receive a call within the EU, regardless of the mobile network used, at any time. O2 IRELAND SELECTED OPERATING DATA Unaudited figures 2006 2005 2006 September % Chg September December March June Cellular customer (thousands) 1,603.0 2.1 1,569.8 1,601.8 1,593.0 1,598.6 Prepaid 1,134.9 (1.1) 1,147.7 1,173.2 1,154.0 1,146.9 Contract 468.1 10.9 422.1 428.6 439.0 451.7 3Q % Chg 3Q 4Q 1Q 2Q MOU (minutes) 241 8.6 222 224 220.0 237 ARPU (EUR) 45.2 (4.5) 47.3 46.1 44.6 45.8 Prepaid 29.8 (4.9) 31.3 30.5 28.9 29.4 Contract 83.5 (8.3) 91.0 88.1 87.1 88.2 Data ARPU 9.9 1.0 9.8 9.6 9.5 9.5 % non-P2P SMS over data revenues 18.4% 9.6 p.p. 8.8% 11.8% 13.8% 15.6% Note: MOU and ARPU calculated as monthly quarterly average. O2 Airwave O2 Airwave continues to perform well, making good progress on delivering theAirwave service to new customers and securing additional contracts, and remainsa valuable part of the group. Following the successful conclusion of contractnegotiations to equip all Fire and Rescue Services across Wales and Scotlandwith a resilient and secure voice and data communications service, as announcedin the second quarter, Airwave signed a 10 year contract with the ScottishAmbulance Service, worth almost 50 million pounds, to use the Airwave service.The Welsh Ambulance Service is expected to finalise contract negotiations in thenear future. The rollout of Airwave to Ambulance Trusts in England is progressing well with 3Ambulance Trusts now at Ready for Service (RFS) - this marks completion of thefirst key milestone in the Ambulance Programme. During the quarter Airwave acquired Decision Focus, the world's leading providerof TETRA radio management applications with a proven track record of successwith public safety customers. Its market leading capabilities in radio andmobile asset management and TETRA fleet mapping make it a valuable addition toAirwave. Decision Focus also has a strong process consulting capability andprovides process redesign and implementation services to a wide range ofcustomers over a number of sectors, helping them reduce costs and improveoperational effectiveness. Decision Focus has approximately 80 customersthroughout the UK and worldwide, the majority of whom operate solely in publicsafety. Airwave now has over 200,000 users on the network and is supplying service toover 200 public safety and other organisations. FINANCIAL TARGETS Financial targets for O2 Group are detailed below: O2 UK: Given the continued high rate of growth in the customer base, O2 UK'sservice revenue growth is now expected to be in the range 14% - 15% for the 11months ended 31 December 2006. Given this higher rate of growth, and theincreasingly competitive nature of the UK market, OIBDA margin for the 11 monthsended 31 December 2006 is now expected to be around one percentage point lowerthan for the comparable period last year. O2 Germany: O2 Germany's service revenue growth is now expected to be in thehigh single digits for the 11 months ended December 2006, from low double digitspreviously. OIBDA margin for the 11 months ended December 2006 is expected to bestable, as previously guided . CapEx: Capital expenditure for the O2 group, excluding acquisitions, is expectedto be in the middle of the range 2.0 - 2.3 billion euros for the 11 months endedDecember 2006. RESULTS BY BUSINESS LINES Telefonica O2 Europe TELEFONICA O2 CZECH REPUBLIC Telefonica O2 Czech Republic contribution to Telefonica Group revenues in thefirst nine months of 2006 amounted to 1,592.5 million euros. In local currency,and taking into account other recurring revenues, this represents an increase of0.6% year-on-year (2.0% year-on-year up in the third quarter alone). Consolidated operating expenses showed a decrease in local currency of 1.1%year-on-year in the first nine months of 2006. The Group's operating incomebefore depreciation and amortization (OIBDA) amounted to 778.8 million euros, ayear-on-year increase of 4.1% in local currency, while growth in the thirdquarter alone was 2.0%. As a result, OIBDA margin was 48.9% in the first ninemonths of 2006 (49.6% in the third quarter alone), compared to 47.2% margin inthe same period of 2005. Total CapEx for Telefonica O2 Czech Republic Group in the first nine monthsamounted to 141.9 million euros, an increase of 26.0% year-on-year in localcurrency, on the back of higher investments in the growth areas of the business(such as ADSL, IPTV and broadband mobile networks), and the payment for themobile license in Slovakia, which became effective on 7 September. Cumulative operating free cash flow (OIBDA-CapEx) to September 2006 stood at636.9 million euros, 0.2% year-on-year higher in local currency than in the sameperiod last year. After the merger of Cesky Telecom and Eurotel into Telefonica O2 Czech Republicas of 1 July, all inter-company transactions between fixed and mobile becameintra-company. As a result, the financial results of the fixed and mobilesegments for the nine months of 2006, as well as the comparable results from thesame period of 2005 are disclosed excluding inter-segment revenues and costs.However, mobile ARPU calculation includes the full amount of revenues (includingrevenues from fixed line business). Fixed Line Business Revenues in the fixed line business amounted to 790.5 million euros for thefirst nine months, a decrease of 4.8% year-on-year in local currency, reflectingthe continuous shift from traditional telephony services to Internet, data andother value added services, which accounted for 27.1% of total revenues, 1.1percentage points higher than in the same period last year. Revenues from traditional access fell by 7.8% year-on-year in local currency,primarily due to the 15.5% decline in the number of fixed telephony accesses toreach 2.5 million accesses at the end of September, once "incoming only lines"have been excluded from the calculation. The rebalancing of residential monthlyfees from 1st May impacted positively on this revenue stream, with the rate ofdecline slowing to 1.7% in the third quarter alone, compared to a decline of7.8% in the second quarter. Revenues from traditional voice services (voice traffic and interconnection)declined by 7.1% year-on-year in local currency. Revenues from voice trafficdeclined by 13.3% year-on-year in local currency, as a result of lower voicetraffic generated by end customers in the first nine months of 