1st Aug 2005 07:01
Telefonica SA29 July 2005 Quarterly results January - June 2005 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 • Atento Group • Content and Media Business • Telefonica Deutschland Group AddendA Companies included in each Financial Statement Key Holdings of the Telefonica Group and its Subsidiaries Significant Events Changes to the Perimeter and Accounting Criteria of Consolidation This document contains financial information/data reported under IFRS. Thesedata are preliminary, as only full compliance with International FinancialReporting Standards issued at 31/12/2005 is required, unaudited, and thus, beingsubject to potential future modifications. This financial information has beenprepared based on the principles and regulations known to date, and on theassumption that IFRS principles presently in force will be the same as thosethat will be adopted to prepare the 2005 full year consolidated financialstatements and, consequently, does not represent a complete and finalinformation under these regulations. In addition, the IFRS financial informationcontained herein may not be comparable to financial information published byTelefonica that was prepared under Spanish GAAP. The English language translation of the consolidated financial statementsoriginally issued in Spanish has been prepared solely for the convenience ofEnglish speaking readers. Despite all the efforts devoted to this translation,certain omissions or approximations may subsist. Telefonica, its representativesand employees decline all responsibility in this regard. In the event of adiscrepancy, the Spanish-language version prevails. These consolidated financial statements are presented on the basis of accountingprinciples generally accepted in International Financial Reporting Standards(IFRS). Certain accounting practices applied by the Group that conform withgenerally accepted accounting principles in IFRS may not conform with generallyaccepted accounting principles in other countries. TELEFONICA GROUP TELEFONICA GROUP ACCESSES Unaudited figures (thousands) June 2005 2004 % Chg Fixed telephony accesses (1) 40,971.9 37,396.5 9.6Internet and data accesses 12,907.1 10,419.9 23.9Narrowband 6,275.4 6,273.3Broadband 5,782.3 3,670.7ADSL (2) 4,876.3 3,057.7Retail (3) 4,037.6 2,559.7Other accesses (4) 849.4 478.9Unbundled loops (5) 297.0 43.4Pay TV 488.7 388.3 25.9Cellular accesses (6) 90,918.0 55,646.4 63.4 Total Accesses 145,285.7 103,851.1 39,9 Note: Cesky Telecom accesses included. (1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primaryaccess; 2/6 Access x30. Company's accesses for internal use included (2) T. Deutschland's connections resold on a retail basis and Cable Modem inPeru included. ((3) TdE Retail includes satellite. TASA Retail includes ISP in the north partof the country. (4) Cable modem El Salvador, WiFi clients, satellite Latam, fiber and leasedcircuits included. (5) Includes fully unbundled loops and shared loops. (6) Since the cancellation of Movistar Puerto Rico's management contract inSeptember 2004 , its subscriber base is excluded from the Group subscriber base TELEFONICA GROUP Financial Highlights The most relevant factors of the Telefonica Group 2005 first half quarterresults are the following: • The increase in revenues during the first six months (+20.0%) far exceeds that of any other peers in the sector, with a clear acceleration in the year-on-year growth vs. the first quarter (+16.7%). During the second quarter, the rate of growth in revenues rose to 23.1%. • Solid growth in accesses through all business lines (+39.9% over the previous year) reaching 145.3 million, due to stronger commercial activity in the second quarter across every market and the Cesky Telecom incorporation. It should be highlighted the high number of new customers at Telefonica Moviles, following the launch of the movistar brand in 13 countries and the commercial campaigns accomplished: • Net adds of 5.4(1) million cellular customers during the second quarter of the year, giving the Telefonica Moviles Group a managed customer base of 86.5 million, without taking into account Cesky Telecom (4.4 million). • The Group's retail ADSL accesses (Spain, Latin America and the Czech Republic) stood at 4.0 million, vs. 2.6 million as of June 30th 2004. • Positive and upward trend in the Telefonica Group's profitability: consolidated net income reached 1,835.1 million euros, up 25.4% from the same period of 2004. Operating Income before D&A (OIBDA) increased by 15.3%, while Operating Income (OI) grew by 21.4%. • For the first time in four years, foreign exchange rates make a positive contribution to the P&L, +1.2 p.p. and +1.4 p.p., respectively, to the growth in revenues and OIBDA. • Organic growth(2) in Revenues, OIBDA and OI reached +10.1%, +6.6% and +12.6%, respectively, reflecting the positive evolution of the operations. • Operating free cash flow (OIBDA-CapEx) rose to 4,631.7 million euros, with a year-on-year increase of 5.5%, supported by the Telefonica Latinoamerica Group (+10.1% in current euros; +8.0% in constant euros) and the Telefonica de Espana Group (+7.6%). • The results of the Telefonica Group are also strengthened by its diversification as an integrated operator, providing the double digit growth rates of the key parameters of business lines with activity with stability: • The cellular business is the main contributor to the growth of revenues (+40.2% year-on-year), while fixed operators contribute most highly to profitability (46.2% and 32.9% growth in the Operating Income for the Telefonica de Espana Group and the Telefonica Latinoamerica Group, respectively, compare to the first half of 2004) ------------------------ (1)Excludes the adjustment of 300,000 inactive lines in Mexico, not longerconsidered in the reported customer base.