Telefonica's Net Profit up 25.4%, to 1,835 Million Euros in 1H05

29 July 2005

Telefonica Now Has a Customer Base of over 145 Million, and Has Seen Solid Growth in Customer Acquisitions in All of the Group's Business Lines

-- Revenue growth in the first half of this year (+20%) far outperforms any comparable company in the sector, with the speed of y-o-y growth clearly increasing compared to the first quarter (+16.7%).

-- Once again Group profitability continued to rise, with Operating income before depreciation and amortisation (OIBDA) up by 15.3%, and Operating Income (OI) by 21.4%.

-- The diversification that being an integrated company brings to the Telefonica Group, gives it greater stability of growth in key business indicators in every division.

-- Telefonica Moviles was the main contributor to revenue growth (+40.2%), while the fixed operators, Telefonica de Espana and Telefonica Latinoamerica, were the main contributors to profitability with a 46.2% and 32.9% Operating Income growth respectively vs 1H04.

-- Cash-flow generation (OIBDA-CapEx) hit 4,631.7 million euros up 5.5% on 1H04, underpinned by the performance of Telefonica Latinoamerica Group (+10.1%) and Telefonica de Espana Group (+7.6%).

-- The number of Telefonica Group ADSL household access subscribers in Spain, Latin America and the Czech Republic, reached 4 million in the first six months of this year, vs. 2.6 million in the first half of last year.

-- Telefonica's CapEx in 1H05 rose 47.6% in year-over-year terms, to 1,989.7 million euros.

The Telefonica Group's results for the first six months of the fiscal year 2005 are characterized by growth acceleration in both Group revenues (+20.0%) and Group's customer base, strongly above sector's peers. The growth in revenues came along with a positive improvement in the Company's profitability, with an increase in the Operating Income before D&A (OIBDA) and in the Operating Income (OI) of 15.3% and 21.4% respectively, which allowed the Company to post a 25.4% growth in net income. Additionaly we should highlight that 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.

The solid performance of every business lines has resulted in a 5.5% growth in the Operating free cash flow (OIBDA-CapEx) versus June of 2004, which in absolute terms amounted to 4,631.7 million euros. By business lines, the Company registered a solid growth in the fixed line business (Telefonica Latinoamerica Group +10.1% and Telefonica de Espana Group +7.6%).

The results of the Telefonica Group are also strengthened by its diversification as an integrated operator, providing a stable floor for double digit growth rates of the key parameters of business lines. Hence, the cellular business is the main contributor to the revenue growth (+40.2% year-on-year), while fixed operators contribute mainly to profitability, with a 46.2% and 32.9% growth in the Operating Income for the Telefonica de Espana Group and the Telefonica Latinoamerica Group, respectively, compared to the first half of 2004. Thus, the need to finance the increase in cellular clients at a key moment of expansion and with their obvious impact on margins is more than offset by the solid results from the fixed telephony divisions of the Group, a clear reference in the sector in terms of revenues, profitability and cash flow generation.

Customer base: 145 million accesses

The strong commercial activity for loyalty and customer acquisition were reflected in the 39.9% growth in total accesses (fixed telephony accesses, data and Internet access, Pay TV and cellular accesses) compared with June 2004, reaching 145.3 million. This number of total accesses includes the accesses from the recently acquired operator Cesky Telecom (8.7 million).

The strong activity registered in all the markets where Telefonica Moviles has operations, following the April market launch of the movistar brand in 13 countries, along with the strong activity for the quarter, enabled Telefonica Moviles to report net adds of 5.4(1) million for the quarter vs. more than 3 million in January-March of 2005, amounting the managed customer base to 86.5 million. Of the total customer base, 63.7 million corresponded to the Latin American operators, 19.4 million to Telefonica Moviles Espana and more than 3.4 million to Medi Telecom. In the other hand, cellular accesses at Cesky Telecom rose 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 Czech Republic up to 4.0 million at June 30, 2005 (+57.6%). Telefonica Group retail ADSL accesses in Spain rose to 2.3 million (+41.8% vs. June 2004), representing an estimated market share of 54.1% of the total broadband market. In Latin America, retail ADSL accesses stood at 1.7 million and grew by 70.9% over the same period last year, highlighting Telesp, with almost one million ADSL access lines (exceeded during July).

Revenues and expenses

As a result, revenues for the first half of the year amounted to 17,359.7 million euros, 20.0% higher than revenues as of June 2004, accelerating the year-on-year growth during the second quarter of the year (+23.1% in April-June 2005 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 the Telefonica Latinoamerica Group (+20.6% in April-June 2005 vs. +4.5% in the first quarter 2005). For the cumulative six months, all business lines recorded solid results, with the cellular business standing out due to the incorporation of the BellSouth assets.

The cellular business continues to be the main contributor to the revenue growth during the first six months of 2005, with total revenues of 7,759.8 million euros, up 40.2% year-on-year (service revenues: +39.1%; revenues from handset sales: +47.3%). 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 coming from Internet Services and Broadband. During the first half of 2005, revenues at Telefonica Latinoamerica rose to 3,692.1 million euros, representing a solid year-on-year growth of 12.5%, showing a clear acceleration vs. March (+3.4%). This change was due to an improvement of the operators results in the second quarter of the year, mainly Telesp (+7.3% in local currency, vs. +3.2% in January-March of 2005).