2006, whichdecreased by 5.8 % year-on-year. However, the unification of local and longdistance rates effective as of 1st April helped long distance traffic toincrease by 2.8% in the first nine months of 2006. Interconnection revenuesincreased by 2.5% year-on-year in local currency in the first nine months of2006, mainly due to the growth in revenues from international operators, as aresult of higher international transit traffic. Revenues from Internet and Broadband services registered a year-on-year increaseof 7.0% in local currency. Revenues from narrowband Internet services fell by48.9% in local currency, showing a limited downside potential, and were morethan offset by the increase in revenues from broadband services (up 48.8%year-on-year). The total number of retail Internet broadband accesses at the end of September,2006 amounted to 363,900 (which represents 85,3% of the whole ADSL base),showing a net gain of 138,199 accesses in the first nine months of the year,more than 1.4 times the net gain achieved in the same period of last year. On 1st September, Telefonica O2 Czech Republic launched its IPTV offer under theO2 TV brand name. The product is based on the Imagenio platform, and as of theend of September had 2,806 customers. Revenues from data services showed a 4.4% year-on-year decrease in localcurrency as the decrease in revenues from leased lines (-11.1%) was partiallyoffset by the increase in revenues from virtual private networks based onbroadband IP connectivity solutions (+6.0%). Operating expenses of the fixed line business fell by 3.2% year-on-year in localcurrency. Supplies expenses grew by 6.7% year-on-year in local currency.Interconnection costs decreased slightly by 1.0% year-on-year in local currency,cost of goods sold went down by 16.2% year-on-year in local currency and showeda similar development to equipment sales, while other supplies increased by44.5% year-on-year in local currency. Personnel costs, including headcount reduction costs, were down by 10.4%year-on-year in local currency in the first nine months of 2006. Externalservices (subcontracts) expenses recorded an 3.2% year-on-year decrease, with a60.5% increase in marketing and sales expenses related to new ADSL offers andhigher marketing spending related to the re-branding project, launched on 1stSeptember 2006. Other external services including consultancy went down by 31.8%year-on-year in local currency. OIBDA in the fixed line business amounted to 382.1 million euros in the firstnine months of 2006, a 2.5% year-on-year increase in local currency. CapEx for the Telefonica O2 Czech Republic fixed line business in the first ninemonths of 2006 amounted to 65.5 million euros, a 28.0% year-on-year increase inlocal currency, largely due to the accelerated broadband rollout. Mobile Business Revenues for the first nine months of 2006 in the mobile segment increased by5.9% year-on-year in local currency to reach 801.9 million euros. The total number of cellular accesses increased by 6.0% year-on-year to reach4.8 million at the end of September, 2006. Net additions for the first ninemonths amounted to 84,000, with a net loss of 10,000 customers in the thirdquarter as a result of the old NMT system users who were disconnected at the endof June and had not migrated to GSM by the end of September. Further migrationof prepaid customers to postpaid tariffs, has lead to a 28.4% year-on-yearincrease in the number of contract customers who at the end of September totaled1.8 million, or 37.4% of the total customer base compared with 30.9% at the endof September 2005. The blended monthly average churn rate stood at 1.5% for thefirst nine months of the year, the same as in the same period of last year. Revenues from voice services (monthly fees, customer and interconnectiontraffic) increased in the first nine months by 3.7% in local currency, with theincrease in revenues from monthly fees (+9.0% year-on-year), driven by thelarger contract customer base, and helped by the 1.2% year-on year increase intraffic revenues as a result of traffic stimulation activities. Total mobiletraffic grew by 18.0% year-on-year, reflecting an increased average MOU persubscriber and the increase of incoming traffic (MOU per customer blendedresulted in 102 minutes in the first nine months, up from 94 minutes in the sameperiod of last year). In the first nine months of 2006, blended ARPU registered a 0.6% year-on-yeardecrease in local currency to reach 17.8 euros on the back of contract ARPUdilution caused by customer migration from the prepaid to the contract segment. Revenues from Value Added services increased by 9.7% in local currency, with thenon-SMS blended data ARPU as a percentage of data ARPU reaching 40%, comparedwith 38% for the same period last year. The number of customers using the Data Express service (CDMA-based broadbandinternet access service) reached 89,000, an increase of 19,000 in the first ninemonths. This, together with the 7.7% increase in the number of customers usingthe Data Nonstop service (GPRS-based internet access service), which stood at71,000 at the end of September, led to a year-on-year increase in revenues fromInternet and Data of 26.2% in local currency. Revenues from equipment (including connection fees) showed a 5.9% year-on-yearincrease in local currency. Operating expenses increased by 0.7% year-on-year in local currency, mainly as aresult of a 6.6% increase in supplies expenses (costs of goods sold,interconnection and roaming and other supplies), partially offset by a 19.8%reduction in local currency in personnel expenses which were impacted by one-offitems in the second quarter of 2005. Operating income before depreciation and amortization (OIBDA) totaled 395.2million euros for the first nine months of 2006, a 11.9% increase in localcurrency. CapEx for the mobile business amounted to 72.1 million euros for the first ninemonths of the year, a 17.5% year-on-year increase in local currency, primarilydue to investment made in the mobile broadband networks. TELEFONICA O2 CZECH REPUBLIC SELECTED OPERATING DATA CELLULAR BUSINESS Unaudited figures 2006 2005 2006 September % Chg September December March June Cellular customer (thousands) 4,759.7 6.0 4,488.9 4,676.0 4,695.0 4,770.2 Prepaid (1) 2,978.3 (4.0) 3,101.3 3,130.4 3,051.8 3,043.1 Contract 1,781.3 28.4 1,387.6 1,545.6 1,643.2 1,727.1 3Q % Chg 3Q 