(2)Assuming constant exchange rates and including the consolidation of the LatinAmerican assets acquired to Bell South in Argentina, Colombia, Chile, Ecuador,Guatemala, Nicaragua, Panama, Peru, Uruguay and Venezuela in the cellularbusiness and Atrium in the Telefonica Latinoamerica Group from 1 January 2004. TELEFONICA GROUP Consolidated Results The results obtained by Telefonica Group and the management report included inthis report are based on the actions carried out by the various business unitsin the Group and which constitute the units over which management of thesebusinesses is conducted. This implies a presentation of results based on theactual management of the various businesses in which Telefonica Group ispresent, instead of adhering to the legal structure observed by theparticipating companies. In this sense, income statements are presented by business, which basicallyimplies that each line of activity participate in the companies that the Groupholds in the corresponding business, regardless of whether said holding hasalready been transferred or not, even though it might be the final intent ofTelefonica, S.A. to do so in the future. It should be emphasized that this presentation by businesses in no case altersthe total results obtained by Telefonica Group. These results are incorporatedfrom the date of effective acquisition of the holding. The Telefonica Group's results for the first six months of the fiscal year 2005are characterized by growth acceleration in both Group revenues (+20.0%) andGroup's customer base, strongly above sector's peers. The growth in revenues came along with a positive improvement in the Company'sprofitability, with an increase in the Operating Income before D&A (OIBDA) andin the Operating Income (OI) of 15.3% and 21.4% respectively, which allowed theCompany to post a 25.4% growth in net income. The solid performance of every business lines has resulted in a 5.5% growth inthe Operating free cash flow (OIBDA-CapEx) versus June of 2004, which inabsolute terms amounted to 4,631.7 million euros. By business lines, the Companyregistered a solid growth in the fixed line business (Telefonica LatinoamericaGroup +10.1% and Telefonica de Espana Group +7.6%). The results of the Telefonica Group are also strengthened by its diversificationas an integrated operator, providing a stable floor for double digit growthrates of the key parameters of business lines. Hence, the cellular business isthe main contributor to the revenue growth (+40.2% year-on-year), while fixedoperators contribute mainly to profitability, with a 46.2% and 32.9% growth inthe Operating Income for the Telefonica de Espana Group and the TelefonicaLatinoamerica Group, respectively, compared to the first half of 2004. Thus, theneed to finance the increase in cellular clients at a key moment of expansionand with their obvious impact on margins is more than offset by the solidresults from the fixed telephony divisions of the Group, a clear reference inthe sector in terms of revenues, profitability and cash flow generation. The strong commercial activity for loyalty and customer acquisition werereflected in the 39.9% growth in total accesses (fixed telephony accesses, dataand Internet access, Pay TV and cellular accesses) compared with June 2004,reaching 145.3 million. This number of total accesses includes the accessesfrom the recently acquired operator Cesky Telecom (8.7 million). The strong activity registered in all the markets where Telefonica Moviles hasoperations, following the April market launch of the movistar brand in 13countries, along with the strong activity for the quarter, enabled TelefonicaMoviles to report net adds of 5.4(1) million for the quarter vs. more than 3million in January-March of 2005, amounting the managed customer base to 86.5million. Of the total customer base, 63.7 million corresponded to the LatinAmerican operators, 19.4 million to Telefonica Moviles Espana and more than 3.4million to Medi Telecom. In the other hand, cellular accesses at Cesky Telecomrose to 4.4 million. Broadband is the main contributor to the growth in data and Internet accesses ,totaling the number of retail ADSL lines in Spain, Latin America and the CzechRepublic up to 4.0 million at June 30, 2005 (+57.6%). Telefonica Group retailADSL accesses in Spain rose to 2.3 million (+41.8% vs. June 2004), representingan estimated market share of 54.1% of the total broadband market. In LatinAmerica, retail ADSL accesses stood at 1.7 million and grew by 70.9% over thesame period last year, highlighting Telesp, with almost one million ADSL accesslines (exceeded during July). As a result, revenues for the first half of the year amounted to 17,359.7million euros, 20.0% higher than revenues as of June 2004, accelerating theyear-on-year growth during the second quarter of the year (+23.1% in April-June2005 vs. +16.7% in the first quarter 2005), mainly due to the cellular business(+45.7% in April-June 2005 vs. +34.6% in the first quarter 2005) and to theTelefonica Latinoamerica Group (+20.6% in April-June 2005 vs. +4.5% in the firstquarter 2005). For the cumulative six months, all business lines recorded solidresults, with the cellular business standing out due to the incorporation of theBellSouth assets. However, if we exclude the impact of exchange rates andchanges in the consolidation perimeter, the organic growth2 would be +10.1%(+9.2% in March). For the first time in four years, it was registered a positivecontribution because of the variations in the exchange rates (+1.2 percentagepoints. vs. -0.6 percentage points in January-March of 2005). The cellular business continues to be the main contributor to the revenue growthduring the first six months of 2005, with total revenues of 7,759.8 millioneuros, up 40.2% year-on-year (service revenues: +39.1%; revenues from handsetsales: +47.3%). Among the operators, it should be mentioned the solidperformance at Telefonica Moviles Espana (+8.4%; service revenues +7.3%) thanksto the higher traffic and the positive results of the new commercial activitieslaunched recently. The Telefonica de Espana Group achieved revenues of 5,802.9 million euros, 5.4%higher than in the first six months of 2004 mainly driven by the revenues comingfrom Internet Services and Broadband. This growth was slightly lower than thatreported during the first quarter (+6.0%) due to the lower growth at the parentcompany Telefonica de Espana (+5.3% in June, vs. +6.4% in March), which wasaffected in the year-on-year growth comparison by the elimination in the monthlyfee 2004 increase and the decline in the SIM (Comprehensive Maintenance Service)bonuses. Likewise, it should be mentioned the year-on-year increase in thesecond-quarter revenues from Telyco (+40.8%) mainly due to higher handsets salesrelated to