28th Feb 2005 17:34
Telefonica SA28 February 2005 Quarterly results January-December 2004 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 Mobile Business Other Business • Directories Business • Terra Networks Group • Atento Group • Content and Media Business • Telefonica Deutschland Group AddendA Companies included in each Financial Statement Key Holdings of the Telefonica Group and its Subsidiaries Significant Events Changes to the Perimeter and Accounting Criteria of Consolidation NOTE: 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 Spain. Certain accounting practices applied bythe Group that conform with generally accepted accounting principles in Spainmay not conform with generally accepted accounting principles in othercountries. TELEFONICA GROUP Market Size (Data in thousands) EUROPE AFRICA Spain Morocco WIRELINE WIRELESS T de Espana: 19,835 Medi Telecom: 2,730 WIRELESS T Moviles: 18,977 PAY TV CUSTOMERS Imagenio: 6 Deutschland/UK WHOLESALE ADSL LINES T Deutschland Group: 497LATIN AMERICAArgentina Brazil El Salvador Guatemala PeruWIRELINE WIRELINE WIRELINE WIRELINE WIRELINET de Argentina: 4,517 Telesp: T. El Salvador: 86 T. Guatemala: 35 T del Peru: 2,362WIRELESS WIRELESS 13,289 WIRELESS WIRELESS WIRELESS TCP Argentina: 3,370 CRT Celular: 3,215 T. El Salvador: 384 T. Guatemala: 751 T. Moviles: 2,870 TeleSudeste Cel: 4,377 PAY TV CUSTOMERS PAY TV CUSTOMERS TeleLeste Celular: 1,321 TV Cable: 13 Cable Magico: 389Chile Global Telecom: 2,579 WIRELINE Grupo Telesp Cel: 9,231 Nicaragua CTC Chile: 2,628 TeleCentro Oeste: 5,821 Ecuador WIRELESS WIRELESS WIRELESS Telefonia Celular: 286 UruguayT. Movil Chile: 3,318 Otecel: 1,122 WIRELESS Colombia Panama Abiatar: 203 WIRELESS WIRELESS TEM Colombia: 3,297 Mexico TEM Panama: 626 Venezuela WIRELESS WIRELESS TEM Mexico: 5,639 Telcel: 4,326 TELEFONICA GROUPMARKET SIZEUnaudited figures (Thousands) Managed Weighted (*) Dec 2004 Dec 2003 % Chg. Dec 2004 Dec 2003 % Chg.Lines in service (1) 43,249.5 41,128.4 5.2 39,998.5 37,947.5 5.4 In Spain 19,835.3 19,100.4 3.8 19,835.3 19,100.4 3.8 In other countries 23,414.3 22,028.0 6.3 20,163.3 18,847.1 7.0Cellular customers (2) 74,442.5 51,848.6 43.6 49,592.0 31,376.2 58.1 In Spain 18,977.0 19,660.6 (3.5) 17,546.2 18,174.3 (3.5) In other countries 55,465.4 32,188.0 72.3 32,045.9 13,201.9 142.7Total (3) 118,100.3 93,351.3 26.5 89,990.3 69,686.5 29.1 (*) Weighted by the equity interest of Telefonica in each of the companies. (1) Lines in service: includes all lines in service for Telefonica de Espana, Telefonica CTC Chile, Telefonica de Argentina, Telefonica del Peru, Telesp, Telefonica Moviles El Salvador, Telefonica Moviles Guatemala and Telefonica Deutschland. (2) Cellular customers: includes all cellular customers of Telefonica Servicios Moviles Espana, MediTelecom, Telefonica Movil Chile, TCP Argentina, Telefonica Moviles Peru, Brasilcel (the Joint Venture with Portugal Telecom in Brazil), Telefonica Moviles Guatemala, Telefonica Moviles El Salvador, Telefonica Moviles Mexico and those acquired from BellSouth Latin-America operators (Venezuela, Guatemala, Nicaragua, Panama, Ecuador, Colombia, Peru and Uruguay), except Chile and Argentina (3) Includes Pay TV customers of Cable Magico in Peru, Multiservicio in El Salvador and Imagenio in Spain. TELEFONICA GROUPACCESSESUnaudited figures (thousands) January - December 2004 2003 % ChgFixed telephony accesses (1) 37,793.3 37,428.0 1.0Internet and data accesses 10,075.8 8,027.8 25.5 Narrowband 5,055.0 4,983.4 Broadband 5,020.8 3,044.4 ADSL (2) 4,682.2 2,797.5 Fully unbundled loops 78.4 16.3 Other accesses (3) 260.2 230.6Pay TV 410.7 377.2 8.9Cellular accesses (4) 74,442.5 52,023.2 43.1Total Accesses 122,722.4 97,856.3 25.4 (1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access x30; 2/6 Access. Company's accesses for internal use included. (2) T Deutschland's connections resold on a retail basis included. (3) Cable modem, WiFi clients, satellite and fiber included. (4) Accesses corresponding to acquired operators from BellSouth included with the exception of Chile and Argentina. TELEFONICA GROUP Financial Highlights The most relevant factors of the Telefonica Group results during 2004 are thefollowing: • Significant growth in the main items on the profit and loss account, meeting the financial commitments set for 2004: • Strong operating performance, increasing revenues and EBITDA by 6.8% and 4.9% respectively (+8.3% and +6.0% excluding the negative impact of the exchange rates and the variations in the consolidation perimeter). • The Operating Profit presents double digit growth both in current euros (+14.3%) and excluding exchange rates effect and changes in the consolidation perimeter (+15.5%). • The client oriented management resulted in a strong organic growth in all business lines: • Intense commercial efforts have been reflected in the significant client base growth. At year end, the Group's managed customers totaled 118.1 million (up26.5% year-on-year). Including the customers from BellSouth operators in Chile and Argentina, whose acquisition was completed in early January 2005, managed clients totaled 121.9 million. • A resilient capacity to transform the top line growth into profitability and cash flow: • The Operating Free Cash Flow generated (EBITDA-CapEx) increased by 6.4% year-on-year to reach 9,443.5 million euros, driven by the Telefonica