4Q 1Q 2Q MOU (minutes) 102 8.5 94 97 96.0 102 ARPU (EUR) 18.3 4.7 17.5 17.5 17.1 17.9 Prepaid 8.6 (0.3) 8.6 8.3 7.9 8.4 Contract 34.9 (8.9) 38.3 36.8 34.8 34.8 Data ARPU 3.8 8.6 3.5 3.8 3.7 3.7 % non-P2P SMS over data revenues 43.0% 2.4 p.p. 40.6% 40.2% 39.1% 38.7% Note: MOU and ARPU calculated as monthly quarterly average. (1) 13 month active customer base. FINANCIAL TARGETS The financial outlook for Telefonica Czech Republic in 2006 is: • Group revenues guidance in local currency maintained: reach the same amount as in 2005 • OIBDA guidance in terms of year-on-year growth in local currency upgraded from flat to around 2% • CapEx level for the full year confirmed in the region of 225 million euros RESULTS BY BUSINESS LINES Telefonica O2 Europe Telefonica Deutschland Telefonica Deutschland revenues in the third quarter amounted to 66.0 millioneuros, 3.6% lower than in the same period last year, and reached a total of219.2 million euros for the first nine months of 2006, a year-on-year increaseof 5.2%. This was primarily due to a significant increase in revenues from voiceservices that offset the decline in revenues from the Internet narrowbandwholesale business. Voice revenues in the first nine months of 2006 amounted to69.8 million euros, an increase of 112% compared to the first nine months of2005, representing 3.4 billion minutes carried by the Telefonica Deutschland IPnetwork and positioning the company as the leader in the German VoIP wholesalemarket. Third quarter voice revenues were 24.1 million euros, an increase of 63%on the same period last year and representing 1.2 billion minutes. In the thirdquarter voice revenues surpassed revenues from the Internet narrowband wholesalebusiness for the first time. Although competition in the German broadband access retail market remainedintense, the total number of equivalent ADSL lines in service increased to about450,000 at the end of the third quarter of 2006. Telefonica Deutschlandcontinues to provide services to nearly all the major ISPs in Germany,maintaining its strong market position. In September 1&1, one of Germany's majorISPs, successfully launched its Video-On-Demand service using Telefonica'sinfrastructure. Telefonica Deutschland registered a negative operating income beforedepreciation and amortization (OIBDA) of 25.2 million euros in the first ninemonths of 2006, compared to positive OIBDA of 1.1 million in the first ninemonths of 2005, mainly due to start up losses relating to its nationwide ULLrollout. By the end of September over 40% of households were covered, with atarget of 60% by the end of the second quarter next year. O2 GROUP CONSOLIDATED INCOME STATEMENT Unaudited figures (Euros in millions) February - September 2006 Revenues 7,635.0 Internal expenditure capitalized in fixed assets (1) 132.7 Operating expenses (5,666.6) Other net operating income (expense) (46.3) Gain (loss) on sale of fixed assets (10.2) Impairment of goodwill and other assets 0.0 Operating income before D&A (OIBDA) 2,044.6 Depreciation and amortization (1,265.0) Operating income (OI) 779.5 (1) Including work in process. TELEFONICA O2 CZECH REPUBLIC SELECTED FINANCIAL DATA Unaudited figures (Euros in millions) January - September July - September 2006 2005 % Var 2006 2005 % Var Revenues 1,592.5 509.4 n.c. 543.5 509.4 6.7 Operating income before D&A (OIBDA) 778.8 252.7 n.c. 269.8 252.7 6.8 OIBDA margin 48.9% 49.6% (1.4 p.p.) 49.6% 49.6% 0.1 p.p. Note: In 2005 Telefonica O2 Czech Republic includes the results from July TELEFONICA DEUTSCHLAND SELECTED FINANCIAL DATA Unaudited figures (Euros in millions) January - September July - September 2006 2005 % Chg 2006 2005 % Chg Revenues 219.2 208.2 5.2 66.0 68.5 (3.6) Operating income before D&A (OIBDA) (25.2) 1.1 c.s. (15.5) (3.8) n.m. OIBDA margin (11.5%) 0.5% (12.1 p.p.) (23.5%) (5.6%) (18.0 p.p.) TELEFONICA O2 EUROPE ACCESSES Unaudited figures (Thousands) 2006 2005 2006 September % Chg September December March June Final Clients Accesses 37,566.3 10.9 33,865.3 35,730.1 36,361.9 37,055.8 Fixed telephony accesses (1) 2,598.3 (15.7) 3,080.4 3,021.6 2,971.4 2,894.9 Internet and data accesses 564.6 (10.1) 628.0 613.5 596.5 572.7 Narrowband 178.6 (58.6) 431.2 366.9 292.4 224.3 Broadband 373.9 103.8 183.4 233.7 291.5 335.9 Other 12.1 (8.9) 13.3 12.8 12.6 12.5 Cellular accesses 34,400.7 14.1 30,156.9 32,095.0 32,794.0 33,588.2 Pay TV 2.8 n.m. 0.0 0.0 0.0 0.0 Wholesale Accesses (2) 620.0 9.5 566.2 597.3 573.0 527.2 Total Accesses 38,186.3 10.9 34,431.5 36,327.4 36,934.8 37,583.0 (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) Includes T. Deutschland connections resold on a retail basis. Note: Cellular accesses, Fixed telephony accesses and Broadband accesses include MANX customers. TELEFONICA O2 EUROPE CONSOLIDATED INCOME STATEMENT Unaudited figures (Euros in millions) January - September 2006 Revenues 9,434.3 Internal expenditure capitalized in fixed assets (1) 161.9 Operating expenses (6,733.9) Other net operating income (expense) (53.8) Gain (loss) on sale of fixed assets (8.8) Impairment of goodwill and other assets (1.5) Operating income before D&A (OIBDA) 2,798.2 Depreciation and amortization (2,477.5) Operating income (OI) 320.7 (1) Including work in process. Note: Telefonica O2 Europe includes O2 Group (February-September), Telefonica O2 Czech Republic y T. Deutschland. RESULTS BY BUSINESS LINES Others Business Atento Group Operating revenues for the Atento Group continued their growth trend of thefirst half of the year to total 758 million euros in the third quarter of the2006, equivalent to a 24.6% growth compared to the prior year. The progress ofGroup revenues was due to the increased activity by its main clients, primarilyin Brazil, Mexico, Venezuela, Chile and Spain, as well as the addition of newclients in all countries, except for Puerto Rico. The ratio of revenues generated by clients outside the Telefonica Groupincreased by 1.5 percentage points year on year from 46.7% as of the end ofSeptember 2006. The main clients which contributed to this growth are: • In Brazil: Increased activity primarily in the financial sector with Banco IBI, Badresco, Itau, Redecard and Microsoft as well as the addition of new clients such as Sky and Banco Santander. • In Mexico, greater activity with BBVA, in Telecobranza services, US Airways, BAT, Hipotecaria, Seguros Zodiaco and Finanzia and the