Telefonica Moviles rebranding (movistar). ------------------------ 1 Excludes the adjustment of 300,000 inactive lines in Mexico, not longerconsidered in the reported customer base.2 Assuming constant exchange rates and including the consolidation of the LatinAmerican assets acquired to Bell South in Argentina, Colombia, Chile, Ecuador,Guatemala, Nicaragua, Panama, Peru, Uruguay and Venezuela in the cellularbusiness and Atrium in the Telefonica Latinoamerica Group from 1 January 2004. During the first half of 2005, revenues at Telefonica Latinoamerica rose to3,692.1 million euros, representing a solid year-on-year growth of 12.5%. Inconstant euros the growth represents 6.5% increase and shows a clearacceleration vs. March (+3.4%). This change was due to an improvement of theoperators results in the second quarter of the year, mainly Telesp (+7.3% inlocal currency, vs. +3.2% in January-March of 2005). In turn, it should behighlighted that CTC and TdP both reported slight growths (+2.3% and +1.0%,respectively) vs. slight declines registered in the first quarter of the fiscalyear (-0.3% and -0.1%, respectively). Revenues coming from Spain represented 55.4% of consolidated revenues as ofJune, 2005, experimenting a 6.8 percentage points decrease in its contributionover the same period in 2004. In turn, the contribution from Latin Americaincreased to 40.6% (33.0% a year ago) due to the acquisition of the BellSouthLatin American operators. Brazil maintains its revenue contribution up to 17.4%. At the end of the second quarter, accumulated operating expenses were 23.2%higher than in the previous year, amounting 11,022.2 million euros, 5.0percentage points higher than in March, due to the acceleration in thecommercial efforts for capturing customers. The cellular business was the maincontributor, that also includes the launch of the movistar brand in 13 countriesin April. The higher commercial expenses and the incorporation of BellSouth'sLatin American assets, mainly explained by the 36.3% growth in the TelefonicaGroup's external services year-on-year(+34.7% in constant euros). The 30.2% increase in supplies over January-June 2004 (+29.2% in constant euros)was mainly due to the change in the consolidation perimeter and to the highercommercial activity in the cellular business, as well as, to a lesser extent, topurchases of ADSL and Imagenio equipment by the Telefonica de Espana Group. Personnel expenses increased in the first half of 2005 by 2.6% over June 2004due to the increase in the average Group workforce (+19.0%, to 180,260employees), due to the incorporation of the BellSouth employees and to theincrease in the Atento Group workforce. Excluding the Atento Group'semployees, the workforce level would have increased by 7.3%. Regarding the2003-2007 Redundancy Program of the Telefonica de Espana Group, a provision of531.2 million euros was accounted for 1,750 employees who joined this program in2005. In this sense, it should be noted that a portion of this provision hasalready been recorded during the first quarter of the fiscal year (121.3 millioneuros). At the end of the first half, the Telefonica Group reported a gain on sale offixed assets for 164.3 million euros, of which 120.6 million euros werematerialised during the first quarter and corresponded, among other things, tothe capital gains generated by the sale of, Radio Continental, Radio Estereo(both from the ATCO Group), Infonet and the sale of real estate. During theperiod April-June 2005, the Company recorded an income of 43.7 million eurosrelated among others, to the sale of 1.2% of the TPI share capital. As a consequence of the evolution of revenues and expenses described above, theconsolidated OIBDA for the first six months of 2005 amounted 6,621.4 millioneuros, up 15.3% year-on-year (+16.2% in the first quarter). The organicgrowth(3) would be 6.6%, compared with 9.5% in the first quarter. The variationsin the exchange rates contribute with 1.4 percentage points to the OIBDA growth,being the first positive contribution in four years. In terms of profitability,the OIBDA margin stood at 38.1%, 1.5 percentage points lower than at the end ofthe first half of 2004. This margin was affected by the decrease in the OIBDAmargin to 35.3% in the second quarter, as a result of the higher commercialexpenses related to the acquisition of new customers and to the impact of theprovision for the Redundancy Program at Telefonica de Espana. The cellular business, the main contributor to the Group's growth, reported anOIBDA of 2,578.8 million euros for the first half of the year (38.9% of totalconsolidated OIBDA), which represented a 13.3% increase over January-June of2004. The impact of the change in brand, along with the higher commercialefforts, reduced the OIBDA margin for the first half to 33.2% and the margin forthe second quarter to 30.9%. At the end of the first half, the Telefonica de Espana Group reported a total of2,141.5 million euros (32.3% of total OIBDA), up 10.3% year-on-year. The OIBDAmargin stood at 36.9% (35.3% as of June 2004), although these margins wereaffected by the provision for the Redundancy Program in both six-month periods. The Telefonica Latinoamerica Group's OIBDA (25.9% of consolidated OIBDA)reached 1,716.5 million euros as of June 2005, which amounted to an increase of18.3% in current euros. The growth in constant euros would be 12.3% (+16.8% inthe first quarter 2005). This lower year-on-year growth rate in constant euroswas related to the operators' higher commercial expenses. The OIBDAmargin for the first half improved 2.3 percentage points year-on-year to 46.5%.If we adjust the margin for the capital gains of the sale of assets in bothperiods, the OIBDA margin would decline to 44.3%, 0.4 percentage points higherthan the one registered as of June 2004. Following the trend in the previous quarter, Spain's contribution toconsolidated OIBDA dropped significantly from that of the prior year (61.8% inJune of 2005, 6.1 percentage points lower than a year ago), while thecontribution of Latin America increased by 5.4 percent, to 35.7%, following theacquisition of Bell South's Latin American operators. Within LatinAmerica, Brazil is the country with the highest weight (18.9%, +0.4 percentagepoints over the previous year), followed by Argentina (4.4%, -0.2 