de Espana Group (+17.2%). • The consolidated EBITDA margin stood at 43.6%. • Substantial growth in consolidated net income (+30.6% year-on-year), to an all time high of 2,877.3 million euros: • 31.3% increase in earnings per share over the period (0.581 euros in 2004 vs. 0.442 euros in 2003). • The investments grew by 1.2% year-on-year to 3,771.9 million euros, with close to 55% of the total allocated to growth businesses. • Strengthen in the shareholder remuneration policy: • A 25% increase in the dividend corresponding to the fiscal year 2004 to 0.5 euros per share. • The share buy-back program maintained its fast pace. As of February 15th 2005, Telefonica's treasury stock represents 4.966% of its current share capital. • Commitment to distribute 4% of the treasury stock to shareholders (1x25). • Completion of the BellSouth's Latin American operators acquisitions, gaining scale and enhancing the Group growth profile in the future. TELEFONICA GROUP Consolidated Results The results obtained by Telefonica Group and the management report included inthis report are based on the actions carried out by the various business unitsin the Group and which constitute the units over which management of thesebusinesses is conducted. This implies a presentation of results based on theactual management of the various businesses in which Telefonica Group ispresent, instead of adhering to the legal structure observed by theparticipating companies. In this sense, income statements are presented by business, which basicallyimplies that each line of activity participate in the companies that the Groupholds in the corresponding business, regardless of whether said holding hasalready been transferred or not, even though it might be the final intent ofTelefonica, S.A. to do so in the future. It should be emphasized that this presentation by businesses in no case altersthe total results obtained by Telefonica Group. These results are incorporatedfrom the date of effective acquisition of the holding. Starting first quarter 2004, Telefonica Empresas results will be included inTelefonica de Espana Group and Telefonica Latinoamerica Group results. In thatsense, Telefonica Data Espana and Telefonica Soluciones results will beincorporated within Telefonica de Espana Group, whereas Telefonica Data in LatinAmerica and TIWS will be incorporated in Telefonica Latinoamerica Group results.Finally, Telefonica Deutschland Group results will be incorporated to OtherCompanies in Telefonica S.A. accounts. In the fourth quarter of 2004, results of November and December of the newoperators acquired from BellSouth in Latin America (Venezuela, Guatemala,Nicaragua, Panama, Ecuador, Colombia, Peru and Uruguay) were accounted, exceptthose of Chile and Argentina, whose acquisition was completed in January 2005. The Telefonica Group achieved a solid combination of growth, efficiency andprofitability during 2004. The main items on the profit and loss account grewsignificantly (operating revenues up 6.8%; EBITDA up 4.9%; operating profit up14.3% and net income up 30.6%), due to the positive evolution of operations,mainly supported by the increase in the client base and the intense commercialefforts. At the same time, operational efficiency has been transformed intoprofitability (EBITDA margin 43.6%) and into an operating free cash flowgeneration (EBITDA-CapEx) of 9,443.5 million euros (+6.4%) thanks to investmentrationale (+1.2%), that only increased in high growth businesses (broadband andmobile telephony). All of this has driven a continuous improvement in the shareholder remunerationpolicy, being one of the most attractive and long-term committed in the Europeantelecommunications sector. So, a 0.4 euros per share dividend corresponding tofiscal year 2003 has been paid and the share buy-back program has maintained itsfast pace. At February 15th 2005, treasury stock amounted to 4.966% of thecapital share. The Company also proposed the distribution of Telefonica S.A. ownshares, that represents 4% of the capital share, for the next AGM at aproportion of one treasury stock share for every twenty five. Moreover, apayment of 0.5 euros per share dividend corresponding to fiscal year 2004 wasalso proposed for the next AGM, which is 25% higher than on the previous year.The Board of Director's intention is to maintain this same minimum dividend forfiscal year 2005. Likewise, during 2004 has been announced and completed the acquisition ofBellSouth's Latin America mobile operators. This operation has led toincorporate more than 14.7 million cellular clients in 2004, and to strengthenthe scale and Telefonica Group's future growth profile. The Group's managed client base (fixed and mobile telephony and pay television)stood at 118.1 million at December 31st, 2004, registering a 26.4% increase overthe same period of 2003. Including the clients from the Latin American BellSouthmobile operators in Chile and Argentina, whose acquisition was completed inJanuary 2005, the number of clients managed would amount to 121.9 million. This growth was mainly due to the strong growth of Telefonica Moviles throughits intense commercial activity and the integration of the BellSouth operators.Thus, it reached a total of 74.4 million clients managed (+43.6% vs. 2003),obtaining a net gain in the last quarter of 6 million (4.8 million excludingBellSouth's Latin American