1st Quarter Results

Telefonica SA 15 May 2006 Part 1 Quarterly results January-March 2006 TABLE OF CONTENTS TELEFONICA GROUP Market Size Financial Highlights Consolidated Results Financial Data RESULTS BY BUSINESS LINES Fixed Line Business â€¢ Telefonica de Espana Group â€¢ Telefonica Latinoamerica Group Telefonica Moviles Group Telefonica O2 Europe â€¢ O2 Group â€¢ Cesky Telecom â€¢ Telefonica Deutschland Other Business â€¢ Directories Business â€¢ Atento Group â€¢ Content and Media Business ANEXOS Companies included in each Financial Statement Key Holdings of the Telefonica Group and its Subsidiaries Significant Events 63 Changes to the Perimeter and Accounting Criteria of Consolidation The financial information contained in this document has been prepared under International Financial Reporting Standards (IFRS). This financial information is unaudited and, therefore, is subject to potential future modifications. The English language translation of the consolidated financial statements originally issued in Spanish has been prepared solely for the convenience of English speaking readers. Despite all the efforts devoted to this translation, certain omissions or approximations may subsist. Telefonica, its representatives and employees decline all responsibility in this regard. In the event of a discrepancy, the Spanish-language version prevails. These consolidated financial statements are presented on the basis of accounting principles generally accepted in International Financial Reporting Standards (IFRS). Certain accounting practices applied by the Group that conform with generally accepted accounting principles in IFRS may not conform with generally accepted accounting principles in other countries. TELEFONICA GROUP TELEFONICA GROUP ACCESSES Unaudited figures (thousands) January - March 2006 2005 % Chg Final Clients Accesses 184,161.0 129,312.3 42.4 Fixed telephony accesses (1) 40,914.4 37,712.7 8.5 Internet and data accesses 11,198.5 9,719.9 15.2 Narrowband 4,760.3 5,504.4 (13.5) Broadband (2) 6,262.9 4,029.7 55.4 Other (3) 175.2 185.7 (5.7) Cellular accesses 131,308.5 81,438.3 61.2 Pay TV 739.6 441.4 67.6 Wholesale Accesses 1,897.9 1,501.9 26.4 Unbundled loops 556.1 193.4 187.5 Shared UL 320.3 93.2 243.8 Full UL 235.8 100.2 135.2 Wholesale ADSL (4) 1,286.0 1,258.8 2.2 Other (5) 55.9 49.7 12.4 Total Accesses 186,058.9 130,814.2 42.2 (1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access; 2/6 Access x30. Company's accesses for internal use included. (2) ADSL, satelite, optical fibre, cable modem and broadband circuits. (3) Remaining non-broadband final client circuits. (4) Includes T. Deutschland connections resold on a retail basis. (5) Circuits for other operators. Note: Cellular accesses, Fixed telephony accesses and Broadband accesses include MANX customers. TELEFONICA GROUP Financial Highlights The most relevant factors of Telefonica Group results for the January-March 2006 period are the following: â€¢ Strong growth in net income and basic earnings per share: â€¢ Basic earnings per share amounted to 0.268 euros/share and recorded a 43.8% year-on-year increase since 0.186 euros/share. â€¢ Total net income stood at 1,273.5 million euros, 39.6% up on that of March 2005. â€¢ Solid increase in revenues +45.4%, Operating Income before Depreciation and Amortisation (OIBDA +37.3%) and Operating Income (OI +34.2%) in comparison with March 2005: â€¢ All lines of business recorded higher revenues, OIBDA and OI than those of the first quarter of the previous year. â€¢ Significant contribution of changes in the consolidation perimeter: 02 in February 2006 and Cesky Telecom in July 2005. â€¢ Positive contribution of exchange rates, adding 9.0 percentage points to the growth of revenues, 8.1 percentage points to OIBDA and 6.2 percentage points to OI. â€¢ Significant organic growth1 in operations due to the solid progress of business: revenues +8.9%, OIBDA +6.2% and OI +13.8%. â€¢ Continued progress in the Group's efficiency, reflected by the operating margins and the increased operating free cash flow: â€¢ 26.4% increase in the operating free cash flow (OIBDA-CapEx), amounting to 3,379.5 million euros. â€¢ OIBDA margin stood at 38.9%. â€¢ The fast integration of purchased assets began to deliver tangible scale benefits. â€¢ Greater balance in exposure by regions and businesses following the acquisitions made. â€¢ Total accesses reached 186.1 million and increased 42.2% in relation to January-March 2005 thanks to the growth in cellular accesses (131.3 million, +61.2%) and retail Internet broadband connections (6.3 million, +55.4%) due to the bet for growth through the higher commercial activity delivered: â€¢ O2 Group and Cesky Telecom contributed with 36.4 million accesses. ------------------------ 1Assuming constant exchange rates and including the consolidation of Cesky Telecom in January-March 2005 and the O2 Group in February and March 2005. TELEFONICA GROUP Consolidated Results The results obtained by Telefonica Group and the management report included in this report are based on the actions carried out by the various business units in the Group and which constitute the units over which management of these businesses is conducted. This implies a presentation of results based on the actual management of the various businesses in which Telefonica Group is present, instead of adhering to the legal structure observed by the participating companies. In this sense, income statements are presented by businesses, which basically implies that each business line participate in the companies that the Group holds in the corresponding business, independently of the legal structure. It should be emphasized that this presentation by businesses in no case alters the total results obtained by Telefonica Group. These results are incorporated from the date of effective acquisition of the holding. The results of the Telefonica de Espana Group and the Telefonica Latinoamerica Group include the results from Terra Networks operations as of 1st January 2005. Hence, Terra Espana, Azeler and Maptel results are included in the Telefonica de Espana Group, whereas the Terra results in Latin America are included in the Telefonica Latinoamerica Group. As of 1st February 2006, the results of the O2 Group are consolidated into Telefonica O2 Europe business line. This business line is integrated by the assets of O2 Group, Cesky Telecom (during the July-December 2005 period it was an independent business line) and Telefonica Deutschland (in 2005 it was included in Other companies of the Telefonica Group). The results of Telefonica Group corresponding to the first quarter of 2006 recorded a solid growth in all business lines (revenues up 45.4% year-on-year), mainly supported by the expansion of the client base achieved thanks to the strong commercial activity delivered. The Company's profitability reached an outstanding level, OIBDA increasing by 37.3% in comparison with March 2005 and OI by 34.2%, whereas the effective management of operations led to a 26.4% growth in the operating free cash flow (OIBDA-CapEx). As a result of all this, the net income exceeded 1,270 million euros, 39,6% higher than that obtained in the first three months of 2005, and the basic earnings per share amounted 0.268 euros versus the 0.186 euros earnings per share achieved during the first quarter of 2005 (+43.8%). As of the end of March, Telefonica Group's total number of accesses reached 186.1 million, a year-on-year increase of 42.2%, with cellular and retail Internet broadband accesses being the main contributors to this performance. Of the total number of accesses, 184.2 million correspond to final client accesses and 1.9 million to wholesale accesses. Telefonica Group's cellular accesses totalled 131.3 million at 31st March 2006, equivalent to a 61.2% year-on-year increase. The strong commercial activity in the Telefonica Moviles Group's operating markets, with a net gain over the quarter of 4.1 million clients allowed to manage a 98.5 million client base, equivalent to a 21.0% year-on-year growth. In Telefonica O2 Europe, cellular accesses amounted to 32.8 million, of which 4.7 million belong to Cesky Telecom and 28.1 million to O2 Group. The number of retail Internet broadband accesses stood at 6.3 million (4.0 million at 31st March 2005), constituting one of the main driving forces of the growth of the fixed operators. The figure has exceeded the 3 million mark in Spain, up 46.8% up over the first quarter of 2005, and in Latin America it has reached 2.9 million (+50.2% year-on-year). Revenues of Telefonica Group over the first three months of the year amounted 12,036.4 million euros and recorded a year-on-year growth of 45.4%, supported by the general growth in every business lines. This increase it is also affected by the first consolidation of O2 Group as of February 2006 and Cesky Telecom as of July 2005 as well as the appreciation of the Latin American currencies in relation to the euro. Therefore, the organic growth1 of revenues stands at 8.9%. ------------------------ 1Assuming constant exchange rates and including the consolidation of Cesky Telecom in January-March 2005 and the O2 Group in February and March 2005. The main contributor to Telefonica Group's revenues continued to be Telefonica Moviles Group, which ended the quarter with a growth in revenues of 17.7% versus March 2005 reaching 4,327.3 million euros, due to the increase in the total number of clients and traffic. By country, the evolution of revenues from Venezuela (+58.9% in local currency), Spain (+4.4%), Argentina (+38.0% in local currency) and Chile (+17.3% in local currency) must be highlighted. Telefonica Latinoamerica Group's revenues in the January-March 2006 period reached 2,318.1 million euros, a 30.6% year-on-year increase impacted very positively by the exchange rate effect, which contributed with 24.5 percentage points to revenue growth. In constant euros, the year-on-year variation reached 6.1%. Telesp is the operator that contributed the most to revenue growth with a 7.1% increase in local currency thanks to the good performance of the traditional business and the Internet business (narrowband + broadband). Telefonica de Espana Group's revenues totalled 2,944.3 million euros, up 3.3% versus those obtained in the first three months of 2005 pushed by Broadband revenues (+35.0%) that more than offset the fall in revenues from traditional voice services (-2.6%) and traditional access (-1.7%). Telefonica O2 Europe, constituted by the O2 Group from February to March 2006, Cesky Telecom and Telefonica Deutschland from January to March 2006 contributed with 2,409.2 million euros of revenues. Among the companies, it should be enhanced the service revenue growth of O2 UK during the first three months of 2006 (+17% year-on-year in local currency), O2 Germany (+13% year-on-year) and the moderate growth of Cesky Telecom (+0.5% in local currency). Following the acquisitions made by the Telefonica Group during 2005, consolidated revenues reflected a greater geographic diversification, decreasing revenues from Spain to 40.7% (56.6% one year ago) as of March 31th 2006 and those from Latin America to 36.6% (39.6% twelve months ago) due to the greater weight of Europe, excluding Spain (21.8% compared with 2.9% at March 2005). The UK accounted for 9.5% of total revenues, Germany for 5.1% and the Czech Republic 4.2%. Brazil remained almost stable in terms of its contribution (-0.5 percentage points to 16.1%) to consolidated revenues. Operating expenses accumulated over the quarter increased by 50.3% versus March 2005 reaching 7,505.7 million euros. This increase was affected by the positive impact of exchange rates, the inclusion of assets from the 02 Group and Cesky Telecom and the continued commercial efforts made to attract greater growth in cellular telephony and broadband and to lead innovation in products and services. The performance of the main expense concepts was as follows: â€¢ Supplies expenses (3,512.6 million euros) increased by 66.1% versus the first quarter of 2005 (57.2% in constant euros), basically as a consequence of the changes in the accounting consolidation perimeter, the Telefonica Latinoamerica Group (higher interconnection costs, particularly in Brazil) and the Telefonica Moviles Group (more handsets purchases and higher commercial activity). â€¢ Personnel expenses for the first three months of the year (1,679.8 million euros) increased by 29.4% (+22.6% assuming constant exchange rates), basically as a consequence of the average workforce increase (+24.0% reaching 219,357 employees) due to the O2 and Cesky acquisition and the increase of Atento Group's number of employees (excluding Atento Telefonica' s workforce increases 21.9% to 122,884 employees). During the first quarter of 2006, 286 employees joined the Telefonica de Espana 2003-2007 Redundancy Plan and 25 employees joined the Terra Espana Redundancy Plan, reaching the provision 94.9 million euros. â€¢ External services expenses (2,096.5 million euros) increased by 47.6% in comparison with March 2005 (36.9% excluding the exchange rate effect), basically due to greater commercial expenses in Telefonica Moviles and to the changes in the consolidation perimeter, particularly that of the O2 Group. On the other hand, at the end of the quarter, Telefonica Group accounted for a gain for the sale of fixed assets of 151.6 million euros (120.6 million euros in January-March 2005), mainly corresponding to the sale of shares in Sogecable following the take-over bid presented by Prisa Group. The described development of revenues and expenses during the first quarter of the year placed operating income before depreciation and amortisation (OIBDA) at 4,686.7 million euros, 37.3% up on the same period of the previous year, although organic growth2 stood at 6.2%. The OIBDA margin of the Telefonica Group amounted to 38.9% at March end, 2.3 percentage points down on the same period last year. ------------------------ 2Assuming constant exchange rates and including the consolidation of Cesky Telecom in January-March 2005 and the O2 Group in February and March 2005. By business lines, the Telefonica Moviles Group had an absolute OIBDA of 1,471.9 million euros (+11.7% year on year) in the first three months of the year, representing 31.4% of the total OIBDA (38.6% at March 2005). The OIBDA margin stood at 34.0%, 1.8 percentage points down on January-March 2005 due to the heavy influence by the commercial activity in very competitive environments. The Telefonica Latinoamerica Group's OIBDA (21.2% of consolidated OIBDA vs. 25.2% at March 2005) amounted 994.2 million euros, 15.5% up from that obtained in the first three months of 2005. In constant euros, the OIBDA increased by 3.9%, eliminating the capital gains accounted from the sale of Infonet during the first quarter of the previous year. The OIBDA margin, excluding the result from the disposal of assets during both periods, reached 43.0% versus the 44.0% of the previous year. Telefonica de Espana Group, with a contribution to consolidated OIBDA that fell to 26.9% from the 35.1% of the previous year, obtained an OIBDA of 1,262.6 million euros during the first three months of 2006. This was a 5.3% increase versus March 2005 thanks to the cost containment (operating expenses -0.4%) and to efficiency. The OIBDA margin stood at 42.9%, 0.8 percentage points higher than that of March 2005. Excluding the Redundancy Plan provisions in both periods, the margin in relation to revenues would have dropped by 0.2 percentage points to 46.1% as of the end of the first quarter of 2006. Telefonica O2 Europe (constituted by the O2 Group in February and March 2006, Cesky Telecom and Telefonica Deutschland in January-March 2006) reaches an OIBDA of 756.0 million euros. Following the same path of revenues Telefonica Group's OIBDA reflected the greater diversification of the Telefonica Group into geographic areas by increasing its Europe contribution. By the end of the quarter, the contribution of Spain fell 15.9 percentage points to 47.1% whereas that of Europe (excluding Spain) represents 16.9% (2.8% twelve months ago). UK contributed with 6.5% of the consolidated OIBDA in the first quarter, the Czech Republic 5.4% and Germany 2.9%. Thanks to the contribution of the Latin American BellSouth operators acquired in 2004 and 2005, Latin America maintains its contribution in 33.5%. The contribution of Brazil fell by 1.0 percentage point reaching 16.7% of total OIBDA in March 2006. Depreciation and amortization grew 41.0% year-on-year to total 2,152.7 million euros during the first quarter of the year. This increase