percentagepoints compared to the previous year), Chile (4.3%, +0.2 percentage pointscompared to the previous year), Peru (4.1%, +0.2 percentage points compared tothe previous year) and Venezuela (3.9%). ------------------------ (3) Assuming constant exchange rates and including the consolidation of theLatin American assets acquired to Bell South in Argentina, Colombia, Chile,Ecuador, Guatemala, Nicaragua, Panama, Peru, Uruguay and Venezuela in thecellular business and Atrium in the Telefonica Latinoamerica Group from 1January 2004 Consolidated Operating Income (OI) for the period January-June of 2005 reached3,528.4 million euros, representing a 21.4% increase over the first six monthsof 2004, down 4.1 percentage points from the first quarter. This slowdown wasdue to the OIBDA evolution described above and by the higher year-on-yearincrease in depreciation (+9.2% as of June, vs. +6.5% as of March). The higherlevel of depreciation was attributable to changes in the consolidation perimeterin the cellular business. The organic growth(4) of operating income stood at+12.6% (+21.3% in the first quarter of 2005). Results of associated companies began reporting positive figure during the firsthalf of the year (+5.2 million euros), versus negative results of 42.3 millioneuros during the same period last year. This change was due primarily to thehigher contribution of Portugal Telecom, the positive contribution from MediTelecom and lower losses at Sogecable, Lycos Europe, and IPSE 2000. In thesecond quarter of 2005, the Company reported a positive result of 14.4 millioneuros, related to the higher contribution of Portugal Telecom, the positivecontribution from Medi Telecom and the lower losses at Sogecable. Financial expenses amounted to 733.7 million euros in the first half, 22.6%above the same period in the year before. 85 million euros are due to the 11%increase in the average net debt, and the remaining 50 million is related to theincrease in the Latam debt (higher after the acquisition of the Bell Southassets and the increase in the interest rates in Brazil) with a saving of 33million euros as a consequence of better interest rates in the Group. The net free cash flow after CapEx generated by the Telefonica Group amounted to2,614.4 million euros for the first half of the year. Of this, 3,533.8 millioneuros were devoted to financial investments (net of divestiture) and 1,589.7million euros for net payment for dividends and treasury stock. Including thesum of 78.5 million euros received from the sale of real estate, the free cashflow after dividends is negative, -2,430.6 million euros. Free cash flow stoodat 2,800.0 million euros (according to the criteria used at the 3rd and 4thInvestor Conferences) prior to payments made to amortize commitments related toheadcount reduction plan (and taking into account the almost absence of dividendpayments to minority interests during the first quarter). ------------------------ (4) Assuming constant exchange rates and including the consolidation of the LatinAmerican assets acquired to Bell South in Argentina, Colombia, Chile, Ecuador,Guatemala, Nicaragua, Panama, Peru, Uruguay and Venezuela in the cellularbusiness and Atrium in the Telefonica Latinoamerica Group from 1 January 2004.. The Telefonica Group's net financial debt at the end of June 2005 stoodat 27,990.4 million euros. 57% of the increase in debt was due to the financialinvestments of the period, 24% due to appreciation of the dollar and the LatinAmerican currencies against the euro throughout the first half of the year,which accounted for 1,032.0 million euros of the increase in debt. The remaining19% corresponds to the changes in the consolidation perimeter after theacquisition of Bell South subsidiaries in Argentina and Chile and Cesky Telecom.Total debt (including guarantees and labor commitments for a total of 3,431.52million euros) amounted to 31,941.1 million euros, equivalent to 2.26 timesOIBDA annualized for the period, including Cesky Telecom. The tax provision totaled 806.7 million euros in the first half (tax rate of28.8%), although the Group's cash outflow will be more reduced for theTelefonica Group as far as more tax bases are offset. Results attributed to minority interest, increased by 32.1% year-on-year,reducing the Telefonica Group's net income by 158.1 million euros. Thischange was mainly due to minority shareholders' participation in the netincome of Terra Networks Group vs. the net losses of the last year and to thehigher net income achieved by Telesp. Consolidated net income rose to 1,835.1 million euros as of June 2005, versus1,464.0 million euros in the period January-June of 2004, representing anincrease of 25.4%. The Telefonica Group's CapEx for the first six months amounted to 1,989.7million euros, 47.6% higher than in the previous year (organic change:(5)+29.0%), at 1,989.7 million euros. The Telefonica Latinoamerica Group and theTelefonica de Espana Group increased by 60.8% and 17.7%, respectively, year-on-year, due to higher investments in broadband. Investment in the cellularbusiness in Mexico, Colombia, Argentina, Chile and Peru increased by 64.4% year-on-year. Nevertheless, it should be noted that there is a strong cyclicalcomponent to the investment, so this performance cannot be extrapolated for thefull year.------------------------ (5) Assuming constant exchange rates and including the consolidation of theLatin American assets acquired to Bell South in Argentina, Colombia, Chile,Ecuador, Guatemala, Nicaragua, Panama, Peru, Uruguay and Venezuela in thecellular business and Atrium in the Telefonica Latinoamerica Group from 1January 2004. TELEFONICA GROUP Financial Data TELEFONICA GROUP SELECTED FINANCIAL DATA Unaudited figures (Euros in millions) January - June 2005 2004 % Chg Revenues 17.359,7 14.469,9 20,0 Operating income before D&A (OIBDA) 6.621,4 5.740,3 15,3 Operating income (OI) 3.528,4 2.907,0 21,4 Income before taxes 2.800,0 2.266,3 23,5 Net income 1.835,1 1.464,0 25,4 Basic earnings per share 0,375 0,290 29,1 Weighted average number of ordinary shares 4.897,1 5.042,8 (2,9) outstanding during the period (millions) Note: For the basic earnings per share calculation purposes, the weighted average number of ordinary shares outstanding during the period have been obtained applying