operators). Including clients from BellSouthoperators in Chile and Argentina, whose acquisition was completed in January2005, the total number of cellular clients would total 78.2 million, 56.5million corresponding to Latin America. ADSL connections also grew significantly over the year, with a total of 3.9million connections by the end of December 2004, both in Spain and Latin America(+61.0% vs. 2003), with a net gain of 1.5 million lines in the last twelvemonths. In Spain, there were 2.5 million connections (+50.0% year-on-year),giving the Group an estimated market share of 73.8% in the total broadbandmarket. Telefonica Group retail ADSL clients in Spain totaled 1.9 million,representing a total estimated market share of 55.5%. In Latin America, thenumber of ADSL connections exceeded 1.4 million (+84.7% year-on-year), with asignificant contribution of Brazil (58.1% of the total) with 0.8 millionconnections, compared with the 0.5 million at December 2003. Telefonica Group's operating revenues totaled 30,321.9 million euros in 2004,posting a 6.8% increase over 2003, boosted by higher revenues from almost allbusiness lines, with the exception of the Content and Media business and TerraNetworks, which reduced their revenues due to the changes in the consolidationperimeter. The growth rate of revenues was influenced on one hand by thenegative effect of exchange rates, which deducted 2.4 percentage points togrowth (-2.3 percentage points at September) and on the other hand by thechanges in the consolidation perimeter, which contributed with 0.9 percentagepoints to growth (-1.0 percentage points in January-September 2004), due to theincorporation of BellSouth's eight Latin American operators. Thus, the variationof revenues adjusted for these two factors would stand at 8.3%, meeting the 2004target (+7/+10%). The cellular business continued to be the main contributor in the Group'sgrowth, registering operating revenues of 12,054.1 million euros, 15.6% morethan in 2003. By components, revenues from services and sale of handsets were15.4% and 32.6% higher than those recorded the previous year, respectively. Byoperator, the solid performance of Telefonica Moviles Espana (+9.3% year onyear), Telefonica Moviles Mexico (+49.2% year-on-year in local currency) andVIVO (+16.2% year on year in local currency) must be highlighted. The Telefonica Latinoamerica Group registered in 2004 operating revenues of6,883.4 million euros, showing a 2.1% increase, although in constant euros thisgrowth rose to 7.5%. This variation was mainly explained by Telesp and TASA,whose revenues increased in local currency by 14.6% and 10.6%, respectively,more than offsetting the fall in revenues in local currency at Telefonica delPeru (-1.1%) and Telefonica CTC Chile (-6.2%). In the fourth quarter of 2004 Telefonica de Espana Group accelerated itsoperating revenues growth rate, recording an increase of 2.7% in comparison withthe 1.7% in the first quarter, the 2.7% in the second quarter and the 2.6% inthe third quarter. In 2004, operating revenues totaled an absolute value of10,955.8 million euros, 2.4% more than in 2003 due to the significant increasein Internet and broadband revenues (+34.2%), which exceeded the fall in revenuesfrom traditional services (-2.5%). By countries, Spain accounted for 60.3% of the Group's consolidated revenues,down by 1.3 percentage points year-on-year, while 34.8% came from Latin America(33.3% a year ago). Brazil increased its contribution to total revenues over theyear by 0.3 percentage points to 17.3%. The Group's total accumulated expenses at the end of 2004 totaled 17,962.5million euros, an 8.1% increase year-on-year and 3.8 percentage points more thanin September. These higher expenses are mainly due to the incorporation ofBellSouth's operators to the cellular business consolidation perimeter. Hence,excluding changes in the consolidation perimeter and in constant euros,operating expenses would increase by 9.8%, 1.1 percentage points more than inthe first nine months of the year. By different expense items, subcontracts grew by 11.5% year-on-year as a resultof the commercial effort made by the Group and supply expenses jumped by 17.4%due to increased handset purchases. Personnel expenses, however, decreased by4.9% compared with the previous year, mainly due to the savings obtained throughthe 2003-2007 Redundancy Program at Telefonica de Espana. The Telefonica Group's bad debt control policy continued to executesuccessfully, placing the bad debt provision as a percentage of revenues(excluding pre-paid revenues) at year-end 2004 at 1.2%, showing a 0.4 percentagepoint improvement over December 2003 and a 0.1 percentage points increase overthe nine months of 2004. Telefonica Latinoamerica was the business line thatreduce the most its bad debt ratio as a percentage of revenues over the pasttwelve months (-0.8 percentage points) to 2.3%, mostly due to Telesp, whichrecorded a 0.8 percentage point improvement (3.1% as a percentage of revenues)thanks to the launch of more adapted products to different client profiles, andTASA, whose ratio stood at below 1%. Telefonica CTC Chile was the only operatorto register a worse bad debt ratio (4.1% in December 2004 vs. 3.8% a year ago),due to the accounting of certain extraordinary provisions in the last quarter ofthe year. The bad debt ratio as a percentage of revenues for the