is basically due to the first consolidation of the O2 Group and Cesky Telecom, the latter contributing with 38.4 million euros associated to the amortisation of the allocated assets in the acquisition process and the increased amortisation in the Telefonica Latinoamerica Group (+23.1%) and the Telefonica Moviles Group (+16.8%), both positively impacted by the exchange rate effect. At organic level3, there was a 1.8% drop due primarily to the decreased amortisation of Telefonica de Espana Group (-13.9%). The consolidated operating income (OI) over the first three months of the year amounted to 2,534.1 million euros, up 34.2% on that obtained in the same period of 2005. The organic growth3 declines to 13.8%, which was higher than the growth in OIBDA (+6.2%). The accumulated result of associated companies reached 21.8 million euros as of the end of March 2006, compared with the 9.1 million euros loss in January-March 2005. Most notable in this year-on-year sign change is the greater contribution of Portugal Telecom. To a lesser extent, the reduction in losses attributable to IPSE-2000 and the positive contribution of the Medi Telecom consortium in comparison with the negative contribution of the first quarter of the previous year must be noted. Net financial expenses amounted 523.7 million euros in the first quarter 2006, 64.8% year-on-year increase (206.0 million euros) compared with the comparable figure of 2005 (317.7 million euros). The interest rates expenses grew by 220.4 million euros due to the 67.8% growth in the average net debt versus 2005. The net free cash flow after CapEx generated by the Telefonica Group in the first quarter 2006 amounted 1,814.1 million euros, of which 1,126.3 million euros were dedicated to the buyout out treasury stock in Telefonica, S.A. and 211.1 million euros to the cancellation of commitments, mainly headcount reduction program. Since the financial investments in the period (net of the sale of real state and the O2 cash in the moment of the acquisition) totalled 22,855.7 million euros, mainly because of the O2 take over (purchases of O2 shares in the stock market began in 2005), the net financial debt has been increased by 22,379.0 million euros. ------------------------ 3Assuming constant exchange rates and including the consolidation of Cesky Telecom in January-March 2005 and the O2 Group in February and March 2005. Telefonica Group's net financial debt at the end of March 2006 stood at 53,509.9 million euros. Along with the aforementioned effect (increase of 22,379.0 million euros), another two effects have to be added: i) increase of 1,590.4 million euros due to the changes in the perimeter of consolidation and others effects over the financial statements, mainly the incorporation of O2 gross debt and ii) reduction of 526.6 million euros as a consequence of the effects of the exchange rates on net financial debt not denominated in euros. This results in an increase of the net financial debt of 23,442.9 million euros versus the 2005 net financial debt figure (30,067.0 million euros). The taxable rate accrued during the first quarter of the year stood at 33% due to an increase in the tax provision to 666.2 million euros, although the cash outflow for the Telefonica Group will be further reduced as negative tax bases are compensated for. The results attributed to minority interests provided a negative 92.4 million euro provision toward the net profit of the Telefonica Group for the January-March 2006 period, with a 33.0% year-on-year increase that can basically be explained by the stake of minority interests in the net income of Cesky Telecom, given that it was not included in the accounting consolidation perimeter during the first quarter of 2005. As a result of the entries explained, the consolidated net income of the Telefonica Group for the first three months of the year totalled 1,273.5 million euros, a year-on-year growth of 39.6% (912.2 million euros). Finally, Telefonica Group's CapEx for the first quarter of 2006 amounted 1,307.2 million euros and recorded a strong year-on-year growth (+76.4%) as a result of greater investments in broadband in the fixed telephony business in both Spain and South America and the first consolidation of the O2 Group and Cesky Telecom. The organic growth4 would stand at 2.1%. However, it should be noted that there is a strong cyclical component of the investments, so that this performance cannot be extrapolated to the full year. ------------------------ 4Assuming constant exchange rates and including the consolidation of Cesky Telecom in January-March 2005 and the O2 Group in February and March 2005. TELEFONICA GROUP Financial Data TELEFONICA GROUP SELECTED FINANCIAL DATA Unaudited figures (Euros in millions) January - March 2006 2005 % Chg Revenues 12,036.4 8,278.8 45.4 Operating income before D&A (OIBDA) 4,686.7 3,414.7 37.3 Operating income (OI) 2,534.1 1,888.3 34.2 Income before taxes 2,032.1 1,561.4 30.1 Net income 1,273.5 912.2 39.6 Basic earnings per share 0.268 0.186 43.8 Weighted average number of ordinary shares outstanding during the period (millions) 4,754.9 4,896.3 (2.9) Note: For the basic earnings per share calculation purposes, the weighted average number of ordinary shares outstanding during the period have been obtained applying IFRS rule 33 'Earnings per share'. Thereby, there are not taking into account as outstanding shares the weighted average number of shares held as treasury stock during the period nor the shares assigned to the stock options plans for employees. Furthermore, in line with IFRS rule 33, the weighted average number of shares outstanding during every period, has been adjusted for these operations that had implied a difference in the number of outstanding shares, without a variation associated in the equity, as if those have taken place at the beginning of the first period presented. It consists on the distribution of the paid-in capital reserve by means of delivery of shares in the proportion of 1 share to every 25 shares, approved by the AGM as of May 31, 2005. TELEFONICA GROUP RESULTS BY COMPANIES Unaudited figures (Euros in millions) REVENUES OIBDA OPERATING INCOME January - March January - March January - March 2006 2005 % Chg 2006 2005 % Chg 2006 2005 % Chg Telefonica de Espana Group (1) 2,944.3 2,850.2 3.3 1,262.6 1,199.0 5.3 772.4 629.6 22.7 Telefonica Latinoamerica Group (1) 2,318.1 1,775.1 30.6 994.2 860.5 15.5 494.4 454.5 8.8 Telefonica Moviles Group 4,327.3 3,675.9 17.7 1,471.9 1,317.9 11.7 855.6 790.3 8.3 Telefonica O2 Europe (2) 2,409.2 - N.C. 756.0 - N.C. 228.9 - N.C. Atento Group 255.5 178.7 43.0 34.5 22.6 53.1 27.4 15.5 76.1 Content & Media Business 349.0 266.5 30.9 166.7 45.4 N.S. 159.8 38.1 N.S. Directories Business 123.2 96.2 28.0 29.5 23.9 23.3 22.6 18.1 24.8 Other companies (3) 168.0 187.3 (10.3) (33.5) (50.4) (33.4) (44.2) (78.5) (43.7) Eliminations (858.0) (751.1) 14.2 4.8 (4.2) c.s. 17.2 20.7 (17.0) Total Group 12,036.4 8,278.8 45.4 4,686.7 3,414.7 37.3 2,534.1 1,888.3 34.2 (1) Telefonica de Espana Group and Telefonica Latinoamerica Group results consolidates the results from Terra Networks operations from 1 January 2005. (2) Telefonica O2 Europe includes O2 Group (February and March), Cesky Telecom y T. Deutschland. (3) 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 - March 2006 2005 % Chg Telefonica de Espana Group (1) 314.6 250.8 25.5 Telefonica Latinoamerica Group (1) 173.9 127.3 36.5 Telefonica Moviles Group 293.2 309.8 (5.4) Telefonica O2 Europe (2) 405.6 - N.C. Atento Group 3.8 4.4 (14.7) Content & Media Business 21.4 8.8 142.5 Directories Business 2.6 2.6 2.0 Other companies & Eliminations 92.2 37.4 146.5 Total Group 1,307.2 741.1 76.4 Note: Group CapEx in 2006 at cumulative average exchange rate. For comparative purposes, 2005 Capex has been recalculated at the cumulative average exchange rate for the corresponding period. (1) Telefonica de Espana Group and Telefonica Latinoamerica Group results consolidates the results from Terra Networks operations from 1 January 2005. (2) Telefonica O2 Europe includes O2 Group (February and March), Cesky Telecom y T. Deutschland. TELEFONICA GROUP CONSOLIDATED INCOME STATEMENT Unaudited figures (Euros in millions) January - March 2006 2005 % Chg Revenues 12,036.4 8,278.8 45.4 Internal expenditure capitalized in fixed assets (1) 145.8 87.4 66.7 Operating expenses (7,505.7) (4,993.6) 50.3 Supplies (3,512.6) (2,114.5) 66.1 Personnel expenses (1,679.8) (1,298.1) 29.4 Subcontracts (2,096.5) (1,420.4) 47.6 Taxes (216.7) (160.5) 35.0 Other net operating income (expense) (136.1) (74.7) 82.1 Gain (loss) on sale of fixed assets 151.6 120.6 25.7 Impairment of goodwill and other assets (5.3) (3.8) 36.7 Operating income before D&A (OIBDA) 4,686.7 3,414.7 37.3 Depreciation and amortization (2,152.7) (1,526.4) 41.0 Operating income (OI) 2,534.1 1,888.3 34.2 Profit from associated companies 21.8 (9.1) c.s. Net financial income (expense) (523.7) (317.7) 64.8 Income before taxes 2,032.1 1,561.4 30.1 Income taxes (666.2) (579.9) 14.9 Income from continuing operations 1,365.9 981.6 39.2 Income (Loss) from discontinued operations 0.0 0.1 N.S. Minority interest (92.4) (69.4) 33.0 Net income 1,273.5 912.2 39.6 Weighted average number of ordinary shares outstanding during the period (millions) 4,754.9 4,896.3 (2.9) Basic earnings per share 0.268 0.186 43.8 (1) Including work in process. Note: For the basic earnings per share calculation purposes, the weighted average number of ordinary shares outstanding during the period have been obtained applying IFRS rule 33 'Earnings per share'. Thereby, there are not taking into account as outstanding shares the weighted average number of shares held as treasury stock during the period nor the shares assigned to the stock options plans for employees. Furthermore, in line with IFRS rule 33, the weighted average number of shares outstanding during every period, has been adjusted for these operations that had implied a difference in the number of outstanding shares, without a variation associated in the equity, as if those have taken place at the beginning of the first period presented. It consists on the distribution of the paid-in capital reserve by means of delivery of shares in the proportion of 1 share to every 25 shares, approved by the AGM as of May 31, 2005. TELEFONICA GROUP CONSOLIDATED BALANCE SHEET Unaudited figures (Euros in millions) March 2006 2005 % Chg Non-current assets 84,998.0 49,725.7 70.9 Intangible assets 13,913.1 5,914.9 135.2 Goodwill 24,126.2 6,656.4 N.S. Property, plant and equipment and Investment property 33,500.8 23,416.2 43.1 Long-term financial assets and other non-current assets 5,722.9 4,959.4 15.4 Deferred tax assets 7,735.0 8,778.8 (11.9) Current assets 18,041.5 11,362.3 58.8 Inventories 1,154.1 718.1 60.7 Trade and other receivables 9,243.9 6,311.5 46.5 Current tax receivable 1,288.0 1,208.9 6.5 Short-term financial investments 1,876.8 2,063.5 (9.0) Cash and cash equivalents 4,468.1 1,048.8 N.S. Non-current assets classified as held for sale 10.5 11.4 (7.7) Total Assets = Total Equity and Liabilities 103,039.5 61,088.0 68.7 Equity 15,328.1 13,000.2 17.9 Equity attributable to equity holders of the parent 11,545.3 11,313.5 2.0 Minority interest 3,782.8 1,686.7 124.3 Non-current liabilities 52,210.7 28,800.0 81.3 Long-term financial debt 41,665.4 18,113.2 130.0 Deferred tax liabilities 3,028.1 1,871.5 61.8 Long-term provisions 6,463.7 7,687.9 (15.9) Other long-term liabilities 1,053.6 1,127.5 (6.6) Current liabilities 35,500.7 19,287.7 84.1 Short-term financial debt 19,506.6 9,455.1 106.3 Trade and other payables 8,791.7 5,488.4 60.2 Current tax payable 1,984.8 1,997.6 (0.6) Short-term provisions and other liabilities 5,217.6 2,341.2 122.9 Liabilities associated with non-current assets classified as held for sale 0.0 5.4 N.S. Financial Data Net Financial Debt (1) 53,509.9 23,948.1 123.4 (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 - March 2006 2005 % Chg I Cash flows from operations 4,112.5 2,695.2 52.6 II Net interest payment (1) (644.5) (400.5) III Payment for income tax (302.8) (192.9) A=I+II+III Net cash provided by operating activities 3,165.2 2,101.8 50.6 B Payment for investment in fixed and intangible assets (1,557.6) (937.0) C=A+B Net free cash flow after CAPEX 1,607.6 1,164.8 38.0 D Net Cash received from sale of Real Estate 12.4 39.3 E Net payment for financial investment (22,868.1) (906.3) F Net payment for dividends and treasury stock (2) (1,130.9) (224.0) G=C+D+E+F Free cash flow after dividends (22,379.0) 73.8 c.s. H Effects of exchange rate changes on net financial debt (526.6) 292.4 I Effects on net financial debt of changes in consolid. and 1,590.4 78.6 others J Net financial debt at beginning of period 30,067.0 23,650.9 K=J-G+H+I Net financial debt at end of period 53,509.9 23,948.1 (1) Including cash received from dividends paid by subsidiaries that are not under full consolidation method. (2) Dividends paid by Telefonica S.A. and dividend payments to minoritaries from subsidiaries that are under full consolidation method and treasury stock. TELEFONICA GROUP RECONCILIATIONS OF CASH FLOW AND OIBDA MINUS CAPEX Unaudited figures (Euros in millions) January - March 2006 2005 % Chg OIBDA 4,686.7 3,414.7 37.3 - CapEx accrued during the period (EoP exchange rate) (1,302.7) (744.0) - Payments related to commitments (242.8) (236.4) - Net interest payment (644.5) (400.5) - Payment for income tax (302.8) (192.9) - Results from the sale of fixed assets (151.6) (120.7) - Invest. in working cap. and other deferred income and expenses (434.8) (555.4) = Net Free Cash Flow after CapEx 1,607.6 1,164.8 38.0 + Net Cash received from sale of Real Estate 12.4 39.3 - Net payment for financial investment (22,868.1) (906.3) - Net payment for dividends and treasury stock (1,130.9) (224.0) = Free Cash Flow after dividends (22,379.0) 73.8 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-Mar 2006 Jan-Mar 2005 Net Free Cash Flow after CapEx 1,607.6 1,164.8 + Payments related to cancellation of commitments 211.1 191.3 - Ordinary dividends payment to minoritaries (4.6) (0.4) = Free Cash Flow 1,814.1 1,355.7 TELEFONICA GROUP NET FINANCIAL DEBT AND COMMITMENTS Unaudited figures (Euros in millions) March 2006 Long-term debt 42,041.5 Short term debt including current maturities 19,506.6 Cash and Banks (4,468.1) Short and Long-term financial investments (1) (3,570.1) A Net Financial Debt 53,509.9 Guarantees to IPSE 2000 365.5 Guarantees to Newcomm 83.4 B Commitments related to guarantees 448.9 Gross commitments related to workforce reduction 5,058.8 (2) Value of associated Long-term assets (3) (739.7) Taxes receivable (4) (1,497.4) C Net commitments related to workforce reduction 2,821.7 A + B + C Total Debt + Commitments 56,780.5 Net Financial Debt / OIBDA (5) 2.80x Total Debt + Commitments/ OIBDA (5) 2.97x (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 91.3 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 12 months accumulated OIBDA, including Cesky Telecom and O2. TELEFONICA GROUP EXCHANGES RATES APPLIED P&L and CapEx (1) Balance Sheet (2) Jan - Mar 2006 Jan - Mar 2005 % Chg March 2006 March 2005 United States (Dolar USA/Euro) 1.202 1.311 1.210 1.296 United Kingdom (Sterling/Euro) 0.686 - 0.696 - Argentina (Peso Argentinean/Euro) 3.685 3.839 3.730 3.782 Brazil (Real Brasileno/Euro) 2.637 3.495 2.629 3.456 Rep. Checa (Corona Checa/Euro) 28.600 - 28.595 - Chile (Peso Chileno/Euro) 632.911 757.576 636.943 757.576 Colombia (Peso Colombiano/Euro) 2,724.796 3,086.420 2,770.083 3,076.923 El Salvador (Colon/Euro) 10.520 11.468 10.591 11.343 Guatemala (Quetzal/Euro) 9.169 10.108 9.217 9.849 Mexico (Peso Mexicano/Euro) 12.727 14.654 13.255 14.641 Nicaragua (Cordoba/Euro) 20.740 21.533 21.004 21.427 Peru (Nuevo Sol Peruano/Euro) 4.018 4.277 4.069 4.230 Uruguay (Peso Uruguayo/Euro) 29.124 33.157 29.292 33.124 Venezuela (Bolivar/Euro) 2,583.979 2,816.901 2,604.167 2,785.515 (1) These exchange rates are used to convert the P&L and CapEx accounts of the Group foreign subsidiaries from local currency to euros. (2) Exchange rates as of 31/03/06 y 31/03/05. RESULTS BY BUSINESS LINES Fixed Line Business TELEFONICA DE ESPANA GROUP The first quarter of 2006 closed with a year on year revenue growth for Telefonica de Espana of 3.3%, together with an intensive operating expenses containment to give a 5.3% increase in the Operating Income Before Depreciation and Amortization (OIBDA). Once again, the growth of the Internet and Broadband business and the control in the drop of traditional business were the main driving forces behind these good results. The following can be highlighted among the latest