incorporation of new clients (Sony, Master Card, Metlife, SAP and Volaris). • In Spain, the 012 Catalonia Services, Repsol, Agencia Estatal de Administracion Tributaria and BBVA. • In Venezuela, growth with the CANTV Group (primarily Movilnet). • In Chile, growth of activity with VTR and Interamericana. In terms of the geographic distribution of revenues, Brazil accounted for 38.7%and Spain for 29.9% of the total, 1.1 percentage points below September 2005figure. Atento Mexico continued with its significant growth rate to stand at9.9% of revenues compared with 8.4% the previous year. Chile represented 6.2%compared with 5.9% twelve months ago and Venezuela totalled 3.7% in comparisonwith 2.2% in September 2005, leading to greater diversification in thegeographic distribution of revenues. Operating expenses grew 23.9% year-on-year to 654 million euros in the firstthree quarters of the year, due to increased personnel expenses (+26.1%) as aresult of the Group's growth in activity. The OIBDA of the Atento Group totalled 102.3 million euros, equivalent to a23.9% year-on-year increase generated by the growth in activity and by savingsin structural costs. In terms of profitability, the OIBDA margin stood at 13.5%,0.1 percentage points below last year figure. In relation to OIBDAcontributions, Atento Brasil amounted to 43.9% with 44.9 million euros. Theremaining operations contributing most to the consolidated OIBDA were Mexicowith 13.1% (13.4 million euros), Chile with 9.9% (10.1 million euros), Venezuelawith 7.8% (8.0 million euros), Spain with 7.4% (7.6 million euros) and Peru with6.4% (6.5 million euros). The operating result through September amounted to 81.3 million euros,representing a year-on-year growth of 31.3%. CapEx through September 2006 contributed 19.2 million euros in comparison with24.2 million euros during the same period of 2005, primarily focusing on Brazil,Mexico, Venezuela and Spain. Operating free cash flow (OIBDA - CapEx) improved in relation to the figureaccumulated through September 2005 by 24.7 million euros to stand at 83.1million euros, as a result of the increased operating results and lowerinvestments. In terms of operations, the Atento Group had 43,851 positions in place at 30thSeptember 2006, 18.7% more than one year ago. The average number of occupiedpositions for 2006 stood at 34,520. Productivity stood at 77.1%, 3.5 percentagepoints below last year's figure. ATENTO GROUP CONSOLIDATED INCOME STATEMENT Unaudited figures (Euros in millions) January - September July - September 2006 2005 % Chg 2006 2005 % Chg Revenues 758.0 608.6 24.6 249.7 220.4 13.3 Internal expenditure capitalized in fixed assets (1) 0.0 0.0 n.s. 0.0 0.0 n.m. Operating expenses (654.0) (527.9) 23.9 (210.0) (189.8) 10.6 Other net operating income (expense) (1.6) 1.9 c.s. (1.9) 0.5 c.s. Gain (loss) on sale of fixed assets (0.1) (0.0) n.m. (0.1) 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) 102.3 82.6 23.9 37.8 31.1 21.6 Depreciation and amortization (21.1) (20.7) 1.9 (7.0) (7.0) (0.1) Operating income (OI) 81.3 61.9 31.3 30.8 24.0 27.9 (1) Including work in process. RESULTS BY BUSINESS LINES Others Business Content and Media Business The Contents and Media business ended the third quarter of 2006 with a netturnover (revenues) of 1,124.9 million euros, 28.0% up on the amount achieved inthe same period of the previous year. This increase is due to the improvedresults from the main lines of business, particularly Endemol. Operating income before depreciation and amortization (OIBDA) in theJanuary-September period amounted to 270,1 million euros, compared with the167.1 million euros earned in the same period of 2005. This significant growthin 2006 was primarily due to the revenues from the sale of part of the Sogecablestake by the Telefonica Group in the take-over bid launched by the Prisa Group. Endemol NV Endemol N.V. ('Endemol') a global leader in television and other audiovisualentertainment, announced that the sound performance in the first half-year of2006 continued into the third quarter of 2006. The company has enjoyed growth inall genres and most of its territories. The overall financial outlook for 2006 remains good. Turnover is expected togrow organically by more than 15% (previous guidance 11-13%). EBITDA as apercentage of turnover is expected to remain within the earlier indicated 15-17%range. Game shows on the rise The very sound performance Endemol has enjoyed in the first three quarters ofthe year has been strongly fuelled by the success of Deal or No Deal. The showhas enjoyed excellent popularity in most of the 45 territories where it has beenproduced so far this year, the most significant examples being the US and theUK. The success of DOND triggered an increasing demand for game shows worldwide.This has had a very positive effect for Endemol, helping the company to close anumber of deals in several territories for other game shows. These include 1 vs.100, a revamped format from Endemol's library, and new formats Show me the Moneyand Set for Life. The format 1 vs. 100, for instance, is already sold in 15territories, and is likely to roll out further in the near future thanks to itsvery successful debuts in the USA on NBC and in the UK on BBC ONE. The show'smid-October launch on NBC scored the highest 18-49 rating for any non-sportsFriday telecast on any network since January 2005. NBC ordered 10 additionalepisodes just after its launch. On BBC ONE the show has been achieving verystrong ratings, peaking at 7.4 million viewers and a 33.6% share. ATCO The advertising market in Argentina (Capital and Gran Buenos Aires regions)increased by 11.6% over the first nine months of the year in relation to that ofthe previous year. This can be compared with the 21.5% increase recorded in thesame period of 2005, which reflected the market recovery recorded over 2004 in2005. In this favourable market context, Telefe reaffirmed its position as leader,obtaining 39.4% of the total audience during the first six months of 2006 -compared with the 38.6% recorded in the same period of the previous year -followed by Canal 13, its main competitor, with an average share of 29.5%. Themarket share accumulated by Telefe through September 2006 stood at 41.8%, thesame as that achieved in the same period of 2005 and, once again, followed byCanal 13 with 37.6%. CONTENT AND MEDIA BUSINESS CONSOLIDATED