cellularbusiness dropped to 0.8% (1.3% in 2003) and that of the Telefonica de EspanaGroup by 0.4 percentage points to 0.5% over revenues. Consolidated EBITDA for the year reached 13,215.4 million euros, 4.9% higherthan the previous year. The negative evolution of exchange rates deducted 1.7percentage points to the growth (1.5 percentage points at September), while thechanges in the consolidation perimeter contributed to the growth with 0.6percentage points, compared with the 0.0 percentage points in January-September,due to the incorporation of BellSouth's Latin American operators. Thus, assumingconstant exchange rates and excluding changes in the consolidation perimeter,EBITDA showed a year-on-year increase of 6.0%, in line with the targetestablished for 2004 (+5/+7%). Although it has slowed down vs. the first ninemonths of 2004 (+7.1%) due to the intense commercial efforts made during thecampaigns in the fourth quarter. In terms of profitability, the 2004 EBITDAmargin reached 43.6%, showing a 0.8 percentage point drop over the previous yearas a result of the EBITDA margin decrease in the cellular business, which couldnot be offset by the better margins in the rest of the businesses. For the third consecutive quarter, the Telefonica de Espana Group is the Group'sbiggest contributor to consolidated EBITDA growth, after recording a 6.1%year-on-year growth up to 5,054.5 million euros (38.2% of total EBITDA). In thefourth quarter of the year, the EBITDA growth rate slowed down compared to theprevious quarter (+4.8% vs. +7.5%), mainly due to the smaller reduction inpersonnel expenses (-6.1% vs. -11.4%), as the first layoffs from the 2003-2007Redundancy Program were accounted for during this period. The EBITDA margin was46.1%, 1.6 percentage points more than twelve months ago. The cellular business EBITDA, which contributed with 36.0% in the Group'sconsolidated EBITDA in absolute terms, amounted to 4,755.0 million euros in2004, 3.8% more than in 2003. Increased commercial and advertising costs relatedto strong commercial activity in operating areas had an impact on the margin asa percentage of revenues, which decreased to 39.4% at December 2004, comparedwith 43.9% twelve months ago. During the fourth quarter, the margin dropped to32.6% (39.1% in October-December 2003). EBITDA at the Telefonica Latinoamerica Group, with a consolidated EBITDAcontribution of 23.8%, stood at 3,141.0 million euros at the end of 2004,registering a 1.3% growth compared to the previous year, or 6.8% in constanteuros (7.2% in January-September 2004). The slow-down in operating expenses overthe year (+7.4% as of December vs. +7.9% as of September), led to a 45.6% EBITDAmargin by the end of 2004, almost the same level as in 2003 (46.0%) and 0.2percentage points up on the first nine months of the year. By geographic areas, Spain generated 70.7% of total EBITDA, 1.1 percentagepoints more than at December 31st 2003, due to lower EBITDA contributions fromLatin America (29.1% compared with 30.6% a year ago). This fall in contributionsfrom Latin America was mostly due to lower contributions over the past year fromBrazil (-0.6 percentage points to 17.2%), Chile (-0.6 percentage points to4.3%), Argentina (-0.5 percentage points to 3.8%) and Peru (-0.2 percentagepoints to 4.0%) and the higher losses recorded in Mexico. The operating profit during January-December 2004 amounted to 7,235.2 millioneuros, posting a year-on-year growth of 14.3%, 3.8 percentage points less thanin September. This slowdown was due to lower EBITDA growth and the lowerdecrease in amortization compared with September (-4.7% vs. -6.7%). In ahomogeneous comparison, i.e. excluding the negative impact of exchange rates andvariations in the consolidation perimeter, the year-on-year reduction inamortization would stand at 3.7% (-4.1% in the first nine months of the year)and the increase in the operating profit would be 15.5% (+18.6% in September),within the guidance for 2004 (+15/+18%). The negative results of associated companies recorded a year-on-year reductionof 156.5 million euros to -56.1 million euros. This 73.6% improvement is mainlydue to: i) the deconsolidation of Via Digital (entry of Sogecable in July 2003),ii) the sale of Audiovisual Sport, iii) the lower losses related to MediTelecom, IPSE-2000 and the Lycos Group following the sale of Lycos Inc lastOctober and iv) the increased participation in Portugal Telecom. Total net financial costs at the end of December 2004 reached 1,183.8 millioneuros, including a 10.6 million euros negative result coming from the Argentinepeso's depreciation. Excluding this effect, net financial costs stood at 1,173.2million euros, experimenting a 19.8% decrease over the comparable net financialcosts of 2003 (1,462.6 million euros). In these results, neither the 134.4million euros profit generated by the appreciation of the Argentine peso nor the267.5 million euros profit coming from the cancellation of US dollarsdenominated debt in 2003 were included. This fall in the net financial costs wasdue to the decrease in the average net debt as well as the reduction of itsaverage cost as a result of the drop in interest rates in the euro and in theBrazilian real. The free cash flow generated by Telefonica Group during 2004 was 6,507.0 millioneuros, of which 1,924.2 million euros were devoted to dividend payments byTelefonica S.A., 