commercial action taken: â€¢ The launch of a global offer targeting SMEs known as 'Puesto de Trabajo Integral' (Comprehensive Desktop) that supplies all the information technologies and communications necessary to start a job: For a fixed monthly fee per post, Telefonica de Espana provides clients with the necessary telephone and computer equipment, access to voice and data networks and comprehensive desktop maintenance and management. â€¢ The establishing of a new Interoperability service related to the Fixed-to-mobile Video-telephony service. â€¢ Launch of new Vouchers with 60 or 100 minutes of fixed-to-mobile calls. â€¢ New text and multimedia message service to any fixed or mobile telephone from Telefonica Net. â€¢ In the Corporate segment, it is worth to mention the launching of the portfolio of solutions for Public Administrations covering the areas of Health, Justice, Education and Local Administration, as well as solutions for specific sectors: Utilities, Finance Institutions, Logistics and Services. â€¢ The portfolio for big Corporations has also been updated by adding 'Geomarketing' (Geographical marketing) and 'Georeferenciacion' (Geographical labeling) portfolio of solutions through the acquisition of Maptel enterprise. The following can be underlined in relation to promotions launched during the quarter: â€¢ The Free Connection Fee campaign that took place between February 27th and March 10th. Campaigns have also been launched to offer free connection fee targeting immigrants, together with offers on international traffic. â€¢ In terms of Broadband, ADSL, Imagenio, DUOS and TRIOS promotions have continued this quarter, with free subscription fees and reduced monthly fees, as well as an offer on the modem. Specific offers for groups and with Spanish Regional Governments have been launched or continued within the initiatives taken for development of the Information Society in Spain. In terms of regulatory issues, it must be noted that the CMT recently completed an analysis of the relevant access market. As a result of this analysis, freezing of the monthly subscription fee for 2006 was confirmed and an agreement reached to establish a limit for access prices (monthly subscription and connection fee) for 2007, setting a maximum price of CPI-0 that will eventually lead to a maximum increase of 2%. Furthermore, the Regulatory body has accepted the possibility of varying the subscription fee depending on the different market segments: residential and business. Another relevant issue for Telefonica de Espana during the first quarter of 2006 was the CMT Resolution on the analysis of retail telephony traffic market. The main result of the Resolution has been the elimination of the pricing control over these services, that had been applied during the last years through a Price Cap model (CPI-X). Moreover, it is important to note this measure will significantly improve Telefonica de Espana commercial flexibility in order to develop these services adapting them to each of the markets and end clients requirements. The CMT has also concluded the analysis of the termination of traffic on fixed networks market. Even though the CMT has left unchanged Telefonica de Espana's obligations within this market, operators of the competition have been authorized to charge Telefonica de Espana up to 30% more for call termination than Telefonica de Espana charges them for time based local interconnection. However, this measure is not to be applied automatically, but through Interconnection Agreements, and as such will be dependent upon operators' will to apply them given the effect it could have on the market development. Revenues of the Telefonica de Espana Group amounted to 2,944.3 million euros during the first quarter of 2006, a year-on-year growth of 3.3%, as mentioned above. The Telefonica de Espana Parent Company's revenues amounted to 2,835.2 million euros, up 3.6% year on year. In relation to the other most significant affiliates, Telyco contributed 102.2 million euros to the Group during this first quarter, 1.8% up on the previous year. TTP contributed 24.5 million euros, a year-on-year drop of 13.6% and lastly Terra, which accounted for 25.9 million euros. In order to make comparisons with the previous year, Terra Espana has been considered under comparable terms as being within the Telefonica de Espana perimeter since January 2005. Under these conditions, a 19.2% drop was recorded. Below is a detailed analysis of the Telefonica de Espana Parent Company's revenues: â€¢ Revenues for traditional access fell 1.7% over the quarter to stand at 695.6 million euros, due to the reduction in the number of fixed telephony access and partial fade away of the effect of the 2.0% increase in subscription fees on January 22nd last year. The 17% drop in revenues from connection fees to 25.3 million euros due to the effects of the promotions and free connection fee campaigns also contributed to this fall. Fixed telephony access in Spain is estimated to have grown by 1.5% over the last twelve months to march 2006, whereas that of Telefonica de Espana fell by 0.9% to 16.1 million, with an estimated access market share of 85%. This trend has been more than offset by the 3.4% growth in the total number of Telefonica de Espana access where data and Internet, pay television and wholesale accesses were accounted for as well as fixed telephony accesses. The total combined figure amounted to 22.2 million accesses. â€¢ Revenues from traditional voice services amounted to 1,249.9, with a year-on-year reduction of 2.6%. Within this area, revenues from outgoing voice services amounted to 784.3 million euros, with a year-on-year drop of 3.5%. The fact that Easter fell during the second quarter instead of the first, like last year, had a positive effect on revenues, which can be estimated in 17 million euros. It is also worth to note starting March 2006, as imposed by the CMT, the business model, add as such the accounting criterion for revenues, from traffic cards. A retail model was previously followed in which traffic resold at the price indicated in the BOE (Boletin Oficial del Estado: Official Spanish State Journal) was recorded as revenue and the bonuses and agreements, etc. with distributors as expenses. A wholesale model is to be followed as of 2006, in which only the net business margin will be recorded as revenues. The impact of this measure stood at approximately 7 million euros in March, reducing both traffic revenues and external services expenses. The estimated impact for the whole of 2006 year is a reduction in revenue growth of 0.7 percentage points The above mentioned drop in revenues does not show the sudden change in trend of traditional outgoing traffic that went from dropping 7.2% in 2005 to remaining practically on a par with the previous year's levels during the first quarter of 2006. Although supported by the effect of Easter, this fact started to reflect the growing dissociation between the behavior of traffic and associated revenues, as a result of the increased generalization of flat rates. This can also be seen in the behavior of the voice market in Spain that, after over 3 years, changed its negative trend and recorded an estimated positive year-on-year growth of 0.3%. Telefonica de Espana's estimated share in this market in March stood at 66%. Traditional outgoing voice traffic processed by Telefonica de Espana amounted to 11,275 million minutes, maintaining, as previously commented, close to the levels of first quarter 2005 (- 0.8% year-on-year). Domestic voice traffic fell slightly by 0.9% in comparison with the previous year, with a total of 8,747 million minutes. International long-distance traffic grew by 6.5% to total 492 million minutes, continuing its growth trend, although somewhat more moderately, due to the lower market growth. Not affected by flat rates, fixed-to-mobile traffic continued to drop by 3.3% to stand at 1,339 million minutes. With regard to service packages, it is worth noting that the total number of combined plans and flat rates amounted to 3,477,182, 20% up on that of December 2005. Moreover, by the end of March, there were 2,197,233 pre-selected lines, a drop of 87,357 over the quarter. â€¢ According to our estimates, the fixed Internet Broadband access market in Spain amounted to 5.5 million accesses by the end of the first quarter 2006, recording an estimated net gain over the first three months of the year of almost half a million accesses, the second highest in history after that achieved in the fourth quarter of 2005. The success of the Telefonica ADSL offering had a determinant impact on this growth, amounting to 3,795,882 accesses in total (wholesale plus retail, including accesses only providing Imagenio service) by the end of 2005. The increase in revenues from Internet and broadband services more than offset (by over 2.5 times) the drop in revenues from the traditional access and voice businesses, amounting to 543.2 million euros, 28.0% up on the previous year. Within this caption, broadband revenues from both Internet access and Pay television grew 35.0% over the year to reach 500.4 million euros, of which 399.5 million euros are from the retail business. Telefonica's client base of retail broadband Internet lines (ADSL, Optical fiber and other technologies, excluding accesses only providing Imagenio service) recorded a net gain of 321,978 connections over the quarter, 80.4% higher than that recorded during the last quarter of the previous year. With this, the total number of Telefonica's retail broadband Internet accesses in March 2006 stands at 3,037,410, which represents an improvement in Telefonica de Espana's retail Internet Broadband access market share in the level of hundreds of basic points. The strong growth in the Telefonica de Espana client base was promoted by the new product packages and the price reductions included in promotions. These commercial initiatives led to a year-on-year reduction in the ADSL connectivity ARPU of over 10% that, partially offset by the growth of almost 40% in the value added services ARPU, led to an overall 4.9% drop in ARPU. Finally, to be noted for the purposes of revenues, the lower ARPU recorded was offset by the significant increase in the number of clients. It must be highlighted that 54% of Telefonica de Espana retail broadband accesses have the Internet connectivity service within some kind of Double or Triple-Offer package. The net gain of unbundled loops during the first quarter reached its maximum level with 111,943 new loops, underlining the support for this technology by many of our competitors. By quarter end, the total number of unbundled loops stood at 546,702 to represent, according to our estimates, 10% of the total number of fixed Internet broadband accesses in the Spanis hmarket, and 12.6% of ADSL lines. Of this total, 320,341 (58.6%) were shared access loops. However, in terms of net gain for the first quarter, fully unbundled loops represented 63.1% of the total. The wholesale ADSL service was affected by the migration to unbundled loops and, therefore, recorded a loss of 15,529 accesses during the first quarter to leave its total to 706,411 accesses. Value-added services (VAS) provided over Telefonica de Espana broadband accesses remained a distinguishing factor with regard to the competition's commercial offer. 70.9% of our retail broadband clients have contracted at least one VAS and the number of operative services now amounts to over 2.7 million units. ADSL Solutions is noteworthy among these services, a total of 295,069 solutions being operational by the end of the first quarter to give a 6.0% increase in relation to December last year. The net gain of the Pay T.V customers at Telefonica de Espana recoded in the first quarter was 43.712, allowing for an increase of up to 7% in the estimated share in the Spanish Pay TV market. The recorded net gain is to be considered within a highly seasonal business, with growth mainly focused in the fourth quarter, and as such lays in the trend of reaching the objective of one million Pay TV customers by year 2008. â€¢ Revenues from data services grew by 2.3% year on year to reach 267.2 million euros. Retail data services fell during this period by 5.7%. Wholesale data revenues, however, recorded a 16.9% growth to total 108.3 million euros, basically promoted by circuit rental and transport capacity to other operators. â€¢ Lastly, information technology services contributed towards Telefonica de Espana revenues with a total of 79.2 million euros, a 30.9% increase year on year. There are currently 197 client management centers operated by Telefonica and 144 contracts with clients who are outsourcing their communications service/ information systems. These figures have grown by 41.7% and 54.8% respectively year on year. The number of servers devoted to clients amounted to 2,984, a 53.4% increase on the previous year. The number of desktop positions managed stood at 87,291, of which 43.1% include high added value solutions such as managed LAN or the Helpdesk service. Telefonica de Espana Group's operating expenses recorded a year-on-year decrease of 0.4% to 1,703.8 million euros. Excluding the effect of the provisions for workforce restructuring, expenses would have increased by 1.3%. This good result is due to the containment of expenses in the main items such as commercial and supplies expenses. â€¢ Personnel expenses dropped by 2.9% year on year to stand at 634.3 million euros. 25 redundancies were recorded during this first quarter of the year at Terra Espana from the Remunerated Layoff Plan, and 286 from the Telefonica de Espana Redundancy Program (E.R:E.). The provision for these items amounts to 94.9 million euros. Excluding the effect of Redundancies provisions in the first quarter of 2005 (121.5 million euros including actuarial reviews) and in 2006, personnel expenses would have grown by 1.5%. This growth was affected by the first quarter 2005 base data used for comparison. Personnel expenses during this quarter recorded a forecast growth in CPI of 2.7% that, by year end, was eventually set at 3.7%. The Telefonica de Espana Parent Company workforce at the end of March was placed at 33,030 employees, a net reduction of 249 employees since the start of the year. The average Telefonica de Espana Group workforce in the first quarter of the year stood at 34,919 employees, a 3.8% reduction in comparison with the average workforce in the same period of 2005. â€¢ Supplies expenses grew by 1.4% in the year to stand at 707.8 million euros. This good behavior, specially considering the 8.7% growth registered in year 2005, was influenced by the 5.6% drop in interconnection expenses, standing at 384.8 million euros as a result of the reduction in fixed-to-mobile traffic and the call termination prices in mobile operator networks. This performance was also affected by the lower expenses associated to the wholesale unbundled loop service, once the main exchange conditioning work had been completed for this service, and by the higher sale of ADSL equipment following the significant growth of the Company's retail broadband clients recorded during the first quarter. â€¢ External services expenses recorded a slight 0.2% drop to total 311.7 million euros, partly due to the 4.8% reduction in Telefonica de Espana Parent Company commercial expenses in comparison with the first quarter of 2005. This drop in commercial expenses is momentary and cannot be extrapolated to the rest of the year. The change in accounting criterion for expenses generated by the sale of traffic cards also influenced this behavior, as explained in the traditional voice service revenues section. The combined effort made by the Company with regard to the growth in revenues and efficiency has led to operating income before depreciation and amortization (OIBDA) of 1,262.6 million euros in the first quarter, a 5.3% year-on-year growth. For comparison purposes with the announced financial guidance, exceptional revenues/expenses not foreseen in the first quarter of 2005 and 2006 must be excluded from OIBDA. Once this adjustment has been made, the growth in OIBDA would stand at 7.2% above the forecasts given by the Company, which established a target growth of between 1% and 3% in OIBDA. The Easter effect has added 1.1 percentage points to this 7.2% growth; the effect, logically, will be present in second quarter 2006 accounts with an opposite sign. The OIBDA margin stood at 42.9% during the first quarter, 0.8 percentage points above that recorded the previous year. Excluding the effect of the provision for the Redundancy Plan, the first