INCOME STATEMENT Unaudited figures (Euros in millions) January - September July - September 2006 2005 % Chg 2006 2005 % Chg Revenues 1,124.9 878.7 28.0 349.8 276.9 26.3 Internal expenditure capitalized in fixed assets (1) 0.4 0.0 n.s. 0.1 0.0 n.s. Operating expenses (1,006.6) (727.4) 38.4 (306.4) (230.4) 33.0 Other net operating income (expense) 8.8 8.4 4.2 4.1 6.4 (35.7) Gain (loss) on sale of fixed assets 142.7 7.5 n.m. 0.0 0.2 n.m. Impairment of goodwill and other assets (0.1) (0.1) 61.0 0.0 0.0 n.m. Operating income before D&A (OIBDA) 270.1 167.1 61.6 47.6 53.0 (10.3) Depreciation and amortization (21.2) (20.5) 3.6 (7.3) (6.4) 15.1 Operating income (OI) 248.8 146.7 69.7 40.3 46.7 (13.8) (1) Including work in process. ADDENDA Companies included in each Financial Statement Based on what was indicated at the start of this report, the results breakdownof Telefonica Group are detailed according to the business in which the Grouphas a presence. The main differences between this view and the one that wouldapply attending to the legal structure, are the following • Telefonica O2 Europe results up to September 30th 2006 include O2 Group results from February 1st 2006 to September 30th 2006, and Telefonica O2 Czech Republic and Telefonica Deutschland results from January 1st 2006 to September 30th 2006. As of September 2005 include Telefonica O2 Czech Republic for the three months July 1st 2006 to September 30th 2006 and the Telefonica Deutschland results for the nine months January 1st 2006 to 30th September 2006. Telefonica Group 69.4% stake in Telefonica O2 Czech Republic is legally dependent upon Telefonica S.A. • Telefonica, S.A. directly participates in the share capital of Endemol Entertainment Holding, N.V., which has been included in Content and Media Business. The results from the Sogecable S.A. stake have been also assigned to Content and Media Business, including the portal divestiture that took place in the first quarter, even though a part of the investment is legally dependent upon Telefonica, S.A. • Telefonica Holding Argentina, S.A. holds a minority stake of Atlantida de Comunicaciones, S.A. (ATCO) which, for those purposes, is considered to be part of Telefonica de Contenidos, consolidating 100% share capital of ATCO in the Content and Media Business. • Telefonica International Wholesale Services Group (TIWS) financial results has been assigned to Telefonica Latinoamerica Group, even though is legally dependent upon Telefonica, S.A. (92.5%) and Telefonica Data Corp (7.5%). • Terra Networks Espana S.A. has merged with Telefonica de Espana S.A. with economic effects from January 1st 2006. The 2005 results also has been assigned to the Telefonica de Espana Group for this presentation. Maptel Networks, S.A.U. and Azeler Automocion, S.A. have been included in Telefonica de Espana Group although as of September 30th 2006, are directly participated by Terra Networks Asociadas, S.L, which are legally dependent upon Telefonica, S.A. • Latin American companies formerly dependent upon Terra Group have been legally transferred to Telefonica International, S.A. during the second half of 2005, although the results have been assigned to Telefonica Latinoamerica Group from the beginning of 2005. ADDENDA Key Holdings of the Telefonica Group and its Subsidiaries detailed by businesslines TELEFONICA GROUP TELEFONICA DE ESPANA GROUP % Part % PartTelefonica de Espana 100.00 Telyco 100.00Telefonica Moviles (1) 100.00 Telefonica Telecomunic. Publicas 100.00Telefonica Latinoamerica 100.00 Telefonica Soluciones Sectoriales 100.00Telefonica de Contenidos 100.00 T. Soluciones de Informatica y 100.00Atento Group 91.35 Comunicaciones de EspanaTelefonica O2 Europe 100.00 Nota: Terra Networks Espana and Telefonica Empresas Espana has been absorbed by merger with Telefonica de Espana(1) Telefonica Moviles has been absorbed by Telefonica S.A. TELEFONICA LATINOAMERICA GROUP TELEFONICA MOVILES GROUP % Part % Part Telesp 87.95 Telefonica Moviles Espana 100.00 Telefonica del Peru (1) 98.19 Brasilcel (1) 50.00 Telefonica de Argentina 98.03 TCP Argentina 100.00 TLD Puerto Rico 98.00 T. Moviles Peru 98.40 Telefonica Chile (2) 44.89 T. Moviles Mexico 100.00 Terra Networks Peru 99.99 TM Chile 100.00 Terra Networks Mexico 99.99 T. Moviles El Salvador 99.08 Terra Networks USA 100.00 T. Moviles Guatemala 100.00 Terra Networks Guatemala 100.00 Telcel (Venezuela) 100.00 Terra Networks Venezuela 100.00 T. Moviles Colombia 100.00 Terra Networks Brasil 100.00 Otecel (Ecuador) 100.00 Terra Networks Argentina 99.99 T. Moviles Panama 99.99 Terra Networks Chile 100.00 T. Moviles Uruguay 100.00 Terra Networks Colombia 99.99 Telefonia Celular Nicaragua 100.00 Telefonica Data Colombia 100.00 Telefonica Moviles Chile 100.00 Telefonica Empresas Brasil 93.98 Group 3G (Germany) 57.20 Telefonica Data Argentina 97.92 IPSE 2000 (Italy) (2) 45.59 Telefonica USA (3) 100.00 3G Mobile AG (Switzerland) 100.00 T. Intern. Wholesale Serv. (TIWS) (4) 100.00 Medi Telecom 32.18 Colombia Telecommunications 50.00 Mobipay Espana 13.36 (1) Telefonica Empresas Peru has been absorbed by T.del Peru as of May 1st 2006. Mobipay Internacional 50.00 (2) CTC has changed its name. T. Moviles Soluciones y Aplicac. (Chile) 100.00 (3) Change its name. Before it was Telefonica Data USA Tempos 21 43.68 (4) Telefonica, S.A. owns 92.51% y Telefonica DataCorp owns 7.49%. (1) Joint Venture which fully consolidates Telergipe Celular, S.A., Telebahia Celular, S.A., Telest Celular, Telerj Celular, Note: Telefonica Empresas Brasil has been Celular CRT, Global Telecom, Telesp Celular and TeleCentro Oeste absorbed by Telesp Part., S.A. through participation at Vivo Participacoes (62.77%). (2) Additionally, Telefonica Group holds a 4.08% of IPSE 2000 through Telefonica DataCorp. Note: Radiocomunicaciones Moviles SA (Argentina) has been absorbed by Moviles Argentina TELEFONICA DE CONTENIDOS GROUP TELEFONICA O2 EUROPE % Part % Part Telefe 100.00 O2 UK 100.00 Endemol (1) 99.70 O2 Gemany 100.00 Telefonica Servicios de Musica 100.00 O2 Ireland 100.00 Telefonica Servicios Audiovisuales 100.00 Manx 100.00 Hispasat 13.23 Airwave 100.00 (1) Ownership held by Telefonica S.A. Endemol Holding NV is the parent company of Endemol Group and owns 75% of Be 100.00 Endemol NV, company quoted in the Amsterdam Stock Exchange. Telefonica O2 Czech Republic (1) 69.41 (1) Company owned