5,534.5 million euros to financial investments (net of realestate divestitures) and 697.2 million euros to cancellation of commitmentsacquired by the Group, derived basically from the headcount reduction plan.Thus, the free cash flow after dividend payments, which mainly explains the netdebt increase, was -1,648.9 million euros. Net debt of Telefonica Group at the end of December 2004 stood at 20,982.2million euros. The increase of 1,746.9 million euros with respect to theconsolidated debt at the end of 2003 (19,235.3 million euros) came mainly fromthe aforementioned generation of free cash flow after financial investments anddividend payments (-1,648.9 million euros). Likewise, there was a 321.4 millioneuros increase in net debt due to changes in the consolidation perimeter andother effects on the financial statements, although a big part of this increasehas been compensated by a reduction of 223.4 million euros in net debt, comingfrom the currencies movement effects on the non-euro denominated debt. Cumulative goodwill amortization at the end of December 2004 totaled 432.6million euros, experimenting a 2.2% decrease over the previous year. Thisperformance is partly explained by the reduction in the cellular businessgoodwill amortization (allocation of part of Telefonica Moviles Mexico goodwillin the fourth quarter of 2003 as higher value of the operator's license) andthat of Terra as a result of the sale of Lycos Inc. However, the incorporationin the fourth quarter of 2004 of two months' goodwill amortization coming fromBellSouth's Latin American operators acquisition and since July 2003 that ofSogecable led to an increase in goodwill. Extraordinary results as of December 2004 totaled -1,165.7 million euros,compared with -1,249.7 million euros during the previous year. The mainextraordinary expenses accrued over the year were as follows: i) the accountingof a 674.7 million euros provision related to the acceptance in 2004 of 2,417employees coming from the 2003-2007 Redundancy Program, ii) anticipatedcancellation of Telefonica's UK goodwill for 101.5 million euros, iii)restructuring of the Terra Group (-62.1 million euros), iv) personalreorganizations in other subsidiaries within the Group for 211.4 million euros,v) the impact of the -31.4 million euros of the Arbitration Award concluded inrelation to the claim presented by the Radio Blanca Group to Uniprex, which iscurrently being appealed by the Antena 3TV Group under the Provincial Court andvi) -30.6 million euros as a result of the agreement reached with BidlandSystems Inc concerning certain complaints. The tax provision for the year stood at 1,138.7 million euros, and will mean areduced cash outflow for the Group supposing that it will be compensated bynegative tax bases registered in previous years. Results attributed to minority interests deducted 381.0 million euros from theGroup's net income at year end, compared with the -245.5 million euros of theprevious year. This year-on-year increase of 55.2% is explained by thecontribution of minority interests in the net income of Terra Networks comparedwith the losses of the previous year and the higher stake in this companycompared to 2003. As a result of this, the consolidated net income for the year amounted to2,877.3 million euros, posting a year-on-year growth of 30.6%. In quarterlyterms, the net income of the fourth quarter is four times that obtained in thesame period of the previous year. Excluding the net effect of the 2003-2007Redundancy Program for 2004, net income would reach 3,289.2 million euros, witha year-on-year increase of 6.3%. The Telefonica Group's CapEx during 2004 amounted to 3,771.9 million euros,registering a 1.2% increase over the previous year. Assuming constant exchangerates and excluding variations in the consolidation perimeter, this percentagewould drop to 0.6%. By business line, the cellular business (+24.6%) andTelefonica Latinoamerica (+15.2%) recorded higher investments, due on one hand,to the rollout of the UMTS network in Spain and GSM networks in Argentina andMexico, to the increase in network capacity in Brazil and to the incorporationof BellSouth operators and, on the other hand, to the broadband efforts beingmade in all countries. The remaining business lines have continued with thedownward trend of the previous year, as can be seen in the Telefonica de EspanaGroup (-18.4%). The CapEx ratio as a percentage of revenues stood at 12.4% atyear end, compared with the 13.1% recorded in December 2003. The average workforce of the Telefonica Group in 2004 was 156,819 employees,experimenting an average net increase of 7,354 employees compared to theprevious year, mainly due to an increase in Atento Group workforce to deal withincreased activity. Excluding the Atento Group, there was a 6.8% year-on-yeardecline in the workforce, mainly due to the layoffs carried out at Telefonica deEspana (2003-2007 Redundancy Program) and at Telesp in 2003 and 2004. TELEFONICA GROUP Financial DataTELEFONICA GROUPSELECTED FINANCIAL DATAUnaudited figures (Euros in millions) January - December 2004 2003 % ChgOperating revenues 30,321.9 28,399.8 6.8EBITDA 13,215.4 12,602.1 4.9Operating profit 7,235.2 6,327.9 14.3Income before taxes 4,397.0 3,362.5 30.8Net income 2,877.3 2,203.6 30.6Net income per share 0.581 0.442 31.3Avg. No of shares (millions) (1) 4,955.9 4,984.6 (0.6) (1) Weighted