IAS rule 33 "Earnings per share". Thereby, there are not taking into account as outstanding shares the weighted average number of shares held as treasury stock during the period nor the shares assigned to the stock options plan for employees "Programa TIES". Furthermore, in line with IAS rule 33, the weighted average number of shares outstanding during every period, has been adjusted for these operations that had implied a difference in the number of outstanding shares, without a variation associated in the equity, as if those have taken place at the beginning of the first period presented. It consists on the distribution of the paid-in capital reserve by means of delivery of shares in the proportion of 1 share to every 25 shares, approved by the AGM as of May 31, 2005. TELEFONICA GROUP RESULTS BY COMPANIES Unaudited figures (Euros in millions) REVENUES OIBDA OPERATING INCOME January - June January - June January - June 2005 2004 % Chg 2005 2004 % Chg 2005 2004 % Chg Telefonica de Espana 5.802,9 5.503,3 5,4 2.141,5 1.941,1 10,3 1.033,4 706,7 46,2 Group Telefonica 3.692,1 3.283,0 12,5 1.716,5 1.450,8 18,3 876,5 659,7 32,9 Latinoamerica Group Cellular Business 7.759,8 5.533,3 40,2 2.578,8 2.276,3 13,3 1.484,7 1.535,7 (3,3) Directories Business 239,1 219,1 9,1 62,5 57,7 8,4 50,5 46,8 7,8 Terra Networks Group 240,8 219,3 9,8 46,3 (0,0) c.s. 7,3 (47,8) c.s. Atento Group 388,2 280,3 38,5 51,5 37,1 38,7 37,9 9,8 284,4 Content & Media 601,9 570,9 5,4 114,1 70,6 61,6 100,0 57,5 73,8 Business Other companies (*) 381,1 443,8 (14,1) (70,2) (299,1) (76,5) (100,8) (155,0) (35,0) Eliminations (1.746,2) (1.583,1) 10,3 (19,6) 205,8 c.s. 39,0 93,6 (58,3) Total Group 17.359,7 14.469,9 20,0 6.621,4 5.740,3 15,3 3.528,4 2.907,0 21,4 (*) OIBDA and Operating Income exclude the variation in investment valuation allowances accounted for by Telefonica S.A. parent company and that are eliminated in consolidation. TELEFONICA GROUP CAPEX BY BUSINESS LINES Unaudited figures (Euros in millions) January - June 2005 2004 % Chg Telefonica de Espana Group 620,7 527,6 17,7 Telefonica Latinoamerica Group 378,1 235,2 60,8 Cellular Business 847,0 515,2 64,4 Directories Business 6,8 7,5 (9,6) Terra Networks Group 7,5 11,3 (33,5) Atento Group 19,8 8,2 142,4 Content & Media Business 13,1 12,3 6,8 Other companies & Eliminations 96,8 31,3 209,0 Total Group 1.989,7 1.348,4 47,6 TELEFONICA GROUP CONSOLIDATED INCOME STATEMENT Unaudited figures (Euros in millions) January - June April - June 2005 2004 % Chg 2005 2004 % Chg Revenues 17,359.7 14,469.9 20.0 9,080.9 7,376.5 23.1 Internal expenditure capitalized in 225.2 203.4 10.7 137.7 115.1 19.7 fixed assets (1) Operating expenses (11,022.2) (8,945.2) 23.2 (6,028.6) (4,719.8) 27.7 Supplies (4,552.4) (3,495.9) 30.2 (2,437.9) (1,806.8) 34.9 Personnel expenses (2,924.3) (2,850.6) 2.6 (1,626.1) (1,579.0) 3.0 Subcontracts (3,199.8) (2,347.3) 36.3 (1,779.3) (1,208.9) 47.2 Taxes (345.7) (251.4) 37.5 (185.2) (125.1) 48.0 Other net operating income (98.8) (18.7) n.s. (24.1) 24.1 c.s. (expense) Gain (loss) on sale of fixed assets 164.3 36.3 n.s. 43.7 9.7 n.s. Impairment of goodwill and other (6.8) (5.4) 25.5 (3.0) (3.0) (0.0) assets Operating income before D&A (OIBDA) 6,621.4 5,740.3 15.3 3,206.7 2,802.7 14.4 Depreciation and amortization (3,093.0) (2,833.3) 9.2 (1,566.6) (1,400.3) 11.9 Operating income (OI) 3,528.4 2,907.0 21.4 1,640.1 1,402.3 17.0 Profit from associated companies 5.2 (42.3) c.s. 14.4 (12.7) c.s. Net financial income (expense) (733.7) (598.5) 22.6 (416.0) (276.8) 50.3 Income before taxes 2,800.0 2,266.3 23.5 1,238.5 1,112.8 11.3 Income taxes (806.7) (640.9) 25.9 (226.9) (234.3) (3.2) Income from continuing operations 1,993.2 1,625.4 22.6 1,011.7 878.5 15.2 Income (Loss) from discontinued 0.0 (41.7) n.s. (0.1) (11.9) (99.4) operations Minority interest (158.1) (119.6) 32.1 (88.7) (74.0) 19.8 Net income 1,835.1 1,464.0 25.4 922.9 792.6 16.4 Weighted average number of ordinary 4,897.1 5,042.8 (2.9) 4,898.0 5,019.5 (2.4) shares outstanding during the period (millions) Basic earnings per share 0.375 0.290 29.1 0.188 0.158 19.3 (1) Including work in process. Note: For the basic earnings per share calculation purposes, the weighted average number of ordinary shares outstanding during the period have been obtained applying IFRS rule 33 "Earnings per share". Thereby, there are not taking into account as outstanding shares the weighted average number of shares held as treasury stock during the period nor the shares assigned to the stock options plan for employees "Programa TIES". Furthermore, in line with IFRS rule 33, the weighted average number of shares outstanding during every period, has been adjusted for these operations that had implied a difference in the number of outstanding shares, without a variation associated in the equity, as if those have taken place at the beginning of the first period presented. It consists on the distribution of the paid-in capital reserve by means of delivery of shares in the proportion of 1 share to every 25 shares, approved by the AGM as of May 31, 2005. TELEFONICA GROUP CONSOLIDATED BALANCE SHEET Unaudited figures (Euros in millions) June 2005 2004 % Chg Non-current assets 57.457,3 46.257,9 24,2 Intangible assets 6.849,4 4.568,5 49,9 Goodwill 8.961,4 4.064,4 120,5 Property, plant and equipment and Investment 27.787,2 23.065,9 20,5 property Long-term financial assets and other non-current 5.353,0 5.498,5 (2,6) assets Deferred tax assets 8.506,3 9.060,6 (6,1) Current assets 12.625,5 10.910,3 15,7 Inventories 870,4 576,8 50,9 Trade and other receivables 7.390,9 5.677,2 30,2 Current tax receivable 1.358,0 1.015,2 33,8 Short-term financial investments 1.413,6 2.895,1 (51,2) Cash and cash equivalents 1.579,1 744,7 112,0 Non-current assets classified as held for sale 13,6 1,2 n.s. Total Assets = Total Equity and Liabilities 70.082,8 57.168,2 22,6 Equity 13.961,7 11.841,2 17,9 Equity attributable to equity holders of the 10.637,8 9.882,8 7,6 parent Minority interest 3.323,9 1.958,3 69,7 Non-current liabilities 31.225,4 29.951,7 4,3 Long-term financial debt 19.667,5 19.339,3 1,7 Deferred tax liabilities 2.468,6 1.235,8 99,8 Long-term provisions 7.834,3 8.063,1 (2,8) Other long-term liabilities 1.255,0 1.313,4 (4,5) Current liabilities 24.895,7 15.375,4 61,9 Short-term financial debt 