through Telefonica S.A. Note: Telefonica Deutschland absorbed by O2 Germany ATENTO GROUP OTHER PARTICIPATIONS % Part % Part Atento Teleservicios Espana, S.A. 100.00 Lycos Europe 32.10 Atento Brasil, S.A. 100.00 Sogecable (1) 16.80 Atento Argentina, S.A. 100.00 Portugal Telecom (2) 9.84 Atento de Guatemala, S.A. 100.00 China Netcom Group (3) 5.00 Atento Mexicana, S.A. de C.V. 100.00 BBVA 1.07 Woknal (Uruguay) 100.00 Amper 6.10 Centro de Contacto Salta 100.00 Telepizza (4) 4.33 Mar de Plata Gest y Contactos, S.A. 100.00 (1) Telefonica de Contenidos, S.A. holds 15.67% and Telefonica, S.A. holds 1.13%. Atento Peru, S.A.C. 99.46 (2) Telefonica Group's effective participation. Telefonica Group participation would be 9.96% if we exclude the Atento Chile, S.A. 77.95 minority interests. Atento Maroc, S.A. 100.00 (3) Ownership held by Telefonica Latinoamerica Atento El Salvador, S.A. de C.V. 100.00 (4) Telepizza has been sold in September 2006. ADDENDA Significant Events • On November 12th, 2006, Telefonica reached an agreement to acquire through its wholly-owned subsidiary Telefonica Internacional, S.A.U. or any of its affiliates, an 8% stake in PCCW Limited ("PCCW"), the Hong Kong telecommunications operator, from Fiorlatte Limited ("Fiorlatte"), a company 100% owned by Mr. Francis P.T. Leung. Mr. Francis P.T. Leung agreed on July 9th 2006 to acquire a 22.65% stake in PCCW from Pacific Century Regional Developments Limited ("PCRD"). On completion of such transaction, Telefonica will acquire the aforementioned 8% of the PCCW shares. Completion is expected on or before the first half of January 2007. Telefonica and China Network Communications Group Corporation ("CNC"), which currently owns approximately 19.94% of the issued share capital of PCCW, have entered into an agreement whereby, once Telefonica has acquired the 8% of PCCW, Telefonica and CNC would transfer their respective interests in PCCW into a special purpose vehicle ("SPV") which will hold a combined 27.94% stake in PCCW, becoming the largest individual shareholder of PCCW. • On November 10th, 2006, Telefonica, S.A., distributed an interim dividend from 2006 net income, of a fix gross amount of 0.30 euros for each outstanding share with the right to receive dividends of the Company. • On October 13th, 2006, Telefonica and BBVA made public in relationship with the Framework Agreement stablished in 2000, that once the agreed projects have been implemented as suggested by the course of business in each case, both companies considered that, at present, the factors which justified the presence of a representative of Telefonica on the Board of Directors of BBVA no longer apply, and the latter will therefore shortly cease to form part of that Board. BBVA holds a significant stake in the share capital of Telefonica, and has two proprietory Directors on the Board of Directors of such company; this situation will persists in accordance which BBVA's shareholding. On the other hand, Telefonica retains its current holding in the share capital of BBVA. • On September 19th, 2006, the position of the treasury shares of Telefonica, S.A., was 47,080,408 shares representing 0,957% of the share capital of the company. • On July 28th, 2006, it was the last day of trading for shares of Telefonica Moviles on the Spanish stock exchanges and of Telefonica Moviles American depositary shares ("Telefonica Moviles ADSs") on the New York Stock Exchange. In accordance with the above, on Monday, July 31, 2006, after the execution by IBERCLEAR of the settlements that are customary in these types of transaction, holders of Telefonica Moviles shares that are beneficiaries of the exchange received the Telefonica shares delivered in the exchange. In order to satisfy the merger exchange, Telefonica delivered treasury shares to the shareholders of Telefonica Moviles pursuant to the exchange ratio fixed in the Merger Plan of four (4) shares of Telefonica, each having a par value of one (€1) euro, for every five (5) shares of Telefonica Moviles, each having a par value of fifty (€0.50) euro cents, without any additional cash compensation. ADDENDA Changes to the Perimeter and Accounting Criteria of Consolidation In the period January-September of 2006, the main changes have occurred in theconsolidation perimeter were the following Telefonica Group • On the 31st of October 2005, Telefonica, S.A. announced a Binding Offer for the purchase of all the shares in the UK company O2 plc. Once the Binding Offer ended and the procedure began for the mandatory sale of O2 shares according to the UK Law, by September Telefonica held 100% of the shares forming the capital of this company that, as of 7th March this year, were no longer listed on the London Stock Exchange. The acquisition cost for the buyout of O2 Group was 26,127.71 million euros (17,882.37 million sterling pounds). Telefonica Group financial statements include the results from O2 Group since February 1st, 2006. The company has been included in the consolidation perimeter of the Telefonica Group using the full integration method. • The subsidiary company Comet, Compania Espanola de Tecnologia, S.A., made a capital increase of 0.23 million euros in February this year through an increase in the par value of existing shares. In March Comet made another capital increase. Both were fully subscribed and paid up by its sole shareholder Telefonica. The company continues to be included in the consolidation perimeter of the Telefonica Group using the full integration method. • On the 29th July 2006, the merger contract, relating to Telefonica, S.A.'s absorption of Telefonica Moviles, S.A., was filed in the Madrid Mercantile Register. In order to cover the merger, 4 shares of Telefonica, S.A. with a nominal value of 1 euro, were exchanged for 5 shares of Telefonica Moviles, S.A. with nominal value of 0.5 euros. Telefonica handed over 244,344,012 of their own shares in treasury stock to Telefonica Moviles, S.A. shareholders which represented, approximately, 7.08% of the capital stock. The merger also bore extraordinary dividends of a total of 0.435 euros per share, which when added to the dividend of 0.205 euros, related to the 2005 results, made a total of 0.64 euros gross per share, which was paid on 21st July. The acquired company, Telefonica Moviles, S.A., which was consolidated by the global integration method, was removed