average number of shares in the period adjusted by free capital increases funded by reserves, that mean achange in the number of shares that did not produce any variation of equity structure, as if they were done at thebeginning of the first period presented. That relates the two capital increases funded by a charge on freely disposablereserves, recorded with the Mercantile Register on February 18, 2003 and on April 24, 2003. Moreover, the number ofshares in 2003 is affected by the capital reduction by amortization of treasury stock shares, from April 11, 2003, whenthe AGM was held, and that was recorded with the Mercantile Register on June 10, 2003. Accordingly, there was anaverage number of shares outstanding at the end of the period of 4,955,891,361. TELEFONICA GROUPRESULTS BY COMPANIESUnaudited figures (Euros in millions) REVENUES EBITDA OPERATING PROFIT Dec 2004 Dec 2003 % Chg Dec 2004 Dec 2003 % Chg Dec 2004 Dec 2003 % ChgTelefonica de Espana Group 10,955.8 10,695.4 2.4 5,054.5 4,762.4 6.1 2,680.5 2,123.6 26.2Telefonica Latinoamerica 6,883.4 6,744.9 2.1 3,141.0 3,101.3 1.3 1,443.2 1,295.6 11.4GroupCellular Business 12,054.1 10,428.3 15.6 4,755.0 4,581.9 3.8 3,081.6 3,065.9 0.5Directories Business 628.1 589.3 6.6 215.2 184.0 16.9 190.1 153.3 24.0Terra Networks Group 539.2 545.1 (1.1) 20.9 (39.5) c.s. (58.6) (118.2) (50.4)Atento Group 611.7 493.0 24.1 90.8 66.5 36.6 54.4 14.3 n.s.Content & Media Business 1,219.1 1,378.5 (11.6) 182.6 210.3 (13.2) 152.1 160.4 (5.1)Other companies 803.7 788.8 1.9 (169.1) (185.7) (8.9) (296.8) (330.1) (10.1)Eliminations (3,373.3) (3,263.4) 3.4 (75.5) (79.3) (4.8) (11.2) (36.8) (69.5)Group Total 30,321.9 28,399.8 6.8 13,215.4 12,602.1 4.9 7,235.2 6,327.9 14.3 TELEFONICA GROUPCAPEX BY BUSINESS LINESUnaudited figures (Euros in millions) January - December 2004 2003 % ChgTelefonica de Espana Group 1,207.5 1,480.5 (18.4)Telefonica Latinoamerica Group 753.3 654.1 15.2Cellular Business 1,669.0 1,339.7 24.6Directories Business 21.5 20.6 4.5Terra Networks Group 25.4 80.4 (68.3)Atento Group 22.8 12.9 76.5Content & Media Business 24.3 139.0 (82.5)Other companies & Eliminations 48.1 0.0 n.s.Group Total 3,771.9 3,727.1 1.2 TELEFONICA GROUPCONSOLIDATED INCOME STATEMENTUnaudited figures (Euros in millions) January - December October - December 2004 2003 % Chg 2004 2003 % ChgOperating revenues 30,321.9 28,399.8 6.8 8,395.4 7,566.7 11.0Internal expend capitalized in fixed assets (1) 474.3 531.1 (10.7) 165.7 174.1 (4.8)Operating expenses (17,539.1) (16,136.9) 8.7 (5,267.7) (4,442.7) 18.6 Supplies (7,525.7) (6,412.9) 17.4 (2,392.4) (1,842.0) 29.9 Personnel expenses (4,411.8) (4,641.3) (4.9) (1,149.1) (1,170.7) (1.8) Subcontracts (5,082.5) (4,558.4) 11.5 (1,581.4) (1,285.4) 23.0 Taxes (519.2) (524.2) (1.0) (144.7) (144.7) 0.0Other net operating income (expense) (41.7) (191.9) (78.3) 115.0 10.0 n.s.EBITDA 13,215.4 12,602.1 4.9 3,408.4 3,308.0 3.0Depreciation and amortization (5,980.2) (6,274.2) (4.7) (1,593.6) (1,571.5) 1.4Operating profit 7,235.2 6,327.9 14.3 1,814.8 1,736.5 4.5Profit from associated companies (56.1) (212.6) (73.6) (7.5) (51.2) (85.3)Financial net income (expense) (1,183.8) (1,060.7) 11.6 (366.1) (310.1) 18.0Amortization of goodwill (432.6) (442.5) (2.2) (112.0) (116.5) (3.8)Extraordinary net income (expense) (1,165.7) (1,249.7) (6.7) (299.3) (1,197.3) (75.0)Income before taxes 4,397.0 3,362.5 30.8 1,029.9 61.4 n.s.Income taxes (1,138.7) (913.4) 24.7 (161.8) 204.7 c.s.Net income before minority interests 3,258.3 2,449.1 33.0 868.0 266.2 n.s.Minority interests (381.0) (245.5) 55.2 (107.9) (77.0) 40.1Net income 2,877.3 2,203.6 30.6 760.2 189.2 n.s. Average shares (millions) (2) 4,955.9 4,984.6 (0.6) 4,955.9 4,955.9 0.0Net income per share 0.581 0.442 31.3 0.153 0.038 n.s. (1) Including work in process. (2) Weighted average number of shares in the period adjusted by free capital increases funded by reserves, that mean a change in the number of shares that did not produce any variation of equity structure, as if they were done at the beginning of the first period presented. That relates the two capital increases funded by a charge on freely disposable reserves, recorded with the Mercantile Register on February 18, 2003 and on April 24, 2003. Moreover, the number of shares in 2003 is affected by the capital reduction by amortization of treasury stock shares, from April 11, 2003, when the AGM was held, and that was recorded with the Mercantile Register on June 10, 2003. Accordingly, there was an average number of shares outstanding at the end of the period of 4,955,891,361. TELEFONICA GROUPCONSOLIDATED BALANCE SHEETUnaudited figures (Euros in millions) December 2004 2003 % ChgSubscribed shares not paid-in 0.0 0.0 n.s.Long-term assets 43,982.1 45,003.9 (2.3) Start up expenses 409.2 543.6 (24.7) Intangible net assets 8,430.0 7,673.2 9.9 Fixed net assets 23,348.1 24,315.8 (4.0) Investment 11,794.8 12,471.4 (5.4)Goodwill on consolidation 7,409.4 6,053.9 22.4Deferred expenses 432.2 535.0 (19.2)Current assets 11,642.6 10,482.4 11.1 Inventories 669.6 401.0 67.0 Accounts receivable 6,935.8 6,218.3 11.5 Short-term investments 2,288.4 3,199.6 (28.5) Cash and banks 855.0 336.4 154.2 Others 893.8 327.1 173.3Assets = Liabilities 63,466.3 62,075.2 2.2Shareholder's equity 16,225.1 16,756.6 (3.2)Minority interests 3,775.6 4,426.2 (14.7)Badwill on consolidation 5.0 11.4 (56.5)Deferred