quarter's margin would have increased by 3.2 percentage points to reach 46.1%. Comparing this margin with the comparable margin of the same period in 2005 (excluding the Redundancy Program provision and the actuarial review), performance remained almost stable with a slight 0.2 percentage points drop. The OIBDA for the Telefonica de Espana parent company amounted to 1,249.0 million euros, up 5.0% year on year. CapEx totaled 314.6 million euros, a 25.5% increase in comparison with the previous year although not yet representative of the whole year's performance. TELEFONICA DE ESPANA GROUP ACCESSES Unaudited figures (Thousands) 2006 2005 March % Chg y-o-y March June September December Final Clients Accesses 20,901.7 1.8 20,522.2 20,484.1 20,484.3 20,742.7 Fixed telephony accesses (1) 16,108.5 (0.9) 16,258.3 16,236.5 16,180.8 16,135.6 Internet and data accesses 4,542.9 7.1 4,241.9 4,190.1 4,211.4 4,400.6 Narrowband 1,437.4 (31.4) 2,094.3 1,872.5 1,745.7 1,614.9 Broadband (2) 3,042.7 46.8 2,073.4 2,246.7 2,397.7 2,720.8 Other (3) 62.8 (15.3) 74.2 70.9 68.0 64.9 Pay TV 250.3 N.S. 22.1 57.5 92.1 206.6 Wholesale Accesses 1,260.4 39.5 903.8 1,021.6 1,077.4 1,164.1 Unbundled loops 546.7 182.7 193.4 297.0 361.3 434.8 Shared UL 320.3 243.8 93.2 176.5 228.9 279.0 Full UL 226.4 125.8 100.2 120.5 132.4 155.7 Wholesale ADSL 706.4 0.5 702.5 717.0 708.6 721.9 Other (4) 7.3 (6.5) 7.8 7.6 7.5 7.4 Total Accesses 22,162.1 3.4 21,426.0 21,505.7 21,561.7 21,906.8 (1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access; 2/6 Access x30. Company's accesses for internal use included. (2) ADSL, satelite, optical fiber and broadband circuits. Includes Terra. (3) Leased lines. (4) Wholesale circuits. TELEFONICA DE ESPANA PARENT COMPANY OPERATING REVENUES Unaudited figures (Euros in millions) January - March 2006 2005 % Chg Traditional Access (1) 695.6 707.7 (1.7) Traditional Voice Services 1,249.9 1,283.3 (2.6) Domestic Traffic (2) 321.6 356.0 (9.6) Fixed to Mobile Traffic 273.8 283.2 (3.3) International Traffic 115.8 111.5 3.9 Intel. Network, other cons. and bonusses (3) 73.0 62.1 17.6 Interconnection (4) 231.6 229.2 1.1 Handsets sales and others (5) 234.0 241.4 (3.1) Internet Broadband Services 543.2 424.3 28.0 Narrowband 42.8 53.7 (20.2) Broadband 500.4 370.6 35.0 Retail (6) 399.5 285.8 39.8 Wholesale (7) 100.9 84.9 18.9 Data Services 267.2 261.2 2.3 VPN, Leased Circuits and Broadcasting 159.0 168.6 (5.7) Wholesale 108.3 92.6 16.9 IT Services 79.2 60.5 30.9 Total operating revenues 2,835.2 2,737.0 3.6 (1) Monthly and connection fees (PSTN, Public Use Telephony, ISDN and Corporate Services) and Telephone booths surcharges. (2) Local and domestic long distance (provincial and interprovincial) traffic. (3) Intelligent Network Services, Special Valued Services, Information Services (118xy), bonusses and others. (4) Includes revenues from fixed to fixed incoming traffic, fixed to mobile incoming traffic, and transit and carrier traffic. (5) Managed Voice Services and other businesses revenues. (6) Retail ADSL services and other Internet Services. (7) Includes Megabase, Megavia, GigADSL, and local loop unbundling. TELEFONICA DE ESPANA GROUP CONSOLIDATED INCOME STATEMENT Unaudited figures (Euros in millions) January - March 2006 2005 % Chg Revenues 2,944.3 2,850.2 3.3 Internal expenditure capitalized in fixed assets (1) 35.0 29.1 20.5 Operating expenses (1,703.8) (1,710.4) (0.4) Other net operating income (expense) (17.5) (1.0) N.S. Gain (loss) on sale of fixed assets 7.7 34.3 (77.4) Impairment of goodwill and other assets (3.2) (3.0) 5.3 Operating income before D&A (OIBDA) 1,262.6 1,199.0 5.3 Depreciation and amortization (490.2) (569.4) (13.9) Operating income (OI) 772.4 629.6 22.7 Profit from associated companies 0.0 (0.1) N.S. Net financial income (expense) (24.1) (102.8) (76.5) Income before taxes 748.3 526.6 42.1 Income taxes (254.7) (178.4) 42.8 Income from continuing operations 493.6 348.2 41.8 Income (Loss) from discontinued operations 0.0 0.0 N.S. Minority interest (0.1) (0.1) 65.7 Net income 493.4 348.1 41.7 (1) Including work in process. Note: Telefonica de Espana Group incorporates the results of Terra Networks operations from 1 January 2005. RESULTS BY BUSINESS LINES Fixed Line Business TELEFONICA LATINOAMERICA GROUP From January 1st 2006, Telefonica Latinoamerica Group's fixed telephony operator accounts include the Telefonica Empresas businesses in their respective countries. The 2005 results are shown on comparable terms. On the other hand, to facilitate year-on-year comparisons, the Telefonica Latinoamerica Group figures include the results of the Terra subsidiaries in Latin America since January 1st 2005. The Latin American countries in which Telefonica Latinoamerica is present have, in terms of macroeconomics, progressed favorably this first quarter, which was reflected by an appreciation of all currencies in relation to the euro, particularly the Brazilian real and the Chilean peso. Thus, this good performance of exchange rates this quarter had a positive effect on the Telefonica Latinoamerica Group's accounts, contributing with 24.5 percentage points to the growth of revenues and 21.3 percentage points to the growth of the operating income before depreciation and amortization (OIBDA). By the end of this first quarter, Telefonica Latinoamerica Group recorded revenues of 2,318.1 million euros, 6.1% higher year-on-year in constant euros (+30.6% in current euros), mainly due to the growth in local currency by all fixed and data business operators, particularly in Brazil (+7.1% in local currency due to the increased number of broadband connections, the growth in the traditional business, supported by the higher volume of traffic and tariffs, and the growth in the data and information technology businesses) and in Argentina (+8.0% in local currency due to the greater volume of broadband connections and the good performance of the wholesale business). Chile recorded a smaller growth rate (+3.2% in local currency) thanks to the good progress of the Internet business (narrowband + broadband), the 35.7% growth of which in local currency offset the slower evolution of the traditional business (+0.3% in local currency). The case of Peru is similar, with a slight increase in revenues (+2.7% in local currency) thanks to the growth of the Internet business (+24.7% in local currency) that more than compensates the 1.9% drop in local currency in the traditional business, affected by the application of the productivity factor (CPI-10.07%) to its tariffs. Operating expenses for the Telefonica Latinoamerica Group stood at 1,306.0 million euros for the quarter, with a year-on-year growth of 9.5% in constant euros (+34.5% in current euros). This growth was affected by this quarter's recording of expenses associated to workforce restructuring plans in Chile and Brazil, which affected around 1,000 employees. Furthermore, greater interconnection expenses were recorded, particularly in Brazil, due to greater fixed-to-mobile traffic and higher commercial expenses, especially those related to client assistance and advertising. As a result of the above, Telefonica Latinoamerica Group recorded an operating income before depreciation and amortization (OIBDA) of 994.2 million euros, 5.8% lower year-on-year in constant euros (+15.5% in current euros) due to the effect of the capital gains recorded in 2005 from the sale of Infonet. Excluding this effect, there was a 3.9% growth in OIBDA in constant euros (+27.4% in current euros). Telefonica Latinoamerica Group's CapEx amounted to 173.9 million euros in March, a year-on-year growth of 13.1% in constant euros, primarily due to the expansion of broadband and new businesses. In line with this volume of investment, Telefonica Latinoamerica's free cash flow (OIBDA-CapEx) amounted to 820.3 million euros at March end, a 2.3% growth in constant euros (+25.6% in current euros) having excluded the effect of the sale of Infonet in 2005. By the end of this quarter, the Telefonica Latinoamerica Group managed 28.3 million accesses, compared with the 27.3 million in March 2005 (+3.7% year-on-year). Particularly noteworthy is the strong growth of retail broadband Internet connections, which grew 50.2% year-on-year, to top 2.9 million by March end with a net gain of almost 222,100 connections in the first three months of the year and a significant commercial effort in all countries. The number of fixed telephony accesses amounted to 21.7 million, 1.7% more than in March 2005 mostly thanks to the continued progress of Telefonica del Peru (+8.5%) and TASA (+4.3%). The group's total workforce stood at 28,312 at 31st March, with a net reduction of 544 employees over the quarter due to layoffs in Chile and Brazil. TELESP From a regulatory viewpoint, it must be noted that the conditions of the new Telesp concession contract entered into force on January 1st, although the billing of local calls in minutes have been delayed for 12 months. Furthermore, on March 28th this year ANATEL granted a 7.99% readjustment on long-distance fixed-to-mobile calls corresponding to 2005, the application of which will not be retroactive. In addition to its commercial offer, Telesp launched new modalities of lines with consumption limits (Leisure Line, Control Line, Young Line) during the first quarter of the year, as well as the Plans of Minutes that offer discounts of up to 40% on local calls. By the end of the first quarter of 2006, Telesp (fixed + data business) managed 15.7 million accesses, a year-on-year growth of 1.7% thanks to the strong growth in the number of retail broadband Internet connections that stood at 1.3 million (+47.5% year-on-year), following a net gain over the quarter of 93,600 accesses. The number of fixed telephony accesses remained in line with the previous year (+0.1% year-on-year), following a net gain of 30,200 lines in the first quarter of the year favoured by the sale of new line modalities. Hence, consumption control lines (Family line and the recently-launched Control Line) accounted for approximately 19% of total lines. Voice traffic recorded a 1.1% year-on-year increase to stand at 17,946 million minutes, primarily due to the increase in local fixed-to-fixed traffic (+4.1% year-on-year). Long distance traffic, however, performed negatively (-5.4% year-on-year), mostly due to the lower intrastate long-distance traffic following the increased migration of traffic to mobiles. Lastly, the growth in traffic originating from mobiles -SMP must be noted, which is a result of the expansion of the mobile market throughout 2005. Revenues amounted to 1,427.8 million euros during the quarter, a 7.1% increase in local currency thanks to the 5.0% growth in local currency in revenues from the traditional business, mostly due to the good performance of local traffic revenues, the sale of packages and the tariff increase in July 2005. The Internet business (narrowband + broadband) also played an important role in the growth of revenues (+31.1% in local currency), primarily thanks to the increase in the broadband plant that enabled Internet revenues to total 8.6% of Telesp revenues (7.0% in the first quarter of 2005). To a lesser extent, the increase in sales from the data and information technology business contributed positively (+13.6% and +18.2% in local currency, respectively), providing a combined 3.0% of company revenues. Operating expenses grew by 9.0% year-on-year, mostly due to greater personnel expenses (+31.0% in local currency), the cost associated to the personnel restructuring plan carried out in March. Excluding the extraordinary charge associated to this program, operating expenses recorded a 6.1% increase in local currency, lower than the growth experienced by revenues. Higher interconnection costs have been recorded (+7.1% year-on-year) associated to greater fixed-to-mobile traffic. The efforts made by the company in the containment of costs was reflected in a growth in subcontracting expenses of only 0.6% in local currency compared with the previous year. Tax expenses grew by 76.5% year-on-year in local currency, due to the renewal tax associated to the new contract concession. The ratio of bad debt provision to revenues remained at 2.3%, the same as in 2005. Telesp's operating income before depreciation and amortization (OIBDA) amounted to 630.1 million euros at March end, up 4.5% in comparison with the first quarter of the previous year in local currency. The OIBDA margin stood at 44.1%, 1.1 percentage points below the 2005 margin mostly due to the layoff plan (excluding this effect, the OIBDA margin would be 45.6% and stable compared with 2005). CapEx accumulated to March amounted to 89.5 million euros, a 3.8% growth with regard to the first quarter of 2005 in local currency. The operating free cash flow (OIBDA-CapEx) stood at 540.5 million euros (+4.7% in local currency with regard to the same period of the previous year). TELESP ACCESSES Unaudited figures (Thousands) 2006 2005 March % Chg y-o-y March June September December Final Clients Accesses 15,618.7 1.7 15,356.4 15,535.2 15,642.9 15,606.8 Fixed telephony accesses (1) 12,370.4 0.1 12,356.4 12,434.9 12,446.4 12,340.3 Internet and data accesses 3,248.2 8.3 3,000.0 3,100.3 3,196.5 3,266.5 Narrowband 1,876.1 (8.3) 2,046.3 2,049.9 2,038.4 1,986.7 Broadband (2) 1,307.3 47.5 886.1 982.7 1,091.0 1,213.8 Other 64.8 (4.1) 67.6 67.8 67.2 66.0 Wholesale Accesses 32.7 (4.3) 34.1 33.8 32.9 32.6 Total Accesses 15,651.3 1.7 15,390.5 15,569.0 15,675.8 15,639.4 (1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access; 2/6 Access x30. Company's accesses for internal use included. (2) Includes ADSL and broadband circuits. TELEFONICA DE ARGENTINA The Argentine operator (fixed and data business) progressed favorably this first quarter, despite having maintained its tariffs since 2002, recording an 8.0% year-on-year increase in revenues in local currency. At the end of the first three months of 2006, TASA managed 5.5 million accesses (+4.8% compared with March 2005) thanks to the4.3% year-on-year increase in fixed telephony accesses (to stand at 4.6 million) and the strong growth in the number of retail broadband internet connections (+64.1%), enabling the operator to maintain its position as leader of the broadband market in the South of the country with 346,500 connections. Total voice traffic increased slightly (+1.1% compared with 2005), due to the good performance of local fixed-to-fixed traffic in line with the growth in fixed telephony lines and, to a lesser extent, the growth in fixed-to-mobile traffic following the country's quickly developing cellular business. However, less incoming traffic was recorded (-4.8% year-on-year), primarily due to the fall in mobile-to-fixed traffic that was offset by the increased volume of revenues from circuit rental and lower public telephony traffic due to mobile substitution. Narrowband Internet traffic fell by 20.7% due to migrations to broadband. The good performance of the operating variables for lines and traffic with respect to 2005 led to revenues of 236.4 million euros, an 8.0% year-on-year increase in local currency. By businesses, revenues from the traditional business grew 4.7% year-on-year thanks to the good performance of the traffic packages, the wholesale business and the value added services, whereas revenues from the Internet business (narrowband + broadband), which contributed to 10.7% of TASA revenues (+2.0 percentage points up on 2005), grew by 32.6% in local currency thanks to the expansion of broadband connections, revenues from these services increasing by 49.5% in local currency in relation to the same period of the previous year and offsetting the squeeze in the Internet narrowband business. The data and information technology businesses also progressed extremely positively (+14.6% and +49.7% in local currency, respectively), primarily due to the higher revenues from VPNs, to represent 7.6% of revenues. The salaries increases agreed to at the end of 2005 were the main reason for the growth in TASA operating expenses, which were up 15.7% in local currency. These raises had an impact on both personnel expenses, which increased by 22.7% in local currency, and on service contracts, leading to a 15.3% increase in subcontracting expenses in local currency. Supplies expenses experienced a 15.1% growth in local currency due to the increased interconnection traffic with other operators and to facilities rental, minimized by the lower cost of equipment sales. The ratio of bad debt provision to revenues remained below 1% thanks to good recovery management and to the larger volume of pre-paid and consumption control