11.689,5 6.361,5 83,8 Trade and other payables 6.426,3 4.614,8 39,3 Current tax payable 2.089,1 1.352,9 54,4 Short-term provisions and other liabilities 4.690,7 3.046,2 54,0 Liabilities associated with non-current assets 0,0 0,0 n.s. classified as held for sale Financial Data Net Financial Debt (1) 27.990,4 (1) Net Financial Debt = Long term financial debt + Other long term liabilities + Short term financial debt - Short term financial investments - Cash and cash equivalents - Long term financial assets and other non-current assets. TELEFONICA GROUP FREE CASH FLOW AND CHANGE IN DEBT Unaudited figures (Euros in millions) January - June 2005 2004 % Chg I Cash flows from operations 5.773,8 5.276,6 9,4 II Net interest payment (1) (676,2) (488,2) III Payment for income tax (450,0) (66,8) A= Net cash provided by operating activities 4.647,6 4.721,6 (1,6) I+II+III B Payment for investment in fixed and intangible (2.033,2) (1.707,3) assets C=A+B Net free cash flow after CAPEX 2.614,4 3.014,3 (13,3) D Net Cash received from sale of Real Estate 78,5 204,1 E Net payment for financial investment (3.533,8) (478,9) F Net payment for dividends and treasury stock (2) (1.589,7) (2.192,4) G=C+D+E+F Free cash flow after dividends (2.430,6) 547,1 c.s. H Effects of exchange rate changes on net financial 1.032,0 debt I Effects on net financial debt of changes in 833,5 consolid. and others J Net financial debt at beginning of period 23.694,4 K=J-G+H+I Net financial debt at end of period 27.990,4 (1) Including cash received from dividends paid by subsidiaries that are not under full consolidation method. (2) Dividends paid by Telefonica S.A. and dividend payments to minoritaries from subsidiaries that are under full consolidation method and treasury stock. TELEFONICA GROUP RECONCILIATIONS OF CASH FLOW AND OIBDA MINUS CAPEX Unaudited figures (Euros in millions) January - June 2005 2004 % Chg OIBDA 6.621,4 5.740,3 15,3 - CAPEX accrued during the period (EoP (1.989,7) (1.348,4) exchange rate) - Payments related to commitments (462,6) (459,3) - Net interest payment (676,2) (488,2) - Payment for income tax (450,0) (66,8) - Results from the sale of fixed assets (164,3) (36,3) - Invest. in working cap. and other deferred (264,2) (327,0) income and expenses = Net Free Cash Flow after Capex 2.614,4 3.014,3 (13,3) + Net Cash received from sale of Real Estate 78,5 204,1 - Net payment for financial investment (3.533,8) (478,9) - Net payment for dividends and treasury stock (1.589,7) (2.192,4) = Free Cash Flow after dividends (2.430,6) 547,1 c.s. Note: At the Investor Conference held in October 2003, the concept expected "Free Cash Flow" 2003-2006 was introduced to reflect the amount of cash flow available to remunerate Telefonica S.A. Shareholders, to protect solvency levels (financial debt and commitments), and to accomodate strategic flexibility. The differences with the caption "Net Free Cash Flow after Capex" included in the table presented above, are related to "Free Cash Flow" being calculated before payments related to commitments (workforce reductions and guarantees) and after dividend payments to minoritaries, due to cash recirculation within the Group. jan-jun 2005 jan-jun 2004 Net Free Cash Flow after Capex 2.614,4 3.014,3 + Payments related to cancellation of 387,0 369,8 commitments - Ordinary dividends payment to minoritaries (201,4) (121,3) = Free Cash Flow 2.800,0 3.262,8 TELEFONICA GROUP NET FINANCIAL DEBT AND COMMITMENTS Unaudited figures (Euros in millions) June 2005 Long-term debt 20.271,3 Short term debt including current maturities 11.689,5 Cash and Banks (1.579,1) Short and Long-term financial investments (1) (2.391,3) A Net Financial Debt 27.990,4 Guarantees to IPSE 2000 435,7 Guarantees to Newcomm 83,5 B Commitments related to guarantees 519,2 Gross commitments related to workforce reduction (2) 5.688,0 Value of associated Long-term assets (3) (755,5) Taxes receivable (4) (1.501,0) C Net commitments related to workforce reduction 3.431,5 A + B + C Total Debt + Commitments 31.941,1 Net Financial Debt / OIBDA (5) 2,0x Total Debt + Commitments/ OIBDA (5) 2,3x (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 86.0 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 annualized OIBDA. Including Cesky Telecom January-June 2005 OIBDA. TELEFONICA GROUP EXCHANGES RATES APPLIED P&L (1) Balance Sheet and CapEx (2) Jan - Jun Jan - Jun % June 2005 June 2004 2005 2004 Chg USA (US Dollar/Euro) 1,284 1,226 1,209 1,215 Argentina (Argentinean Peso/Euro) 3,735 3,562 3,491 3,595 Brazil (Brasilian Real/Euro) 3,293 3,641 2,842 3,777 Chile (Chilean Peso/Euro) 746,269 746,269 699,301 775,194 Colombia (Colombian Peso/Euro) 3.012,048 3.311,258 2.816,901 3.278,689 El Salvador (Colon/Euro) 11,233 10,731 10,581 10,636 Guatemala (Quetzal/Euro) 9,837 9,883 9,212 9,637 Mexico (Mexican Peso/Euro) 14,215 13,710 13,111 13,872 Nicaragua (Cordoba/Euro) 21,227 19,309 20,231 19,369 Peru (Peruvian Nuevo Sol/Euro) 4,184 4,262 3,935 4,220 Uruguay (Uruguayan Peso/Euro) 32,020 36,298 29,744 36,101 Venezuela (Bolivar/Euro) 2.659,574 2.352,941 2.597,403 2.336,449 (1) These exchange rates are used to convert the P&L accounts of the Group foreign subsidiaries from local currency to euros. (2) Exchange rates as of 30/06/05 and 30/06/04. RESULTS BY BUSINESS LINES Fixed Line Business TELEFONICA DE ESPANA GROUP The broadband market continued to grow at a strong rate during the secondquarter of 2005. The different actions developed by Telefonica on this marketplaced the company as the main driving force and actor in the growth ofbroadband, enabling its market share and position of leadership to remain at thesame levels as during the first quarter of 2005. These results enforceTelefonica's strategy, characterized by excellent customer service andinnovation and the extensive commercial offer of value added services comparedwith the other actors on the broadband market who focus their efforts primarilyon price competition. The main news relating to the second quarter in terms of development of thecommercial broadband program includes the following: • Continuation of the rollout of Imagenio throughout Spain. The company's new interactive television is now available in 140 cities with a coverage of 4 million homes. Alongside this, the commercial offer for Imagenio continued