Revenues coming from Spain represented 55.4% of consolidated revenues as of June, 2005, experimenting a 6.8 percentage points decrease in its contribution over the same period in 2004. In turn, the contribution from Latin America increased to 40.6% (33.0% a year ago) due to the acquisition of the BellSouth Latin 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, 5.0 percentage points higher than in March, due to the acceleration in the commercial efforts for capturing customers. The cellular business was the main contributor, that also includes the launch of the movistar brand in 13 countries in April. The higher commercial expenses and the incorporation of BellSouth's Latin American assets, mainly explained by the 36.3% growth in the Telefonica Group's external services year-on-year.

The 30.2% increase in supplies over January-June 2004 was mainly due to the change in the consolidation perimeter and to the higher commercial activity in the cellular business, as well as, to a lesser extent, to purchases 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 2004 due to the increase in the average Group workforce (+19.0%, to 180,260 employees), due to the incorporation of the BellSouth employees and to the increase in the Atento Group workforce. Excluding the Atento Group's employees, the workforce level would have increased by 7.3%. Regarding the 2003-2007 Redundancy Program of the Telefonica de Espana Group, a provision of 531.2 million euros was accounted for 1,750 employees who joined this program in 2005. In this sense, it should be noted that a portion of this provision has already been recorded during the first quarter of the fiscal year (121.3 million euros).

At the end of the first half, the Telefonica Group reported a gain on sale of fixed assets for 164.3 million euros, of which 120.6 million euros were materialised during the first quarter and corresponded, among other things, to the capital gains generated by the sale of, Radio Continental, Radio Estereo (both from the ATCO Group), Infonet and the sale of real estate. During the period April-June 2005, the Company recorded an income of 43.7 million euros related among others, to the sale of 1.2% of the TPI share capital.

OIBDA and OIBDA margin

As a consequence of the evolution of revenues and expenses described above, the consolidated OIBDA for the first six months of 2005 amounted 6,621.4 million euros, up 15.3% year-on-year. In terms of profitability, the OIBDA margin stood at 38.1%.

The cellular business, the main contributor to the Group's growth, reported an OIBDA of 2,578.8 million euros for the first half of the year (38.9% of total consolidated OIBDA), which represented a 13.3% increase over January-June of 2004. At the end of the first half, the Telefonica de Espana Group reported a total of 2,141.5 million euros (32.3% of total OIBDA), up 10.3% year-on-year. 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 of 18.3% in current euros.

Following the trend in the previous quarter, Spain's contribution to consolidated OIBDA dropped significantly from that of the prior year (61.8% in June of 2005, 6.1 percentage points lower than a year ago), while the contribution of Latin America increased by 5.4 percent, to 35.7%, following the acquisition of Bell South's Latin American operators.

Consolidated Operating Income (OI) for the period January-June of 2005 reached 3,528.4 million euros, representing a 21.4% increase over the first six months of 2004, down 4.1 percentage points from the first quarter. The higher level of depreciation was attributable to changes in the consolidation perimeter in the cellular business.

Results of associated companies began reporting positive figure during the first half of the year (+5.2 million euros), versus negative results of 42.3 million euros during the same period last year. This change was due primarily to the higher contribution of Portugal Telecom, the positive contribution from Medi Telecom and lower losses at Sogecable, Lycos Europe, and IPSE 2000. In the second quarter of 2005, the Company reported a positive result of 14.4 million euros, related to the higher contribution of Portugal Telecom, the positive contribution 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 the increase in the Latam debt (higher after the acquisition of the Bell South assets and the increase in the interest rates in Brazil) with a saving of 33 million euros as a consequence of better interest rates in the Group.

The Telefonica Group's net financial debt at the end of June 2005 stood at 27,990.4 million euros. 57% of the increase in debt was due to the financial investments of the period, 24% due to appreciation of the dollar and the Latin American 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 remaining 19% corresponds to the changes in the consolidation perimeter after the acquisition of Bell South subsidiaries in Argentina and Chile and Cesky Telecom.

Results attributed to minority interest, increased by 32.1% year-on-year, reducing the Telefonica Group's net income by 158.1 million euros. This change was mainly due to minority shareholders' participation in the net income of Terra Networks Group vs. the net losses of the last year and to the higher net income achieved by Telesp.

Consolidated net income rose to 1,835.1 million euros as of June 2005, versus 1,464.0 million euros in the period January-June of 2004, representing an increase of 25.4%.

The Telefonica Group's CapEx for the first six months amounted to 1,989.7 million euros, 47.6% higher than in the previous year (organic change:(2) +29.0%), at 1,989.7 million euros. The Telefonica Latinoamerica Group and the Telefonica de Espana Group increased by 60.8% and 17.7%, respectively, year-on-year, due to higher investments in broadband. Investment in the cellular business in Mexico, Colombia, Argentina, Chile and Peru increased by 64.4% year-on-year.

(1)Excludes the adjustment of 300,000 inactive lines in Mexico, not longer considered in the reported customer base.

(2)Assuming constant exchange rates and including the consolidation of the Latin American assets acquired to Bell South in Argentina, Colombia, Chile, Ecuador, Guatemala, Nicaragua, Panama, Peru, Uruguay and Venezuela in the cellular business and Atrium in the Telefonica Latinoamerica Group from 1 January 2004.

Source: BusinessWire

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Telefonica's Net Profit up 25.4%, to 1,835 Million Euros in 1H05

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