income 329.0 658.0 (50.0)Provisions for risks and expenses 7,574.2 7,688.2 (1.5)Long-term debt 15,147.9 17,693.8 (14.4)Accrued taxes payable 855.8 801.6 6.8Short-term debt including current maturities 9,413.4 5,587.1 68.5Interest payable 370.8 376.5 (1.5)Other creditors 9,769.5 8,075.8 21.0 Financial DataConsolidated net debt (1) 20,982.2 19,235.3 9.1Consolidated debt ratio (2) 49.8% 45.9% 3.8 p.p. (1) Net debt: Long-term debt + Short-term debt including current maturities - Short-term and Long-term finantial investments - Cash and banks. (2) Debt ratio: Net debt / (Shareholders' equity + Minority interests + Deferred income + Accrued taxes payable + Net debt). TELEFONICA GROUPFREE CASH FLOW AND CHANGE IN DEBTUnaudited figures (Euros in millions) January - December 2004 2003 % ChgI Cash flows from operations 12,635.1 11,974.8 5.5II Extraord. payments related to operating activities and commitm. (956.6) (1,006.4)III Net interest payment (1) (1,152.2) (1,496.9)IV Payment for income tax (326.0) (277.7)A=I+II+III+IV Net cash provided by operating activities 10,200.3 9,194.0 10.9B Payment for investment in fixed and intangible assets (3,457.7) (3,458.7)C=A+B Net free cash flow after CAPEX 6,742.6 5,735.3 17.6D Cash received from sale of Real State 210.8 399.1E Net payment for financial investment (5,745.3) (2,115.1)F Dividends paid (2) (2,857.0) (1,474.5)G=C+D+E+F Free cash flow after dividends (1,648.9) 2,544.9 (164.8)H Effects of exchange rate changes on net debt (223.4) (859.4)I Effects on net debt of changes in consolidation and others 321.4 106.4J Net debt at beginning of period 19,235.3 22,533.1K=J-G+H+I Net debt at end of period 20,982.2 19,235.3 9.1 (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. TELEFONICA GROUPRECONCILIATIONS OF CASH FLOW AND EBITDA MINUS CAPEXUnaudited figures (Euros in millions) January - December 2004 2003 % ChgEBITDA 13,215.4 12,602.1 4.9- CAPEX accrued during the period (EoP exchange rate) (3,771.9) (3,727.1)- Extraord. payments related to operating activities and comm. (956.6) (1,006.4)- Net interest payment (1,152.2) (1,496.9)- Payment for income tax (326.0) (277.7)- Investment in working capital (266.1) (358.8)= Net Free Cash Flow after Capex 6,742.6 5,735.3 17.6+ Cash received from sale of Real Estate 210.8 399.1- Net payment for financial investment (5,745.3) (2,115.1)- Dividends paid (2,857.0) (1,474.5)= Free Cash Flow after dividends (1,648.9) 2,544.9 c.s. Note: At the Investor Conference held in October 2003, the concept expected "Free Cash Flow" 2003-2006 was introducedto 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) andafter dividend payments to minoritaries, due to cash recirculation within the Group. Jan-Dec Jan-Dec 2004 2003 Net Free Cash Flow after Capex 6,742.6 5,735.3 + Payments related to cancellation of 697.2 818.3commitments - Dividend payments to minoritaries (1) (259.8) (241.2) = Free Cash Flow 7,180.0 6,312.4(1) 673.0 million euros corresponding to extraordinary dividends to minorities (mainly of Terra and CTC) are not included in the ordinary dividend payment to minorities of 259.0 million euros. TELEFONICA GROUPNET FINANCIAL DEBT AND COMMITMENTSUnaudited figures (Euros in millions) December 2004 Long-term debt 15,147.9 Short term debt including current maturities 9,413.4 Cash and Banks (855.0) Short and Long-term financial investments (1) (2,724.1) A Net Financial Debt 20,982.2 Guarantees to IPSE 2000 483.9 Guarantees to Sogecable 80.0 Guarantees to Newcomm 44.8 B Commitments related to guarantees 608.7 Gross commitments related to workforce reduction (2) 5,170.3 Value of associated Long-term assets (3) (697.5) Taxes receivable (4) (1,450.1) C Net commitments related to workforce reduction 3,022.8 A + B + C Total Debt + Commitments 24,613.7 Net Financial Debt / EBITDA (5) 1.6x Total Debt + Commitments/ EBITDA (5) 1.9x (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, except 56.9 million euros related to the provision of pension fund liabilities of corporations outside 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 twelve months rolling EBITDA, that is from December 2003 to December 2004. TELEFONICA GROUPEXCHANGES RATES APPLIED P&L (1) Balance Sheet and CapEx (2) Jan - Dec 2004 Jan - Dec 2003 % Chg Dec 2004 Dec 2003US Dollar / Euro 1.242 1.129 1.362 1.263Argentinean Peso / Euro 3.651 3.324 4.058 3.701Chilean Peso / Euro 692.379 670.174 759.235 749.969Brasilian Real / Euro 3.632 3.454 3.616 3.649Peruvian Nuevo Sol / Euro 4.077 3.910 4.470 4.375Mexican Peso / Euro 13.993 12.681 15.344 14.191 (1) These exchange rates are used to convert the P&L accounts of the Group foreign subsidiaries from local currency to euros. P&L accounts for subsidiaries that use inflation adjusted accounting criteria (Mexico, Chile, Peru, Colombia and Venezuela), are first converted to US dollars at the closing exchange rate, and then the conversion into euros is made according to the average exchange rate. (2) Exchange rates as of 31/12/04 and 31/12/03. RESULTS BY BUSINESS LINES Fixed Line Business TELEFONICA DE ESPANA GROUP At the end of 2004, Telefonica de Espana achieved growth in revenues of 2.4%,placing it at the top end of the target set for the year (+0.5%/+2.5%), and agrowth in EBITDA of 6.1% to exceed the target established (+2.0%/+5.0%). Thesegood results support the transformation strategy the Company is committed to,having as basic