to improve to include the possibility of contracting any of the time or volume-based ADSL basic speed connectivity modalities within the triple-offer packages: "ADSL tailor made" (ADSL a tu medida) and "ADSL MINI". Furthermore, the provisions of the video on demand service have been improved with the inclusion of the possibility to select the language of the films, to access extra contents such as the "making of" and to determine the initial viewing point of films, along with new services associated to football, such as the repetition of the best shots. • Launch of two new VAS within the ADSL SME Solutions catalogue: The Back-up Copy ADSL Solution (Solucion ADSL Copia de Seguridad) that allows for a security back-up copy of all information contained on the hard drive of a PC to be created and saved in Telefonica data centers for later recovery, and the ADSL Music System Solution (Solucion ADSL Hilo Musical) that offers a basic package of audio channels and acoustic equipment with a maintenance and contents renewal guarantee. • Launch of different promotions for both ADSL and Imagenio, including free service subscription fees, free local calls during 2005 and different additional bonuses. Aware of the relevance of the voice and access businesses, Telefonica de Espanacontinues to develop a strategy aimed at defending and renewing the traditionalbusiness, making great efforts to update its product portfolio and launchpromotions, both of which are proving effective in sustaining the traditionalbusiness. Within this field, the following commercial actions have beenundertaken, focused on adapting the service catalogue to the new communicationrequirements of our clients: • Free subscription fee campaign during April, subsequently extended on the on-line channel, signed up for by 99,106 clients to June 30th 2005. • April's launch of the Tarifa Plana Autonomica (Regional Flat Rate), the plant of which amounted to 76,133 by June end. Moreover, it should be noted the positive performance of Mini Rates (Tarifas Mini, with a fixed charge independently of the call's duration) reaching a total of 156,778 plans sold. • Launching of Multimedia Messaging Service for fixed telephone lines by using cordless terminals having such capabilities. Furthermore, in compliance with the 1% price cap (CPI-3%) that should have beenapplied before July 1st 2005, of note is the average reduction of 8.47% on ratesfor international calls implemented on June 30th. From a regulatory standpoint, the CMT recently approved the Telefonica de Espana's application to double the speeds of the current ADSL product offeringfor the second time in less than a year. The doubling process, which is tobenefit more than three million users on the Spanish market, and is possiblethanks to ADSL 2+ technology, has already started last July 26th beingcompletion planned for this October. Hence, the basic option will correspond toa download speed of 1 Mbps and an upload speed of 300 Kbps, maintaining theprice of the previous 512 Kbps option that will cease to exist. The highestspeed option will become 8 Mbps, with the same price conditions as the previous4 Mbps. The corresponding OBA (Oferta de acceso al Bucle de Abonado -SubscriberLoop Access Offer-) modification has set additional price reductions, tothe already implicitly included in the speed upgrade , for the ADSL wholesaleservice GigADSL. The decrease in wholesale prices, which is to be applied asspeed upgrade comes into force, varies from the minimum 5.51% reduction for thebasic speed, to the maximum 13.93% reduction for the 4Mbps speed. Hence, the newGigADSL monthly fees will stand as follows: 21.09 euros for 1Mbps, 38.58 for2Mbps, 64.42 euros for 4Mbps and 74.16 euros for 8Mbps. Additionally, in the month of May came into force the decision made by theFinance Ministry in February to liberalize the prices of Telefonica de Espananarrowband Internet access and the Information Service provided via the 11818number. Revenues at Telefonica de Espana Group amounted to 5,802.9 million euros duringthe first half of the year, with a year-on-year growth of 5.4%. Telefonica deEspana Parent Company recorded a 5.3% growth in revenues during this same periodto reach 5,560.1 million euros. It is worth noting that Internet and BroadbandServices accounted for 3.9 percentage points of this growth. In the quarterlyanalysis of Parent Company revenues, the second quarter of the year recorded a4.3% growth to represent a 2.1 percentage points slow-down in growth in relationto the previous quarter. This difference in growth is due to the disappearanceof the positive effect on the growth in revenues by the rise in fees and thereduction of bonuses associated to the Comprehensive Maintenance Service (SIM)during April 2004. The excellent performance of Telyco during the second quarter of 2005, duringwhich time its sales increased by 40.8%, was associated to the increase ofmobile handsets linked to the new branding campaign of movistar. This salesincrease helped offset the lower growth in revenues by Telefonica de EspanaParent Company to place the growth in revenues of the Telefonica de Espana Groupat 4.9% (second quarter of 2005 compared with the same period of 2004), 1.1percentage points down on that recorded in March 2005. • Revenues for Traditional Access grew by 1.7% over the first six months of the year to reach 1,413,3 million euros. The schedule for the rise of PSTN monthly fee in 2004 and the evolution in the number of lines have led to a 0.5% year-on-year drop in revenues during April-June 2005, reducing accumulated growth to June by 2.4 percentage points compared with that recorded in March 2005. The access market in Spain grew by 1.3% at June end, while the estimated market share for Telefonica de Espana dropped by 0.4 percentage points with regard to that reached in March 2005 to stand at 87.3%. Of note is the positive evolution in the loss of PSTN and basic ISDN access lines over the quarter to stand at 29,931 lines lost, a clear improvement on the 85,133 lines lost during the first quarter of the year. This progress has allowed for the rhythm of market share losses to be reduced in comparison with the 0.5 percentage points lost during the first quarter of 2005, as a result of the free subscription fee campaign launched in April