infrastructure, which remained at around 29%. The significant growth in revenues gave TASA an operating income before depreciation and amortization (OIBDA) of 122.2 million euros, 2.1% up in local currency on that obtained in the first quarter of 2005. The operator recorded a margin as a percentage to revenues (taking fixed-to-mobile interconnections into account) of 43.1%, 3.9 percentage points down on that of 2005 due to higher salary and supplies expenses. CapEx for the first quarter of 2006 stood at 31.2 million euros, 22.5% higher than in 2005 in local currency, of which around 50% was devoted to by broadband and new businesses. The operator recorded an operating free cash flow (OIBDA-CapEx) of 91.0 million euros, down 3.4% in local currency on that generated in the same period of 2005, due to increased level of investments. TELEFONICA DE ARGENTINA ACCESSES Unaudited figures (Thousands) 2006 2005 March % Chg y-o-y March June September December Final Clients Accesses 5,465.4 4.8 5,213.8 5,302.3 5,404.6 5,417.3 Fixed telephony accesses (1) 4,553.1 4.3 4,367.5 4,418.9 4,476.7 4,532.2 Internet and data accesses 912.3 7.8 846.3 883.4 927.9 885.1 Narrowband 548.9 (11.3) 618.6 627.6 632.5 564.0 Broadband (2) 346.5 64.1 211.2 239.2 278.8 304.3 Other 16.8 1.9 16.5 16.5 16.7 16.8 Wholesale Accesses 7.3 17.8 6.2 6.6 6.6 6.9 Total Accesses 5,472.7 4.8 5,220.0 5,308.9 5,411.2 5,424.2 (1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access; 2/6 Access x30. Company's accesses for internal use included. (2) Includes ADSL, optical fiber, broadband circuits and ISP in the North part of the country. TELEFONICA CHILE By March end 2006, Telefonica Chile managed 2.9 million accesses, on a par with the total number in March 2005 (-0.3%). The number of fixed telephony accesses managed by Telefonica Chile exceeded the 2.4 million mark and remained almost stable in comparison with the previous year (-0.7%) despite the intense competitive pressure of cable and mobile operators. The number of retail broadband Internet connections amounted to over 345,000 by the end of the quarter, with a net gain of 43,500 connections since the start of the year. The volume of voice traffic processed by the Telefonica Chile network in the first quarter of the year, over 3,600 million minutes, fell by 7.6% year-on-year, mostly due to the drop in local fixed-to-fixed traffic and the lower volume of incoming network traffic and, to a lesser extent, to the drop in domestic long-distance traffic, whereas increases were recorded in fixed-to-mobile traffic and international long-distance traffic. Revenues accrued during the first three months of the year amounted to 261.9 million euros, 3.2% up year-on-year in local currency due to the increased commercial efforts aimed at the widespread implementation of Broadband products. Telefonica Chile announced its plans to launch its own digital television services to add to its offer to the residential market over forthcoming months. Revenues from the traditional business increased slightly in local currency (+0.3%) in relation to 2005 thanks to the launch of new products aimed at clients with low incomes (pre-paid lines and consumption control) and new minute packages (minutes plans), offsetting the drop in fixed traffic and the replacement effect of the increased penetration of mobile telephony. By the end of the quarter, Internet revenues (narrowband + broadband) represented 9.5% of company revenues (+2.3 percentage points year-on-year) and continued to show high levels of growth in relation to the previous year, +35.7% year-on-year in local currency. Telefonica Chile maintained its support for the popularization of Broadband through new offers of ADSL packages and voice minute plans. To a lesser extent (6.3% of company sales), revenues from data and information technology grew a combined 5.3% in local currency. Operating expenses accumulated to March 2006 grew by 21.8% year-on-year in local currency. primarily due to the extraordinary charge linked to the employee restructuring plan announced at the end of 2005. Excluding this effect, operating expenses grow 11.5% in local currency due to higher expenses in supplies (+11.0% in local currency), due to greater interconnection, and subcontracting expenses (+8.8% in local currency), associated to the increased activity of the period. Bad debt in Telefonica Chile continued to fall. Bad debt provisions dropped 9.3% year-on-year in local currency to represent 3.2% of revenues over the period, 0.4 percentage points down on the same period of the previous year. Hence, the accumulated operating income before depreciation and amortization (OIBDA) at March 2006 amounted to 91.5 million euros, a year-on-year drop of 20.0% in local currency. Isolating the effect of the layoff plan, OIBDA would have fallen by 8.2% in local currency. Accumulated investments (CapEx) at March 2006 amounted to 29.5 million euros, 83.4% up on the first three months of 2005 in local currency primarily due to investment in broadband, the TV project and systems. The operating free cash flow (OIBDA-CapEx) accumulated to March stood at 62.0 million euros, a 36.9% drop in local currency with regard to the same period of the previous year. TELEFONICA CHILE ACCESSES Unaudited figures (Thousands) 2006 2005 March % Chg y-o-y March June September December Final Clients Accesses 2,873.8 (0.2) 2,878.3 2,903.1 2,882.6 2.876.0 Fixed telephony accesses (1) 2,407.0 (0.7) 2,423.4 2,443.4 2,462.2 2,429.1 Internet and data accesses 466.7 2.6 454.8 459.7 420.4 446.9 Narrowband 110.7 (51.8) 229.6 211.5 152.0 130.5 Broadband (2) 345.4 68.4 205.1 230.2 253.7 302.0 Other 10.6 (47.2) 20.1 18.1 14.7 14.5 Wholesale Accesses 23.9 (15.2) 28.2 29.6 27.5 25.9 Total Accesses 2,897.7 (0.3) 2,906.5 2,932.7 2,910.1 2,902.0 (1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access; 2/6 Access x30. Company's accesses for internal use included. (2) Includes ADSL, optical fiber and broadband circuits. TELEFONICA DEL PERU In the first quarter of 2006, Telefonica del Peru continued with the strong growth rate in accesses recorded during 2005 (+12.2%) due to its intense commercial activity. This resulted in a final total of 2.4 million fixed telephony accesses (+8.5% year-on-year), whereas retail broadband Internet connections amounted to a total 359,800 (+53.0% year-on-year). Furthermore, a strong increase was also recorded in the number of users of Cable Television (Cable Magico), the total number of which stood at 474,710 connected homes (+16.9% year-on-year). Total traffic processed by TdP fell by 2.1% year-on-year as a result of the 25.7% decrease in narrowband Internet traffic, as voice traffic remained stable in relation to the first quarter of 2005. Within the voice traffic segment, growth was recorded in international incoming, international long-distance and fixed-to-mobile traffic, which offset the fall in public telephony traffic. The rest of the traffic captions remain almost in the same levels recorded in the previous year. Revenues accumulated to March stood at 279.3 million euros, a year-on-year increase of 2.7% in local currency. Internet revenues (broadband + narrowband + cable television) grew by 24.7% in local currency, mainly as a result of the good performance of broadband revenues (+37.0% in local currency) and cable TV revenues (+19.0% in local currency). Hence, Internet revenues contributed to a total 18.5% of company revenues (15.2% in the same quarter of 2005). However, revenues from the traditional business recorded a negative trend (-1.9% in local currency), affected by the impact on revenues by tariffs and traffic from the productivity factor in force since September 2004 (CPI-10.07%) and the drop in public payphone revenues (-2.3% in local currency), partly due to the replacement of fixed traffic for mobile traffic. Lastly, revenues from data and information technology services recorded a combined growth of 8.7% in local currency, contributing to 5.4% of company revenues. Operating expenses for the first quarter of the year fell by 2.2% in local currency thanks to lower supplies expenses that dropped 7.1% in local currency mostly due to the drop in fixed-to-mobile interconnection tariffs and its subsequent impact on interconnection expenses (-13.2% in local currency). Personnel expenses, however, increased by 4.8% in local currency due to the appointing of 430 temporary employees onto the company's workforce, leading to lower expenses from temporary employees, included in subcontracted services that, as a whole, remained stable (+0.7% in local currency). Bad debt provisions fell by 16.4% in local currency to stand at 1.3% of revenues, favored by the higher percentage of prepaid and consumption control plant (59%, compared with 55% one year ago). Operating income before depreciation and amortization (OIBDA) stood at 126.1 million euros, up 23.0% on the same period in 2005 in local currency thanks to the good progress of revenues, the control of operating expenses and to lower extraordinary contingencies, primarily relating to labor and tax issues. The OIBDA margin stood at 45.1% to improve the margin recorded in the same period of 2005 by 7.5 percentage points. CapEx amounted to 17.7 million euros, a year-on-year growth of 19.5% in local currency due to anticipated investments during the first few months of the year. The operating free cash flow (OIBDA-CapEx) stood at 108.3 million euros, a 23.6% increase in local currency as a result of the good performance of OIBDA that was able to offset increased investments. TELEFONICA DEL PERU ACCESSES Unaudited figures (Thousands) 2006 2005 March % Chg y-o-y March June September December Final Clients Accesses 3,277.9 12.2 2,920.9 3,028.8 3,108.9 3,211.0 Fixed telephony accesses (1) 2,388.2 8.5 2,200.6 2,250.0 2,302.1 2,347.6 Internet and data accesses 414.9 32.0 314.3 361.2 369.6 401.2 Narrowband 47.6 (33.7) 71.9 77.5 51.5 52.5 Broadband (2) 359.8 53.0 235.1 276.4 310.7 341.1 Other 7.5 2.1 7.3 7.4 7.4 7.6 Pay TV 474.7 16.9 406.0 417.5 437.2 462.2 Wholesale Accesses 0.6 9.6 0.6 0.8 0.9 0.5 Total Accesses 3,278.5 12.2 2,921.5 3,029.6 3,109.8 3,211.6 (1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access; 2/6 Access x30. Company's accesses for internal use included. (2) Includes ADSL, optical fiber, cable modem and broadband circuits. TELEFONICA INTERNATIONAL WHOLESALE SERVICES (TIWS) Revenues for the first quarter of 2006 stood at 53.7 million euros, a year-on-year increase of 25.7% (+20.9% in constant euros). The positive performance of IP Internacional revenues must be noted, which were up 17.2% (+13.3% in constant euros) to provide 53% of revenues. The 29.2% growth recorded in broadband capacity revenues and the 16.8% growth in virtual private network revenues are also worth noting, both in constant euros. The operating income before depreciation and amortization (OIBDA) stood at 18.7 million euros (+41.4% in constant euros) due to the good performance of revenues and partially offset by increased operating expenses (+13.4% in constant euros), primarily in supplies due to increased activity. The OIBDA margin stood at 34.7% to improve the margin recorded in March 2005 by 4.5 percentage points. TELEFONICA LATINOAMERICA GROUP TELEFONICA LATINOAMERICA GROUP ACCESSES Unaudited figures (Thousands) 2006 2005 March % Chg y-o-y March June September December Final Clients Accesses 28,231.4 3.7 27,211.1 27,654.9 27,981.0 28,086.8 Fixed telephony accesses (1) 21,718.8 1.7 21,348.0 21,547.1 21,687.4 21,649.1 Internet and data accesses 6,037.9 10.6 5,457.1 5,690.2 5,856.5 5,975.4 Narrowband (2) 3,030.6 (11.1) 3,410.1 3,415.9 3,322.2 3,185.1 Broadband (3) (4) 2,907.5 50.2 1,935.5 2,164.6 2,428.3 2,685.4 Other 99.8 (10.6) 111.6 109.7 106.0 105.0 Pay TV 474.7 16.9 406,0 417.5 437.2 462.2 Wholesale Accesses 64.5 (6.7) 69.1 70.8 67.8 66.0 Total Accesses 28,295.9 3.7 27,280.2 27,725.6 28,048.8 28,152.7 (1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access; 2/6 Access x30. Company's accesses for internal use included. (2) Includes narrowband ISP of Terra Brasil and Terra Colombia. (3) Includes broadband ISP of Terra Brasil, Telefonica de Argentina, Terra Guatemala y Terra Mexico. (4) Includes ADSL, optical fiber, cable modem, broadband circuits and ISP in the North part of the country. TELEFONICA LATINOAMERICA GROUP SELECTED OPERATING DATA Unaudited figures (Euros in millions) January - March 2006 2005 % Chg % Chg. Local Cur. Telesp Revenues 1,427.8 1,005.6 42.0 7.1 OIBDA 630.1 454.7 38.6 4.5 OIBDA margin 44.1% 45.2% (1.1 p.p.) Telefonica de Argentina Revenues 236.4 210.1 12.5 8.0 OIBDA 122.2 114.9 6.4 2.1 OIBDA margin (1) 43.1% 46.9% (3.9 p.p.) Telefonica Chile Revenues 261.9 212.0 23.5 3.2 OIBDA 91.5 95.5 (4.2) (20.0) OIBDA margin 34.9% 45,0% (10.1 p.p.) Telefonica del Peru Revenues 279.3 255.6 9.3 2.7 OIBDA 126.1 96.3 30.9 23.0 OIBDA margin 45.1% 37.7% 7.5 p.p. TIWS Revenues 53.7 42.7 25.7 20.9 OIBDA 18.7 12.9 44.4 41.4 OIBDA margin 34.7% 30.2% 4.5 p.p. Note: From January 1st 2006, Telefonica Latinoamerica Group's fixed telephony operator accounts include the Telefonica Empresas businesses in their respective countries. The 2005 results are shown on comparable terms. OIBDA is presented before management fees. Data for Telefonica de Argentina include the ISP business of Advance, while those of Telefonica del Peru includes CableMagico. (1) Margin over revenues includes fixed to mobile interconnection. TELEFONICA LATINOAMERICA GROUP CONSOLIDATED INCOME STATEMENT Unaudited figures (Euros in millions) January - March 2006 2005 % Chg Revenues 2,318.1 1,775.1 30.6 Internal expenditure capitalized in fixed assets (1) 10.9 8.5 27.7 Operating expenses (1,306.0) (970.8) 34.5 Other net operating income (expense) (25.0) (38.8) (35.6) Gain (loss) on sale of fixed assets (2.2) 79.1 c.s. Impairment of goodwill and other assets (1.6) 7.3 c.s. Operating income before D&A (OIBDA) 994.2 860.5 15.5 Depreciation and amortization (499.8) (406.0) 23.1 Operating income (OI) 494.4 454.5 8.8 Profit from associated companies 3.6 0.0 N.S. Net financial income (expense) (68.4) (59.8) 14.3 Income before taxes 429.6 394.7 8.8 Income taxes (155.0) (115.3) 34.5 Income from continuing operations 274.6 279.4 (1.7) Income (Loss) from discontinued operations 0.0 0.0 N.S. Minority interest (32.3) (32.8) (1.7) Net income 242.3 246.6 (1.7) (1) Including work in process. Note: Telefonica Latinoamerica Group incorporates the results of Terra Networks operations from 1 January 2005. RESULTS BY BUSINESS LINES Telefonica Moviles Group Telefonica Moviles recorded strong commercial activity across all its markets in the first quarter of 2006, resulting in the highest level of net adds in any first quarter in the company's history. Total net adds in the first quarter of 2006 almost reached 4.1 millions, 35% higher than in the first quarter of 2005. Net adds in Latin America reached 3.5 millions in the first quarter of 2006, driven by the roll-out of new GSM networks during the past year, implying lower unit commercial costs, and bringing the total customer base in the region to 74 millions (+25% vs. the first quarter of 2005). In Spain, net adds in the first quarter of 2006 (0.4 millions) were the highest quarterly gain since the fourth quarter of 2003, almost four times higher than in the first quarter of 2005, bringing the customer base to 20.3 millions by the end of March. In Morocco, Meditel recorded net adds in the first quarter of 2006 of 0.2 millions to reach a total of 4.2 million customers. Thus, at the end of March 2006, the Group's total managed customer base surpassed 98.5 millions, representing year-over-year growth of 21%. The higher gross adds have been encompassed with churn containment in the main operating markets, despite the intense competitive environment. Key aspects of the first quarter of 2006 results are as follows: â€¢ 17.7% year-over-year growth in consolidated revenues to 4,327.3 million euros. Excluding the impact of exchange rates, consolidated revenues grew by 10.1%. By components, consolidated service revenues (3,780 million euros) rose 18.1%, driven by the larger customer base and traffic growth, which in turn boosted outgoing revenues (+21.6%). Handset sales (547 million euros) grew 15.2% vs. the first quarter of 2005. In Spain, Telefonica Moviles Espana's revenues were up 4.4% vs. the first quarter of 2005, driven by lower incoming revenues and virtually flat revenues from handset sales. Outgoing customer revenues grew 6.4% compared to the first quarter of 2005, despite lower prices and the one-off impact of Christmas promotional campaigns. The Group's Latin American operators increased their