pillars the boost of innovative broadband services andoperational efficiency. In relation with commercial initiatives, it should be highlighted the determinedpush of Telefonica de Espana to launch Imagenio service as a key driver onbroadband strategy. The following items should be mentioned on this front: • Contents: Incorporation of football matches to the contents of Imagenio pay-per-view services following the agreement reach with Sogecable. Under this agreement Imagenio is now offering all Spanish Professional Football League and "Copa del Rey" games on pay-per-view. The offer of these "premium" contents continues the enrichment of the contents catalogue, increasing the attractiveness of Imagenio service. The thematic channels offer has also been improved, comprising now a total of 36 channels after adding new ones such as EuroSport, Canal Real Madrid, Bloomberg TV, Euronews, CNN International and Cartoon Network. • Coverage: Imagenio's coverage has been extended to Basque Country (Pais Vasco) and improved in the areas where the service is already being offered. As such, by middle February, Imagenio is available at around 1.600.000 households. • Services: New Imagenio Service modality without Internet connectivity service for clients only interested in digital television or not having a PC at home. This service is offered at a price of 19 euros per month. Voice price plan offering a flat rate for local and provincial calls made to ten preset numbers at a price of 8 euros per month; should national long distance calls be also included in the voice package, the price rises to 13 euros per month. These voice packages together with Imagenio make up an attractive triple-play offer. • Promotions: Free installation and connection fee, as well as monthly fees up to May, for new clients of Imagenio service and an additional bonus of a free football match of the Spanish League or Copa del Rey. Regarding other broadband services, and on completion of the process to doublethe speed of the ADSL Service, Telefonica de Espana continued its strategy topromote this technology through the launch of new commercial offers during thelast quarter of 2004, more particularly: • "Navidad ADSL" (Christmas ADSL) promotion from November the 20th, 2004 to January the 7th, 2005, by which Telefonica de Espana offered for basic ADSL Service free connection fee, USB modem and monthly fees up to January the 31st, 2005. • The launch of "Servicio Flexible ADSL Negocios" (Flexible ADSL Business Service) taylor made for the business market segment and offering internet access from Monday to Friday from 9:00 to 12:00 and from 18:00 to 21:00, together with 12 extra hours a month during any time slot for 24.90 euros per month. Additional minutes are billed at 2.99 euro cents, with a maximum monthly bill of 42 euros. The new service Solucion ADSL E-gestion Negocio (ADSL E-management Business Solution), also aimed at the business market segment, together with ADSL access to provide management applications for commercial processes based on ASP (Application Service Provider) technology. Other notable commercial actions taken by the Company in the traditionalbusiness include: • 13.7% reduction in the price of the "Combinado Pais" (access+traffic modular plan) rate as of October the 28th, 2005, to 33.17 euros per month. • December launch of the new Video-telephony service over conventional lines. This new services enables real-time transmission and reception of speakers' image by connecting a screen, with a built-in camera, to a basic line at no extra cost to clients. • Improvement of Voice Mailbox Service with the introduction of additional features: information of incoming calls without message, that informs the client on the telephone number of incoming calls that did not leave a message in the voice mailbox; Immediate Call-back Service, allowing to make a phone call to the telephone number leaving a message right after listening to it. • Additionally, a new portfolio of services for SME and Professional market segment has been launched, of which we could highlight the following: free PSTN line connection fee promotion for additional lines from November the 26th, 2004 to March the 31st, 2005; the new "Professional Line" having a Comprehensive and specifically tailored service for the market segment; and the new "Tarifa Plana Comercial" (Commercial Flat Rate), including unlimited national calls within commercial hours for 19 euros per month, with a promotional price of 9,90 euros per month up to June the 30th, 2005. Insofar as Regulation is concerned, the approval of the 2005 Price-Cap formulaset al CPI-3%, must be highlighted. Modifications to rates in compliance withthis formula should be completed by July the 1st, 2005, when the CMT is expectedto have completed its analysis of the relevant markets, resulting in a newregulatory price and service control framework in Spain. Telefonica de Espana has been granted authorization to raise the PSTN monthlyfees by 2.0% to 13.43 euros as of January the 22nd, 2005, when said rise cameinto force. Telefonica de Espana Group operating revenues totaled 10,955.8 million eurosduring the year, representing a 2.4% growth in comparison with 2003, the lastquarter remaining in line with the growth trend recorded in revenues over theRelated Shares:
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