from perimeter of consolidation. • During the month of July, Telefonica, S.A. dealt with the takeover bid formulated by Yell Group Plc, relating to 100% of the shares of Telefonica Publicidad e Informacion, S.A. (TPI), and accepted Yell's offer for the 216,269,764 shares, representing 59.905% of the company's share capital, which Telefonica owned. After the sale and under the "Results for discontinued operations" heading in Telefonica Group's consolidated results account, the result from the disposal are included as well as the results from the TPI Group up to the 30th June of the present financial year. In addition, and for comparison purposes, the consolidated financial statements have been modified for the Telefonica Group in the 2005 financial year to present the TPI Group results under the same heading. Telefonica de Espana Group • In February, the Spanish company Telefonica Cable, S.A. acquired 15% of the share capital of Telefonica Cable Galicia, S.A. Through this purchase, Telefonica Cable became the sole shareholder of the company. The company continues to be included in the consolidation perimeter of the Telefonica Group using the full integration method. • In June, Telefonica Cable, S.A. took over its subsidiary company Sociedad General de Cablevision Canarias, S.A.U. Following this operation, the company taken over was removed from the Telefonica Group perimeter of consolidation in which it was included using the full integration method. • In the month of July, Telefonica de Espana, S.A. absorbed Terra Networks Espana, S.A. and Telefonica Data Espana, S.A. Both companies, which were included in Telefonica Group's consolidation perimeter using the full integration method, have been removed from it. • In the month of July, Telefonica de Espana, S.A. paid 36.5 million euros for 51% of the capital stock in the Spanish company Iberbanda, S.A. The company has been included in the Telefonica Group consolidation perimeter using the full integration method. • In the month of July, the Guatemalan company Telefonica Sistemas Ingenieria de Productos Guatemala, S.A went into liquidation. The company, which was included in the Telefonica Group's consolidation perimeter by the full integration method, has now been removed from it. Telefonica Latinoamerica Group • The Brazilian company Santo Genovese Participacoes Ltda., a holding company that owned all of the capital stock of the Brazilian Atrium Telecomunicacoes Ltda., was liquidated during the first quarter of 2006 after taking over its subsidiary Atrium. Both companies, which were included in the consolidated accounts of the Telefonica Group using the full integration method, have been removed from the consolidation perimeter. • In April, Telefonica Internacional, S.A. purchased 50% plus one share in the Colombian company Colombia de Telecomunicaciones, S.A. ESP by tender for 289 million euros. The company has been included in the perimeter of consolidation of the Telefonica Group using the full integration method. • Telefonica del Peru, S.A.A. took over its subsidiary Telefonica Empresas Peru, S.A.A. in June. The company, which was included in the financial statements of the Telefonica Group using the full integration method, has been removed from the perimeter of consolidation. • On the 29th of July this current financial year, the Brazilian company, Telecomunicacoes de Sao Paulo, S.A. (Telesp), absorbed its subsidiary Telefonica Data Brasil Holding. The company, which was included in the perimeter of consolidation using the full integration method, has now been removed from it. • As a consequence of amortizing its treasury stock, which Telesp did during the first quarter of the financial year, and the purchase of the Telefonica Data Brazil minority shareholders and their later merger with Telesp, the percentage of Telefonica Group's participation in Telesp's capital has increased to 87.95%. The company continues to be included in Telefonica Group's consolidation perimeter by the full integration method. • The Mexican companies Katalyx Mexico S.A. de C.V. and Telefonica Empresas Mexico S.A. de C.V., wholly-owned subsidiaries of the Telefonica Internacional Group, were sold in 2006. Both companies, which were included in the financial accounts of the Telefonica Group using the full integration method, have been removed from the perimeter of consolidation. Telefonica Moviles Group • On the 22nd of February 2006, the Shareholders' Meetings of Telesp Celular Participacoes S.A. ("TCP"), Tele Centro Oeste Celular Participacoes S.A., ("TCO"), Tele Sudeste Celular Participacoes S.A. ("TSD"), Tele Leste Celular Participacoes, S.A. ("TBE") and Celular CRT Participacoes S.A. ("CRTPart") approved corporate restructuring in order to exchange TCO shares for TCP shares to become a wholly-owned TCP subsidiary and the take-over of TSD, TBE and CRT Part by TCP. • In June 2006 VIVO Paticipacoes made a capital increase by asset contribution for a total of 194 million reais. Once the capital increase was completed, Brasilcel, N.V. stake in VIVO Participacoes stood at 62.77%. • In June 2006 Telefonica Moviles Group increased its participation in Telefonica Moviles Peru (TMP), from 98.03% to 98.40%, through the buyout of minorities. The company continues to be included in the consolidation perimeter of the Telefonica Group using the full integration method. • During the financial year, the El Salvadorian company, Telefonica Moviles El Salvador Holding, S.A. de C.V., acquired 2,220 shares in Telefonica Moviles El Salvador, S.A. de C.V., also from El Salvador, increasing their participation in this company to 99.08%. The company continues to be included in the Telefonica Group consolidation perimeter through the full integration method. • The Argentinean company, Telefonica Moviles Argentina, S.A., has absorbed Compania de Radiocomunicaciones Moviles, S.A., Radio Servicios, S.A. and Compania de Telefonos del Plata, S.A, which are also Argentinean companies. After this operation, these companies were removed from the consolidation perimeter, where they had been included using the full integration method. Telefonica O2 EUROPE • During the first half of the year, the Czech company Eurotel Praha, spol. s r.o. (Eurotel) was taken over by its parent company Telefonica O2 Czech Republic, a.s. to give the new integrated operator Telefonica O2 Czech