contribution to total consolidated revenues1 to 50%, up from 44% in the first quarter of 2005. In absolute terms, revenues generated by these operators grew 35% over the first quarter of 2005 (18% ex- forex). Service revenues performance was noteworthy (+36% in euros; +19% ex-forex), boosted by strong growth in outgoing revenues, which outpaced customer growth. â€¢ Consolidated OIBDA grew 11.7% to 1,471.9 million euros in the first quarter of 2006. Excluding the impact of exchange rates, consolidated OIBDA would have grown 6.3%. The Group's OIBDA margin in the first quarter of 2006 stood at 34.0% (-1.8 percentage points vs. the first quarter of 2005), impacted by the high level of commercial activity in very competitive environments. Telefonica Moviles Espana's OIBDA totaled 951.9 million euros, down 3.5% vs. the first quarter of 2005, affected significantly by the pick-up in commercial activity (+17% vs. the first quarter of 2005) and higher customer management and network costs. OIBDA margin in the first quarter of 2006 stood at 44.0%. It is worth highlighting the increasing contribution by the consolidated Latin American subsidiaries to Group OIBDA1 (37% in the first quarter of 2006 vs. 26% in the first quarter of 2005). OIBDA totaled 554.1 million euros in the first quarter of 2006, a strong year-over-year rise in both euros (+57.0%) and excluding the impact of exchange rates (+37%). We would also point out the increasing weight of GSM adds within customer growth in the region, with the corresponding positive impact on unit commercial costs. In addition, the fact that revenue growth outpaced costs reflects greater economies of scale, regional management and the further integration of the companies acquired during the last two years. These positive trends led to significant OIBDA margin expansion to 25.5% in the first quarter of 2006, up 3.5 percentage points over the first quarter of 2005, despite the more intense commercial activity (+37%). Regarding the rest of the main items, we would highlight: â€¢ The year-over-year increase of 16.8% in depreciation and amortization, affected by the appreciation of the Latin American currencies. In 2006 it is still impacted by the amortization of allocated intangible assets related to the acquisition of Telefonica Movil Chile and the 10 Latin American operators acquired from BellSouth in 2004 and early 2005. â€¢ Positive contribution by companies consolidated by the equity method (0.6 million euros) compared to losses in the first quarter of 2005 (-8.6 million euros). We would point out the increasing contribution by Medi Telecom to Group earnings (1.0 million euros vs. -4.2 million euros in the first quarter of 2005). â€¢ Year-over-year increase in net financial losses (+122.1%), due to foreign exchange rate losses compared to gains a year earlier, higher cost of debt as a result of interest rate increases, the appreciation of the Latin American currencies and the greater weight of debt denominated in Latin American currencies. Consolidated net debt at the end of the first quarter of 2006 stood at 8,615 million euros, down 8% from the end of March 2005 and virtually unchanged in relation to year-end 2005. â€¢ The effective tax rate was 36% in the first quarter of 2006. Consolidated CapEx2 in the first quarter of 2006, excluding licenses, stood at 293 million euros. ------------------------ 1Consolidated data before Rest and intragroup eliminations. 2Group CapEx in 2006 at cumulative average exchange rate. For comparative purposes, 2005 CapEx has been recalculated at the cumulative average exchange rate for the corresponding period. SPAIN In the first quarter of 2006 the highly competitive environment which has marked the Spanish wireless market in recent years continued to intensify due to the end of the Christmas campaign. The Spanish market has surpassed 44 million lines, equivalent to an estimated penetration rate of close to 99%. In this context, Telefonica Moviles Espana recorded net adds of 0.4 millions in the first quarter of 2006, 50.5% more than in the fourth quarter of 2005 and almost four times higher than in the first quarter of 2005, surpassing the 20 millions mark (+6.3% vs. the first quarter of 2005), thereby consolidating its position as the leading Spanish wireless operator. The strong commercial results in the first quarter of 2006 were driven by the successful commercial activity undertaken by the company. In the first quarter of 2006 Telefonica Moviles Espana carried out almost 3 million commercial initiatives, 11% more than in the fourth quarter of 2005 and 17% more than in the first quarter of 2005, a record high for the company. The significant increase in gross adds (+26% vs. the first quarter of 2005) is noteworthy, particularly the performance of the contract segment, where gross adds increased 30% year-over-year as a result of the company's increased focus on this segment. The focus on the contract segment is also reflected in number portability, where results were notably better than in the first quarter of 2005. In the contract segment the net balance in portability was positive at 36,000 customers compared to -45,000 in the first quarter of 2005. In all, Telefonica Moviles Espana had a negative net balance of -26,000 customers vs. -181,000 in the first quarter of 2005. These factors, together with ongoing prepaid to contract migrations (over 250,000 migrations in the first quarter of 2006) led the contract segment to represent 54.5% of Telefonica Moviles Espana's total customer base at the end of March 2006 (+4.8 percentage points vs. the first quarter of 2005). On another front, over 1 million handsets upgrades were carried out in the first quarter of 2006 (+4% vs. the first quarter of 2005), driven by retention campaigns that reward customer loyalty by offering them very favorable conditions for upgrades to encourage greater commitment from our customers. This is helping significantly to contain the churn rate, which stood at 1.9% in the first quarter of 2006 vs. 2.0% in the first quarter of 2005. In the first quarter of 2006, 56% of the commercial actions involving handsets were linked to long-term contract. Several promotions aimed at increasing customer usage, particularly those designed to boost on-net traffic, also contributed to contain the churn rate. We would highlight the extension of the '100x1' campaign, the 50% price cut for on-net SMS and MMS and the 'Mis Cinco', (My Five) initiative which has been extended to video calls. These commercial offers, among others, drove customer usage, specially on-net traffic, which has grown 36% to represent 44% of total billable traffic in the first quarter of 2006 (+5% percentage points vs. the first quarter of 2005). The company's networks carried a total of 13,600 million minutes in the first quarter of 2006, 25% more than in the first quarter of 2005. MOU reached 153 minutes in the first quarter of 2006, 14.8% higher than in the first quarter of 2005. The increase in customer usage and the improvement in the contract vs. prepaid mix held up voice ARPU, offsetting the negative impact of the reduction in prices and lower interconnection rates. Voice ARPU stood at 27.4 euros, driven by outgoing voice ARPU (+2.3%). Data ARPU stood at 4.4 euros in the first quarter of 2006, a year-over-year increase of 2.3%, impacted by the lower volume of P2P SMS and partially offset by the strong performance in other data service revenues, which currently represent 43.0% of total data revenues (35.6% in the first quarter of 2005). It is worth mentioning the 31% y-o-y growth achieved in connectivity & content. Overall, ARPU reached 31.8 euros in the first quarter of 2006 (+0.6% vs. the first quarter of 2005). Highlights of Telefonica Moviles Espana's financial results include: â€¢ Revenues totaled 2,165.7 million euros in the first quarter of 2006, representing year-over-year growth of 4.4%, driven by the strong performance of customer revenues which reached 1,490 million euros, up 6.4% over the first quarter of 2005. This performance offset the decline in incoming revenues (-1.5%), leading to a 4.7% increase in service revenues. Revenues from handset sales (266 million euros) increased by 2.1% year-over-year. â€¢ Total commercial costs (including SAC, SRC and advertising) accounted for 16.1% of service revenues ex-loyalty points in the first quarter of 2006 compared to 14.1% in the first quarter of 2005. We note that the first quarter of 2005 was marked by lower commercial activity, a lull before renewed commercial efforts following the re-launch of the movistar brand in April 2005. Commercial costs also reflect the attractive conditions offered to customers in exchange for signing longer term commitment contracts, a key tool for containing churn against the backdrop of an intense competitive environment. â€¢ Higher commercial costs, together with higher customer management costs -linked to increased segmentation-, enhanced customer service and higher network expenses impacted OIBDA, which totaled 951.9 million euros in the first quarter of 2005. This represents an OIBDA margin of 44.0% vs. 47.5% in the first quarter of 2005. CapEx in Telefonica Moviles Espana totaled 107.6 million euros in the first quarter of 2006. Further progress was made in the rollout of the high quality UMTS network TELEFONICA MOVILES ESPANA SELECTED OPERATING DATA Unaudited figures 2006 2005 March % Chg y-o-y March June September December Cellular customer (thousands) 20,276.8 6.3 19,077.4 19,381.8 19,632.9 19,889.9 Prepaid 9,231.9 (3.8) 9,598.7 9,529.3 9,330.0 9,186.4 Contract 11,044.9 16.5 9,478.8 9,852.5 10,302.9 10,703.5 MOU (minutes) 153 14.8 133 154 158 151 ARPU (EUR) 31.8 0.6 31.7 33.3 34.2 33.2 Prepaid 15.7 (6.5) 16.8 17.2 18.9 16.7 Contract 45.5 (3.2) 47.1 49.2 48.5 47.7 Data ARPU 4.4 2.3 4.3 4.1 4.5 4.7 % non-P2P SMS over data revenues 43.0% 7.4 p.p. 35.6% 39.2% 42.3% 41.7% Note: MOU and ARPU calculated as monthly quarterly average. MOROCCO At the end of March 2006, Medi Telecom's customer base stood at 4.2 millions, reflecting a 30.0% y-o-y growth. Regarding financial results, revenues in the first quarter of 2006 totaled 99 million euros (+7% vs. the first quarter of 2005), affected by the reduction in interconnection rates. OIBDA stood at 41 million euros in the first quarter of 2006, with a 18% y-o-y increase. The OIBDA margin reached 42% (38% in the first quarter of 2005). MOROCCO SELECTED OPERATING DATA: CELLULAR CUSTOMERS Unaudited figures (Thousands) 2006 2005 March % Chg y-o-y March June September December MEDI TELECOM 4,185.6 30.0 3,220.8 3,439.6 3,838.6 4,023.3 Prepaid 4,040.5 30.9 3,085.9 3,281.3 3,677.1 3,873.4 Contract 145.1 7.5 135.0 158.2 161.5 149.9 LATIN AMERICA BRAZIL The Brazilian market remained highly competitive in the first quarter of 2006 showing the same trend witnessed in the fourth quarter of 2005, with competitors' commercial efforts increasingly focused on the higher value added segments. This trend is reflected in the lower entry barriers in the contract segment, which in some regions of the country were at 1 reais. Vivo maintained its entry barriers in the contract segment at 99 reais. The Brazilian market continued to grow strongly, albeit at a slower pace than in 2005, with penetration at the end of March at 48.1% (50.9% in Vivo's areas of operation). Vivo's customer base surpassed 30.1 millions at the end of March (+11.1% vs. the first quarter of 2005), with net adds of 0.3 millions in the first quarter of 2006. Vivo continued to target its commercial and retention efforts at the high value segments. MOU in the first quarter of 2006 was 67 minutes (80 minutes in the first quarter of 2005), impacted by lower incoming traffic and affecting ARPU3 that stood at 26 reais (29 reais in the first quarter of 2005). Regarding Vivo's financial results, service revenues were flat year-over-year in the first quarter of 2006 in local currency, hit by the reduction in incoming revenues (-12%), and partially offset by higher outgoing voice revenues (+7%) and the strong performance of data revenues (+27%). The trend in revenues and higher costs led to a year-over-year reduction in OIBDA in the first quarter of 2006 in local currency (-27.5%) and an OIBDA margin of 27.4%. ------------------------ 3In 2006, ARPU definition has been homogenized for all Telefonica Group operators. BRAZIL SELECTED OPERATING DATA: CELLULAR CUSTOMERS Unaudited figures (Thousands) 2006 2005 March % Chg y-o-y March June September December VIVO 30,137.7 11.8 26,958.5 28,446.0 28,840.5 29,804.6 Prepaid 24,377.2 12.6 21,650.4 22,935.2 23,190.3 24,060.8 Contract 5,760.5 8.5 5,308.1 5,510.8 5,650.2 5,743.8 NORTHERN REGION Mexico Measures adopted by Telefonica Moviles Mexico in recent quarters to enhance operating performance are beginning to pay off. This is shown by the positive trends in customer usage, revenues and churn rates, reflecting a notable improvement in the quality of customers acquired in recent months. We continue working to adapt the commercial activity to the reshaping of the distribution channel and the changes in the company's commercial offer. In a quarter marked by lower commercial activity following the Christmas campaigns in the fourth quarter of 2005, net adds totaled 191,000 in the first quarter of 2006, bringing the total customer base to 6.6 millions (+8.2% vs. the first quarter of 2005). It is worth highlighting the performance of the contract segment. Although it only represents 6% of the total customer base, it makes a significant contribution to Telefonica Moviles Mexico's service revenues. Contract gross adds in the first quarter of 2006 were double those of the first quarter of 2005, and the churn rate in this segment was cut by over 60%. In terms of usage, traffic rose in the quarter compared to the fourth quarter of 2005, while normally, seasonal factors dictate lower traffic in the first quarter vs. last quarter of the year. Thus, MOU in the first quarter of 2006 was 55 minutes (+9% vs. the fourth quarter of 2005) and ARPU4 reached 107 Mexican pesos vs. 112 pesos in both the first quarter of 2005 and the fourth quarter of 2005. Contract ARPU grew a solid 17% year-over-year. Regarding financial results, service revenues in local currency grew 8% vs. the first quarter of 2005, driven by the good performance of outgoing revenues (+22% in local currency), which were offset by lower incoming revenues (-13% in local currency), as a result of a 10% reduction in interconnection rates implemented in January 2006. Data revenues continued to grow strongly to account for 14% of service revenues in the first quarter of 2006. Revenues from handset sales fell 46% in local currency from the first quarter of 2005 on the back of lower commercial activity, triggering an 11% decrease in total revenues year-on-year in local currency. The lower commercial activity and efficiency improvements achieved allow for a 57% reduction in operating losses before depreciation and amortization in local currency to 24 million euros in the first quarter of 2006 (vs. -49 million euros in the first quarter of 2005). At the end of March 2006, the GSM network covered 435 cities. CapEx in local currency in the first quarter of 2006 declined by 73% year-over-year in local currency, leading to a sharp reduction in negative operating cash flow (-60% vs. the first quarter of 2005 in local currency). ------------------------ 4In 2006, ARPU definition has been homogenized for all Telefonica Group operators, excluding traffic promotions. NORTHERN REGION SELECTED OPERATING DATA: CELLULAR CUSTOMERS Unaudited figures (Thousands) 2006 2005 March % Chg y-o-y March June September December TEM Mexico 6,559.4 8.2 6,061.1 5,847.4 5,976.6 6,368.1 Prepaid 6,189.1 6.9 5,792.0 5,592.2 5,692.5 6,047.7 Contract 369.3 37.3 269.1 255.2 283.9 319.9 Fixed Wireless 0.9 N.S. 0.0 0.0 0.1 0.6 TEM Guatemala 1,149.1 43.1 802.9 904.0 923.9 1,040.7 Prepaid 965.8 57.2 614.2 721.0 741.6 864.4 Contract 71.2 (5.1) 75.0 72.0 73.2 69.9 Fixed Wireless 112.1 (1.4) 113.7 111.0 109.1 106.3 TEM Panama 904.8 27.6 708.8 751.2 788.2 849.4 Prepaid 836.2 28.6 650.1 688.5 723.0 781.5 Contract 68.5 16.7 58.7 62.7 65.2 67.9 TEM El Salvador 626.4 54.3 405.8 462.1 494.0 537.8 Prepaid 513.6 63.6 313.9 367.7 395.6 435.3 Contract 79.9 3.3 77.4 78.1 77.7 79.0 Fixed Wireless 32.9 126.2 14.5 16.3 20.8 23.5 TEM Nicaragua 414.7 31.3 315.8 329.2 336.9 371.6 Prepaid 354.6 37.7 257.4 269.5 276.6 310.4 Contract 43.4 2.6 42.4 43.8 44.7 45.3 Fixed Wireless 16.7 4.1 16.0 15.9 15.6 15.9 Total Acceses 9,654.3 16.4 8,294.4 8,293.9 8,519.6 9,167.6 ANDEAN REGION Venezuela The Venezuelan wireless market continued to perform