and other initiatives established by the company. • Revenues from Traditional Voice Services amounted to 2,583.0 million euros during the first six months of the year with a slight year-on-year reduction of 0.1%. Over the second quarter, this year-on-year reduction amounted to 1.8%, 3.6 percentage points less than in the first three months of the year, due to the disappearance of impact from the decrease in Comprehensive Maintenance Service bonuses The year-on-year drop of 6.2% in the volume of outgoing voice traffic during the second quarter was partially offset by the evolution of the mix of minutes towards traffic with a higher price per minute. Hence, revenues from outgoing voice traffic (national, international, fixed-to-mobile, intelligent network and other usages) minimized their fall over the quarter to 1.8%. Within this same sector, interconnection revenues grew by 8.2% over the six months to total 453.9 million euros, driven by the transit traffic carried to mobile networks that more than offset the reduction on fixed-to-fixed interconnection traffic. As regards voice traffic, the estimated total volume of the market in Spain, expressed in minutes, was down 3.2% in the first six months of the year in comparison with the same period of the previous year, representing a significant slowing of the rate of decline recorded during the first quarter. Telefonica de Espana's estimated share of the voice market stood at 66.6% in June, 0.4 percentage points down over the quarter and 3.9 percentage points lower over the past twelve months, improving on the 2004 trend when 4.4 percentage points of market share were lost. The estimated total volume of minutes processed by Telefonica de Espana during the first half of 2005 amounted to 57,504 million, presenting a 10.8% year-on-year drop. Total outgoing traffic (including internet), which accounted for 54.7% of total traffic, amounted to 31,442 million minutes and fell by 13.4% with regard to the same period of the previous year. Traditional outgoing traffic totaled 22,765 million minutes at June end, down by 8.0% year on year and slowing down the decline in comparison with the first quarter as a result of the less significant drop in the market. The negative trend in all areas of traffic slowed down over the quarter: in the January-June period local traffic fell by 11.9%, provincial by 11.2% and DLD by 7.9%, all lower than those recorded during the first quarter. Fixed-to-mobile traffic increased slightly over the period (+0.1%) having recorded a 1.2% growth in the second quarter, and international traffic maintained its positive trend with a year-on-year growth of 15.2%, accelerating greatly compared with the 11.6% of the previous quarter and the whole of the past year as a result of the successful capture of traffic by the immigrant population to their countries of origin. The number of outgoing minutes to the Internet amounted to 8,676 million to June and continued to show a negative year-on-year variation during the quarter of 24.9%, mainly as a result of switched internet traffic cannibalization by broadband ADSL services. Finally, incoming traffic amounted to 26,063 million minutes, a 7.5% drop compared with the same period of the previous year. The change in pre-selection tendencies is worth noting, given that the total number of pre-selected lines dropped over the second quarter by 44,443 to stand at 2,358,939 at the end of the second quarter of 2005, 20,518 less than at 2004 December end. • Internet and broadband services contributed mostly towards the growth in Telefonica de Espana revenues to total an aggregate 903.4 million euros by June 2005, a 29.5% increase year on year. Broadband revenues amounted to 795.8 million euros, representing more than 88% of this sector. This was a 47.3% growth compared with the previous year. Revenues from retail broadband services continued to grow at a strong rate, totaling 603.8 million euros over the six months, a 42.9% increase. According to our estimates, the broadband market in Spain has exceeded the 4 million line mark, an increase of 375,784 connections over the second quarter of the year and 37,7% up on the previous year. 2,974,771 of these connections, 71.3%, are Telefonica de Espana ADSL (retail + wholesale), a net gain of 201,964 connections during the period April-June 2005. Telefonica de Espana retail lines amounted to 2,005,009, a net gain of 204,544 lines over the quarter. Telefonica Group's estimated broadband market share stood at 54.1%, 0.1 percentage points down on the end of the last quarter to reflect virtual stabilizing following the losses recorded over the past two quarters and shows the competitiveness of Telefonica's retail broadband offer in relation to the aggressiveness of the competition. The net gain of 200,947 connections during the second quarter, an estimated net gain of 53.5% over the period, has led to Telefonica Group maintaining its market share. Unbundled loops continued to progress on the Spanish Market to total 296,962 in June 2005, 7.1% of total broadband lines. Of these, 176,503 - 59.4% - are shared loops, the modality to record the greatest growth rate. The net gain of unbundled loops amounted to 103,553 over the second quarter, 34% up on that recorded in the first quarter. Obviously, the growth in the total number of unbundled loops is having a negative affect on Telefonica's wholesale ADSL service, recording the plant of operators outside Telefonica Group a minimum growth rate over the quarter to total an estimated 0.3% share of the quarterly net gain of broadband connections. Telefonica de Espana's ADSL value-added services (VAS) remained a distinguishing factor with regard to the retail offer of the competition. 60.6% of our clients have subscribed to at least one VAS; the number of services sold now amounts to over 1.86 million. ADSL Solutions is noteworthy among the services sold, a total of 282,189 solutions being operational by the end of June 2005 to give a 43.1% increase in relation to March this year. The net gain of the Imagenio service amounted to 37,857 clients during the second quarter, enabling the plant to increase by over two times at June end to total 57,490 clients. • Data Services revenues grew by 5.5% to total 515.1 million euros over theRelated Shares:
TDE.L