Republic, a.s.. Following this operation, Eurotel, which was included in the financial statements of the Telefonica Group using the full integration method, was removed from the perimeter of consolidation. • In June, O2 UK Ltd. purchased 100% of the British internet service provider Be Un Limited (Be). The operation involved a total payment of 50 million pounds sterling (approximately 73.5 million euros). Be is now included in the perimeter of consolidation using the full integration method. • During the third quarter of the 2006 financial year, the Telefonica, O2 Czech Republic, a.s., subsidiary company, Telefonica O2 Slovakia, s.r.o., obtained the third mobile telephone licence in Slovakia. The Slovenian company is included in Telefonica Group's perimeter of consolidation by the full integration method. • In the month of October, the British group, O2, acquired the remaining 60% of the share capital in the British company The Link Stores, Ltd. With this acquisition, the Telefonica Group now controls all of this company. The Link Stores, Ltd., which was included by the equity method until the month of September, will now be consolidated by the full integration method from the month of October. ATENTO group • In March, the Argentinean company Atento Mar del Plata, S.A. was set up (later called Mar de Plata Gestiones y Contactos, S.A.) with a share capital totalling 0.05 million Argentinean pesos. The company has been included in the Telefonica Group's financial statement by the full integration method. • In April, the Argentinean company Atento Salta, S.A. was set up (later called Centro de Contacto Salta, S.A.) with capital stock totalling 0.05 million Argentinean pesos. The company has been included in Telefonica Group's financial statements by the full integration method. • In May, Atento Chile Holding purchased the percentage shareholding of Publiguias Chile in Atento Chile, S.A. Following this operation, the shareholding of the Atento Group in Atento Chile increased from 69.99% to 71.16%. The company continues to be included in the perimeter of consolidation of the Telefonica Group using the full integration method. • In June, Atento, N.V. purchased the 100% shareholding in the Uruguayan company Woknal, S.A., with an initial share capital of 0.4 million uruguayan pesos, around 0.01 million euros. The company has been included in the financial statements of the Telefonica Group by the full integration method. TELEFONICA CONTENIDOS group • In March, Prisa launched a partial take-over bid for the 20% of Sogecable, S.A. The Telefonica Group sold shares representative of 6.57% of the company's share capital, reducing its stake from 23.83% to 17.26%. Later in March, Sogecable made a capital increase although without Telefonica Group taking part, thus diluting its stake in the company's share capital to the present 16.84%. In April, Sogecable once again increased its capital to cover the options plans for company directors, executives and managers and turned Class B and series B2005 callable shares into ordinary Class A shares, leading to another decrease in the Telefonica Group shareholding, currently standing at 16.80%. Telefonica Group continues consolidating Sogecable into the financial statements by the equity method. • The Telefonica de Contenidos Group sold all of its shares held in the Argentine company Patagonik Film Group, S.A. in May 2006. The company, which was included in the financial statements of the Telefonica Group using the equity method, has been removed from the perimeter of consolidation. • Andalucia Digital Multimedia, S.A. made a capital increase with the participation of Telefonica de Contenidos, S.A., which subscribed enough shares to enable it to increase its shareholding to 24.20%. The company continues to be included in the consolidation perimeter of the Telefonica Group using the full integration method. DISCLAIMER This document contains statements that constitute forward looking statements inits general meaning and within the meaning of the Private Securities LitigationReform Act of 1995. These statements appear in a number of places in thisdocument and include statements regarding the intent, belief or currentexpectations of the customer base, estimates regarding future growth in thedifferent business lines and the global business, market share, financialresults and other aspects of the activity and situation relating to the Company.The forward-looking statements in this document can be identified, in someinstances, by the use of words such as "expects", "anticipates", "intends","believes", and similar language or the negative thereof or by forward-lookingnature of discussions of strategy, plans or intentions. Such forward-looking statements are not guarantees of future performance andinvolve risks and uncertainties, and other important factors that could causeactual developments or results to differ materially from those expressed in ourforward looking statements. Analysts and investors are cautioned not to place undue reliance on thoseforward looking statements which speak only as of the date of this presentation.Telefonica undertakes no obligation to release publicly the results of anyrevisions to these forward looking statements which may be made to reflectevents and circumstances after the date of this presentation, including, withoutlimitation, changes in Telefonica's business or acquisition strategy or toreflect the occurrence of unanticipated events. Analysts and investors areencouraged to consult the Company's Annual Report as well as periodic filingsfiled with the relevant Securities Markets Regulators, and in particular withthe Spanish Market Regulator. The financial information contained in this document has been prepared underInternational Financial Reporting Standards (IFRS). This financial informationis unaudited and, therefore, is subject to potential future modifications. For additional information, please contact. Investor Relations Gran Via, 28 - 28013 Madrid (Spain) Phone number: +34 91 584 4700 Fax number: +34 91 531 9975 Email address: Ezequiel Nieto - [email protected] Diego Maus - [email protected] Dolores Garcia - [email protected] Isabel Beltran - [email protected] [email protected] www.telefonica.es/accionistaseinversores This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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