well in the first quarter of 2006. The estimated penetration rate at the end of the quarter stood at 50%, up 17 percentage points vs. the first quarter of 2005. Telefonica Moviles Venezuela's customer base reached over 6.7 millions in the first quarter of 2006 (+45.5% vs. March 2005), with net adds of 523,000 in the first quarter of 2006, almost double the net adds recorded in the first quarter of 2005, boosted by the Valentine's Day and other campaigns during the quarter. As for financial results, the strong growth in the customer base, coupled with higher traffic and a steady improvement in data revenues, led to 51% year-over-year growth in service revenues in local currency and a 59% increase in total revenues. The solid revenue growth was encompassed by significant efficiency improvements, leading to an OIBDA in the first quarter of 2006 of 189 million euros (+63% vs. the first quarter of 2005 in local currency) and an OIBDA margin of 42% (+1 percentage point vs. the first quarter of 2005), despite higher commercial activity. Finally, the Company's leadership for innovation in the Venezuelan market led to a strong take-up of the EV-DO services launched commercially at the end of December 2005, which had 91,000 customers by the end of the quarter. Colombia The Colombian cellular market showed the strongest growth in the region once again in the first quarter of 2006, doubling the wireless penetration vs. the first quarter of 2005 and reaching 54%. During this quarter, Telefonica Moviles Colombia further accelerated its commercial activity, underpinned by the deployment of its GSM network, enabling to capture more than 90% of its gross adds in GSM. Net adds in the first quarter of 2006 surpassed 785,000, almost double those recorded in the first quarter of 2005, with net adds in the contract segment more than 10 times higher. This brought the customer base at the end of March 2006 to over 6.8 millions (+84.3% vs. the first quarter of 2005), with GSM customers accounting for 39% of the total customer base. Regarding financial results, revenues grew by 11% year-over-year in local currency. Service revenues (+8.1% vs. the first quarter of 2005) were affected by the reduction in interconnection rates and the rapid growth of its customer base. It is worth highlighting that the OIBDA margin stood at 19% in the first quarter of 2006 (just -0.9 percentage points vs. the first quarter of 2005), despite higher commercial activity (+85% y-o-y). OIBDA reached 37 million euros in the first quarter of 2006. Peru The Peruvian market was extremely dynamic in the first quarter of 2006. In this context, and following the commercial launch of GSM services at the end of February, Telefonica Moviles Peru recorded substantial net adds (226,000), more than twice the number of customers added in the first quarter of 2005. This brought the operator's customer base to 3.7 millions at the end of March 2006 (+23.9% vs. the first quarter of 2005). Regarding financial results, quarterly revenues growth remained solid, growing 10.9% vs. the first quarter of 2005 in local currency, driven by the growth in customers and outgoing traffic, which offset the impact of the reduction in interconnection rates. Outgoing customer revenues rose 24.6% over the first quarter of 2005 in local currency. The higher level of commercial activity vs. the first quarter of 2005 led to a lower OIBDA margin, which stood at 28%. OIBDA in the first quarter of 2006 was 27 million euros. In the first quarter of 2006, the operator continued to roll out its GSM network. CapEx in the first quarter of 2006 stood at 12 million euros and network coverage reached 60% of the population. ANDEAN REGION SELECTED OPERATING DATA: CELLULAR CUSTOMERS Unaudited figures (Thousands) 2006 2005 March % Chg y-o-y March June September December TEM Venezuela 6,683.3 45.5 4,594.8 5,197.4 5,319.0 6,160.3 Prepaid 5,659.0 51.0 3,748.0 4,309.7 4,393.2 5,203.7 Contract 371.7 21.3 306.4 326.1 340.0 347.8 Fixed Wireless 652.7 20.8 540.4 561.7 585.8 608.8 TEM Colombia 6,817.8 84.3 3,699.0 4,756.5 5,170.6 6,033.0 Prepaid 5,283.6 93.5 2,730.0 3,619.8 3,976.7 4,657.9 Contract 1,534.1 58.3 969.0 1,136.7 1,193.9 1,375.1 TEM Peru 3,680.9 23.9 2,971.4 3,058.5 3,199.3 3,455.0 Prepaid 3,007.6 26.5 2,377.9 2,437.5 2,557.7 2,804.3 Contract 603.3 16.1 519.4 548.1 569.8 579.5 Fixed Wireless 70.1 (5.4) 74.1 72.9 71.8 71.1 TEM Ecuador 2,328.4 76.6 1,318.3 1,657.6 1,624.2 1,884.6 Prepaid 1,948.3 89.3 1,029.1 1,318.1 1,273.9 1,517.5 Contract 377.7 31.9 286.4 337.0 347.8 364.7 Fixed Wireless 2.4 (12.8) 2.7 2.5 2.5 2.4 Total Acceses 19,510.5 55.0 12,583.5 14,670.0 15,313.1 17,532.8 SOUTHERN CONE REGION Argentina The Argentine wireless market continued to grow strongly in the first quarter of 2006, achieving an estimated penetration rate of 60%, up almost 22 percentage points on the first quarter of 2005. In this context, Telefonica Moviles Argentina's commercial efforts were intense, registering net adds in the first quarter of 2006 of 579,000 (+38% vs. the first quarter of 2005), boosting the customer base by 44.8% to over 8.9 million euros at the end of March. GSM customers now account for 58% of the total (vs. 25% in the first quarter of 2005). Regarding financial results in local currency, we would highlight the solid top line growth, driven by higher service revenues (+36% y-o-y in local currency), underpinned customer base and usage growth. It is noteworthy the increasing contribution from data revenues, which in the first quarter of 2006 represented 21% of service revenues (11% in the first quarter of 2005). The OIBDA margin improved by 11 percentage points vs. the first quarter of 2005, thanks to efficiency enhancements achieved by the integration of the two Argentine operations, as well as lower SACs, despite the strong commercial activity recorded this quarter. OIBDA in the first quarter of 2006 was 67 million euros (+164% y-o-y in local currency). Chile Despite the high penetration levels reached in 2005, the Chilean wireless market continued to perform well in the first quarter of 2006, with an increase of 1.6 percentage points in the estimated penetration rate to almost 73% (+10 percentage points vs. the first quarter of 2005). In this context, Telefonica Moviles Chile ended the first quarter of 2006 with 5.3 million customers (+8.7% vs. the first quarter of 2005), recording net adds in the first quarter of 2006 of 59,000. The higher growth in the contract customer base (+13%) is noteworthy. GSM customers now represent 57% of the total. In the first quarter of 2006 revenues showed a 17.3% increase in local currency year-over-year, underpinned by solid growth in service revenues (+19.9% y-o-y), driven by the increase in the customer base and the positive performance of ARPU (+10% vs. the first quarter of 2005). The strong top line performance translated to OIBDA, which outpaced revenue growth to reach 41% in local currency, reflecting an OIBDA margin expansion (+5 percentage points vs. the first quarter of 2005). This was achieved despite higher commercial costs associated with the proactive migration process of its customers to GSM. SOUTHERN CONE SELECTED OPERATING DATA: CELLULAR CUSTOMERS Unaudited figures (Thousands) 2006 2005 March % Chg y-o-y March June September December TEM Argentina 8,914.4 44.8 6,155.0 6,731.4 7,395.2 8,335.0 Prepaid 5,535.2 60.9 3,440.0 3,786.1 4,312.2 5,035.8 Contract 3,210.0 28.3 2,501.1 2,740.9 2,896.7 3,119.2 Fixed Wireless 169.2 (20.9) 213.9 204.4 186.3 179.9 TEM Chile 5,335.0 8.7 4,907.2 5,257.2 5,230.2 5,275.8 Prepaid 4,396.0 7.8 4,076.7 4,405.8 4,350.0 4,384.1 Contract 938.9 13.1 830.5 851.4 880.1 891.7 TEM Uruguay 500.4 107.3 241.4 278.6 322.1 418.9 Prepaid 434.7 131.9 187.5 223.1 266.1 356.5 Contract 65.6 21.9 53.9 55.5 56.0 62.4 Total Acceses 14,749.8 30.5 11,303.6 12,267.2 12,947.5 14,029.7 Telefonica Moviles Group TELEFONICA MOVILES GROUP SELECTED FINANCIAL DATA Unaudited figures (Euros in millions) January - March 2006 2005 % Var Spain Revenues 2,165.7 2,075.2 4.4 OIBDA 951.9 986.5 (3.5) OIBDA margin 44.0% 47.5% (3.6 p.p.) Latin America Revenues 2,171.3 1,602.7 35.5 OIBDA 554.1 353.0 57.0 OIBDA margin 25.5% 22.0% 3.5 p.p. Brazil Revenues 496.8 370.7 34.0 OIBDA 136.3 141.9 (4.0) OIBDA margin 27.4% 38.3% (10.8 p.p.) Northern Region Revenues 344.5 313.9 9.8 OIBDA 16.3 (20.1) c.s. OIBDA margin 4.7% -6.4% 11.1 p.p. Andean Region Revenues 823.2 565.8 45.5 OIBDA 271.5 169.3 60.4 OIBDA margin 33.0% 29.9% 3.1 p.p. Southern Cone Revenues 506.8 352.3 43.8 OIBDA 130.0 61.9 110.0 OIBDA margin 25.7% 17.6% 8.1 p.p. Rest and intragroup Revenues (9.6) (2.0) 380.5 OIBDA (34.1) (21.5) 58.4 OIBDA margin N.S. N.S. N.S. TOTAL Revenues 4,327.3 3,675.9 17.7 OIBDA 1,471.9 1,317.9 11.7 OIBDA margin 34.0% 35.9% (1.8 p.p.) TELEFONICA MOVILES GROUP CONSOLIDATED INCOME STATEMENT Unaudited figures (Euros in millions) January - March 2006 2005 % Chg Revenues 4,327.3 3,675.9 17.7 Internal expenditure capitalized in fixed assets (1) 28.6 21.1 35.3 Operating expenses (2,820.3) (2,347.7) 20.1 Other net operating income (expense) (63.8) (29.4) 117.1 Gain (loss) on sale of fixed assets 0.1 (1.0) c.s. Impairment of goodwill and other assets 0.0 (0.9) N.S. Operating income before D&A (OIBDA) 1,471.9 1,317.9 11.7 Depreciation and amortization (616.3) (527.6) 16.8 Operating income (OI) 855.6 790.3 8.3 Profit from associated companies 0.6 (8.6) c.s. Net financial income (expense) (164.4) (74.0) 122.1 Income before taxes 691.9 707.8 (2.2) Income taxes (248.9) (276.3) (9.9) Income from continuing operations 443.0 431.5 2.7 Income (Loss) from discontinued operations 0.0 0.0 N.S. Minority interest 4.0 0.6 N.S. Net income 447.0 432.1 3.5 (1) Including work in process. RESULTS BY BUSINESS LINES Telefonica O2 Europe Telefonica O2 Europe comprises the results of O2 Group as of February 1st, 2006 as well as the results of Cesky Telecom and Telefonica Deutschland as of January 1st, 2006. At the end of March 2006, contribution from Telefonica O2 Europe to Telefonica Group revenues reached 2,409.2 million euros, whereas the operating income before depreciation and amortization (OIBDA) amounted to 756.0 million euros. O2 GROUP O2 UK First quarter net service revenue grew by 17% year on year at constant currency, driven by continued strong customer and ARPU growth. The year on year comparison also reflected Easter falling in April when last year it fell in March. The quarter saw intense competition in the market, particularly in the contract segment, but the business continued to perform well and achieved 29% growth in total gross additions year on year. A total of 359,000 net new customers were added in the quarter, taking the base to 16.340 million, 13.6% higher than at the same time last year. This excludes the Tesco Mobile customer base, which exceeded one million customers at the end of 2005. The major promotions in the quarter were O2 Treats and Business Unlimited. O2 Treats offered customers bundles of free texts, voice minutes or value added services after 6 months as an O2 customer to reward loyalty, while Business Unlimited introduced unlimited calls to any O2 mobile when on a business tariff. A total of 184,000 net new contract customers were added in the quarter, over half the total, driven by higher gross additions as well as lower churn. At the end of the period contract customers made up 34.8% of the total base, compared to 34.1% in the same period last year. The level of contract upgrades was well ahead of the first quarter last year. 12 months rolling contract ARPU of 517 pounds was flat compared to the previous quarter, but 2 pounds ahead of the first quarter last year. 12-month rolling churn fell to 25%, compared to 31% for the same period last year, reflecting the continued focus on rewarding customer loyalty. A total of 175,000 net new pre-pay customers were added in the quarter, again due to higher gross connections. 12 month rolling pre-pay ARPU of 139 pounds was 4 pounds higher than the first quarter last year and 3 pounds higher than the previous quarter. O2 UK's blended 12 month rolling ARPU of 269 pounds was 2 pounds higher than the first quarter last year, and 2 pounds higher than the previous quarter, reflecting the continued underlying ARPU growth no longer being offset by the impact of the September 2004 termination rate cut. O2 UK's own channels accounted for more than 55% of total gross connections in the quarter. Customer acquisition costs (SAC) were stable for both contract and pre-pay connections. Quarterly monthly minutes of use were up 14% year on year to 162 minutes a month, driven by propositions such as O2 Treats and Talkalotmore, which offered free off peak minutes for pre-pay customers topping up 15 pounds or 30 pounds per month. 12 month rolling data ARPU of 79 pounds was 11 pounds higher than the same period last year and 1 pounds higher than the previous quarter. The number of non-SMS data users grew over 50% year on year. In addition O2 UK launched a number of new products and services during the quarter, aimed at acquisition and retention of customers and revenue growth. These included: â€¢ Launch of ebay on i-mode, enabling users to search auctions, view all their 'My eBay' features including 'items I am bidding on', 'items I am selling' and 'items I have won', as well as place bids; â€¢ Launch of Ireland pre-pay roaming bolt on. This offers standard pre-pay rates to make a call or send a text message to anywhere in the UK when roaming on O2 Ireland's network. There is no charge to receive a call. O2 is the first UK operator to offer this kind of tariff to its pre-pay customers; â€¢ Launch of the BlackBerry 8700g handheld, a new premium device from RIM featuring a new, faster Intel processor, and enhanced display and phone features; â€¢ Launch of Euro Top-up. Customers can now purchase a pre-pay top up voucher when abroad from one of eight partner networks in Europe and use this voucher to top up their own O2 phone. O2 UK SELECTED OPERATING DATA Unaudited figures 2006 2005 March % Chg y-o-y March June September December Cellular customer (thousands) 16,340.6 13.6 14,384.0 14,616.0 15,086.0 15,980.9 Prepaid 10,654.4 12.5 9,471.7 9,597.9 9,858.3 10,479.2 Contract 5,686.2 15.8 4,912.2 5,018.1 5,227.7 5,501.6 MOU (minutes) 162 14.1 142 150 158 165 ARPU (EUR) 32.3 4.5 30.9 32.5 33.4 33.3 Prepaid 16.8 9.1 15.4 16.6 17.1 17.2 Contract 61.6 1.7 60.6 63.0 64.5 63.7 Data ARPU 9.8 10.1 8.9 9.3 9.4 10.0 % non-P2P SMS over data revenues 12.5% (0.9 p.p.) 13.4% 13.0% 12.4% 12.2% Note: MOU and ARPU calculated as monthly quarterly average. O2 GERMANY Service revenue grew by 13% in the first quarter, driven by the continued growth of the customer base, which partly offset continued ARPU weakness in the German market. The termination rate cut in December 2005 reduced first quarter service revenue by over 4%. Since the September '05 quarter O2 Germany has seen a trend of declining blended ARPU, although recently this has begun to stabilise, on a monthly basis. The future direction of this trend should be clearer in the next 3 to 4 months of trading. In this competitive environment, O2 Germany continued to trade well with gross additions at the same level as the first quarter last year. A total of 330,000 net new customers were added in the quarter, taking the base to 10.099 million, 27% higher than at the same time last year. Contract customers comprised 51% of the total base at the end of the quarter, compared to 55% at the same time last year, reflecting the rapid growth of the prepaid customer base. The Tchibo Mobile customer base grew to almost 660,000 by the end of the quarter. O2 Germany added a total of 142,000 net new contract customers in the quarter. 12 month rolling contract ARPU of 500 euros was 8 euros lower than the previous quarter, and 23 euros lower than the same quarter last year. This reflected the impact of the approximately 17% termination rate cuts in December 2004 and 2005, as well as increasing competition in the German market and the introduction of new customer offers. These new propositions enabled O2 to continue to drive contract customer acquisition and retention, and stimulate voice and data usage. Minutes of use for contract customers grew by 15% year-on-year, and were 7% ahead of the previous quarter. Contract SAC and churn remained stable. A total of 188,000 net new pre-pay customers were added in the quarter. 12 month rolling pre-pay ARPU of 122 euros was 8 euros lower than the previous quarter and 11 euros lower than the first quarter last year, reflecting the impact of the termination rate cuts, increasing competition, the growth in multiple SIM ownership and the consequent lower minutes of use. Pre-pay SAC was stable while churn moved up around 3 percentage points. Blended 12 month rolling ARPU remained the highest in the German market, at 320 euros, down from 332 euros in the previous quarter and 356 euros in the same quarter last year. This trend reflected the ongoing impact of the termination rate cuts, the higher proportion of pre-pay customers in the total base, and the increasingly competitive market environment. Termination rate cuts reduced 12 month rolling ARPU in the quarter by approximately 14 euros. Quarterly monthly minutes of use grew by 5% year on year, to 127 minutes, driven by new propositions such as Genion flat rate, offering unlimited calls from the homezone to German fixed and O2 mobile numbers. O2 Germany now has a total of 3.7 million Genion customers, with 67% of all new postpay customers opting for Genion. 12 month rolling data ARPU was 74 euros, broadly flat on the previous quarter and 5 euros lower than the same period last year. Non-SMS data users grew 30% compared to the same period last year. In addition O2 Germany launched a number of new products and services during the quarter, including: â€¢ Launch of TV Select. Available through O2 Active, TV Select contains an extensive collection of video clips covering news, weather, the Bundesliga (Germany's Football First Division), comedy, the popular press and TV series, including over 25 TV programmes from ProSieben, Sat.1, N24 and MTV. Episodes of the popular 'Verliebt in Berlin' programme are available to view in advance on the day of transmission from 12 noon; â€¢ Launch of the Xda neo. The Xda neo improves on its predecessor the Xda mini, the most successful model in the Xda series to date. The Xda neo has additional functions such as WLAN connectivity, a 2-mega pixel camera, increased memory and the latest Windows Mobile 5.0 operating system; â€¢ Launch of Microsoft Direct Push on the Xda neo. O2 Germany is the first mobile network operator in Germany to offer the Direct Push business solution which automatically synchronises e-mails and other data such as addresses and contacts between the Xda neo and Microsoft Outlook; â€¢ Launch of the Business Mobile Pack, offering a free GPRS/UMTS laptop card to business customers taking a 24-month contract on the Business Profi tariff. O2 GERMANY SELECTED OPERATING DATA Unaudited figures 2006 2005 March % Chg y-o-y March June September December Cellular customer (thousands) 10,099.0 26.6 7,976.7 8,388.2 8,946.9 9,768.8 Prepaid 4,986.9 37.7 3,620.3 3,888.3 4,254.6 4,798.9 Contract 5,112.1 17.3 4,356.4 4,500.0 4,692.3 4,970.0 MOU (minutes) 127 5.0 121 122 118 124 ARPU (EUR) 24.1 (13.3) 27.8 28.1 28.5 26.5 Prepaid 9.2 (20.7) 11.6 10.7 10.8 10.4 Contract 38.6 (5.4) 40.8 42.9 44.0 41.4 Data ARPU 5.9 (10.6) 6.6 6.5 6.4 6.1 % non-P2P SMS over data revenues 23.0% 4.2 p.p. 18.8% 20.8% 21.0% 21.7% Note: MOU and ARPU calculated as monthly quarterly average. O2 IRELAND Service revenue grew by 7% in the first quarter, driven by both a higher customer base and growing ARPU. The termination rate cut of RPI minus 11% in January impacted first quarter service revenue growth by approximately 2%. In a competitive market O2 Ireland traded well with gross additions in the quarter up 10% compared to the same period last year. While the total customer base fell by 9,000 during the quarter, reflecting the regular rise in inactivity on the pre-pay base after the Christmas period, O2 Ireland ended the quarter with 1.593 million customers, 3.9% higher than at the same time last year. O2 Ireland added a total of 10,000 net new contract customers in the quarter. 12 month rolling ARPU of 1,075 euros was 32 euros higher than the first quarter last year and 2 euros higher than the previous quarter. Pre-pay 12 month rolling ARPU was 360 euros, up 2 euros on the same period a year ago and flat compared to the previous quarter. Blended ARPU of 552 euros was reduced by approximately 10 euros due to the termination rate cut, but was still 8 euros higher than the same quarter last year and 2 euros higher quarter on quarter, reflecting the continuing strength of both voice and data usage trends. Quarterly monthly minutes of use increased by 7% year on year, although compared to the previous quarter they were broadly flat. 12 month rolling data ARPU was 115 euros, 7 euros higher than the first quarter last year and 2 euros higher than the previous quarter. Non-SMS data users grew by 28% year on year. In addition O2 Ireland launched a number of pricing initiatives during the quarter. These included: â€¢ In February 2006, O2 became the first operator in Ireland to announce the abolition of roaming charges in Northern Ireland and the UK. O2 eliminated roaming charges for all customers (pre-pay, pay monthly and business) between the Republic of Ireland and Northern Ireland, and for business customers between Ireland and the UK. â€¢ Launch of 1 cent weekends. From midnight on Friday to midnight on Sunday, pre-pay customers on the Speak Easy tariff can call and text other customers on the O2 network for only 1c. O2 IRELAND SELECTED OPERATING DATA Unaudited figures 2006 2005 March % Chg y-o-y March June September December Cellular customer (thousands) 1,593.0 3.9 1,532.6 1,530.1 1,569.8 1,601.8 Prepaid 1,154.0 2.1 1,129.7 1,119.3 1,147.7 1,173.2 Contract 439.0 9.0 402.9 410.8 422.1 428.6 MOU (minutes) 220 7.3 205 221 222 224 ARPU (EUR) 44.6 1.4 44.0 46.1 47.3 46.1 Prepaid 28.9 (0.3) 29.0 29.2 31.3 30.5 Contract 87.1 1.0 86.2 92.5 91.0 88.1 Data ARPU 9.5 5.6 9.0 9.3 9.8 9.6 % non-P2P SMS over data revenues 13.8% 4.2 p.p. 9.6% 8.7% 8.8% 11.8% Note: MOU and ARPU calculated as monthly quarterly average. O2 AIRWAVE During the quarter Airwave concluded the contract negotiations to equip all Fire and Rescue Services across England with a resilient and secure voice and data communications service. In the last 12 months Airwave has won new contracts worth over 1 billion pounds and more than 200 public safety organizations now use the network. The Scottish and Welsh Ambulance and Fire and Rescue Services are expected to finalize contract negotiations in the near future. OUTLOOK The outlook for the group is unchanged from the targets announced on 1st March 20061. â€¢ O2 UK: The service revenue growth is expected to be in the range 6% - 9% for the 11 months ended December 2006. OIBDA margin is expected to be stable. â€¢ O2 Germany: The service revenue growth is expected to be the low double digits for the 11 months ended December 2006. OIBDA margin is expected to be stable. â€¢ CapEx: The CapEx for the O2 group is expected to be in the range 2.0 - 2.3 euros for the 11 months ended December 2006. ------------------------ 12006 guidance assumes constant exchange rates as of 2005, and excludes changes in consolidation. Operating Income before D&A excludes other exceptional revenues/expenses not foreseeable in 2006. For comparison, the equivalent other exceptional revenues/expenses registered in 2005 are also deducted from reported figures. O2 Group does not include Cesky Telecom and Telefonica Deutschland, and O2 Germany does not incorporate Telefonica Deutschland. For O2 fiscal year corresponds to the February-December period. RESULTS BY BUSINESS LINES Telefonica O2 Europe CESKY TELECOM Cesky Telekom contribution to Telefonica Group revenues in the first quarter of 2006 amounted to 514.6 million euros. In local currency, and taking into account other recurring revenues, a year-on-year increase of 0.5% has been registered, confirming the improved trend seen since the second half of 2005. Consolidated operating expenses showed a slight increase in local currency of 0.8% year-on-year in the first quarter of 2006. The Group's operating income before depreciation and amortization (OIBDA) amounted to 251.5 million euros, a year-on-year increase of 0.9% in local currency. As a result, the OIBDA margin was 48.9% in the first quarter of 2006, compared with the 48.5% margin recorded in the same period of 2005. Total CapEx for Cesky Telecom Group amounted to 34.0 million euros, an increase of 36.7% year-on-year in local currency, on the back of higher investments in the growth areas of the business (such as ADSL and UMTS network rollout). It is important to highlight that this trend should not be extrapolated for the near future, and the guidance already given for the whole year (approximately, 225 million euros) remains unchanged. Operating free cash flow (OIBDA-CapEx) to March 2006 stood at 217.5 million euros, a decrease of 3.0% year-on-year in local currency, mainly as a result of the rise in CapEx, as indicated above. FIXED LINE BUSINESS Revenues in the fixed line business amounted to 263.8 million euros for the first quarter of the year, a 5.5% drop in local currency year-on-year reflecting the continuous shift from traditional telephony services to broadband Internet, data and other value added services, which accounted for 23.2% of total revenues, 1.7 percentage points higher than in the same period last year. Revenues from traditional access fell by 7.1% year-on-year in local currency, primarily due to the 6.9% decline in the number of fixed telephony accesses, which dropped to 2.9 million accesses at the end of March 2006. Total traffic generated by Cesky Telecom customers showed a 6.1% year-on-year decline as a result of the loss of lines and the increase in competition together with ongoing fixed-to-mobile traffic substitution. Thus, revenues from voice services (excluding revenues from interconnection) fell by 16.3% year-on-year in local currency, whereas those from interconnection traffic increased by 13.4% in local currency, mainly due to higher international transit traffic within the Central and Eastern European telecommunication market. Total revenues from traditional voice services fell 4.6% year-on-year in local currency. Revenues from Internet and Broadband services registered a year-on-year decrease of 1.2% in local currency due to the significant migration of customers from narrowband to broadband Internet access. Revenues from narrowband Internet services fell by 50.4% in local currency while revenues from broadband services increased by 47.7%. The total number of retail Internet broadband accesses at the end of March, 2006 amounted to 283,492, a net gain of 57,791 accesses in the quarter on the back of the successful '4xFaster Internet' campaign launched on 1st February, which increased significantly the number of weekly installation orders. Revenues from data services showed a 5.3% year-on-year decrease in local currency as the decrease in revenues from leased lines (-10.3%) was not fully offset by the increase in revenues from virtual private networks based on broadband IP connectivity solutions (+2.6%). Operating expenses of the fixed line business fell by 2.6% year-on-year in local currency. Supplies expenses increased by 13.9% in local currency, primarily due to the increase in international interconnection expenses and cost of goods sold from the broadband business, whereas personnel expenses, including headcount reduction costs, fell by 12.2% on the back of a 12.2% reduction in the number of employees. External services (subcontracts) expenses recorded an 9.2% year-on-year decrease, with the exception of a 32.0% increase in marketing and sales expenses on the back of the broadband Internet campaign. OIBDA in the fixed line business amounted to 123.8 million euros in the first quarter of 2006, a 6.1% year-on-year drop in local currency, with a margin of 46.9%, 0.3 percentage points lower than the same period last year. CapEx for the Cesky Telecom fixed line business in the first quarter of 2006 amounted to 16.4 million euros, a 17.0% year-on-year increase in local currency, largely due to the accelerated broadband rollout. MOBILE BUSINESS (EUROTEL) Eurotel's revenues for the first quarter of 2006 increased by 6.5% year-on-year in local currency to reach 261.0 million euros. The total number of Eurotel cellular accesses increased by 8.5% year-on-year to reach 4.7 million at the end of March, 2006. Net additions for the period amounted to 18,989 compared to a loss of 68,000 recorded in the same period last year. The successful acquisition of new customers as well as further migration of prepaid customers to postpaid tariffs led to a 43.5% increase in the number of contract customers who at the end of the first quarter of 2006 totaled 1.6 million, or 35.0% of the total customer base compared with 26.5% at the end of March 2005. Revenues from voice services (monthly fees, customer and interconnection traffic) increased over the year by 3.0% in local currency, with the increase in revenues from monthly fees (+12.3%), driven by the larger contract customer base, partly offset by the drop in revenues from traffic (-1.3%), which decreased as a result of traffic stimulation activities (such as free minutes for contract customers and other marketing promotions. The total mobile traffic grew by 22.4% year-on-year). In the first quarter of 2006, blended ARPU registered a 1.2% year-on-year increase in local currency to reach 17.1 euros driven by a 15.7% increase in the average MOU per customer. The number of customers using the Eurotel Data Express service (CDMA-based broadband internet access service) reached 79,000, an increase of 36,000 year-on-year. This, together with the 9.7% increase in the number of customers using the Eurotel Data Nonstop service (GPRS-based internet access service), which stood at 68,000 at the end of March, 2006, led to a year-on-year increase in revenues from Internet and Data of 23.9% year-on-year in local currency. The higher number of handsets sold in the quarter led to a 13.3% year-on-year increase in local currency in revenues from equipment. Eurotel's operating expenses increased by 4.8% over the year in local currency, mainly as a result of an 11.2% increase in supplies expenses (costs of goods sold, interconnection and roaming and other supplies), partially offset by a 10.5% in local currency reduction in personnel expenses. Eurotel's operating income before depreciation and amortization (OIBDA) totaled 125.0 million euros for the first quarter of 2006, a 8.3% increase in local currency. OIBDA margin increased by 0.8 percentage points year-on-year to 47.9%. CapEx for the mobile business amounted to 17.6 million euros for the first quarter of the year, a 61.4% year-on-year increase in local currency, primarily due to investment in the rollout of the UMTS network. EUROTEL SELECTED OPERATING DATA Unaudited figures 2006 2005 March % Chg y-o-y March June September December Cellular customer (thousands) 4,695.0 8.5 4,325.9 4,419.8 4,488.9 4,676.0 Prepaid (1) 3,051.8 (4.0) 3,180.6 3,150.5 3,101.3 3,130.4 Contract 1,643.2 43.5 1,145.2 1,269.4 1,387.6 1,545.6 MOU (minutes) 96 15.7 83 94 94 97 ARPU (EUR) 17.1 6.2 16.1 17.3 17.5 17.5 Prepaid 7.9 1.3 7.8 8.2 8.6 8.3 Contract 34.8 (15.5) 41.2 41.0 38.3 36.8 Data ARPU 3.7 15.6 3.2 3.3 3.5 3.8 % non-P2P SMS over data revenues 39.1% 2.6 p.p. 36.5% 37.8% 40.6% 40.2% Note: MOU and ARPU calculated as monthly quarterly average. (1) 13 month active customer base. RESULTS BY BUSINESS LINES Telefonica O2 Europe TELEFONICA DEUTSCHLAND Telefonica Deutschland obtained revenues of 75.6 million euros in the first quarter 2006, showing a year-on-year increase of 5.6% compared to the same period of the previous year, primarily due to a significant increase in revenues from voice services that compensated the declining Internet narrowband wholesale business. Compared with the first quarter of 2005 voice revenues increased by more than 200% to 22.5 million euros in the first quarter of 2006, representing 1.1 billion minutes carried by the Telefonica Deutschland IP network and positioning the company as the leader in the German VoIP wholesale market. With respect to the broadband business, it is worth highlighting the company's continued strong position in the German Internet access retail market, despite tough competition. The total number of equivalent ADSL lines in service still exceeds the figure of around 500,000 at the end of the first quarter of 2006, providing services to nearly all major ISPs in Germany. Telefonica Deutschland registered a negative operating income before depreciation and amortization (OIBDA) of 4.6 million euros in the first quarter 2006, which compares with the negative figure of 52 thousand euros obtained in the first quarter 2005, mainly due to start up losses relating to its nationwide ULL rollout. RESULTS BY BUSINESS LINES Telefonica O2 Europe O2 GROUP CONSOLIDATED INCOME STATEMENT Unaudited figures (Euros in millions) February - March 2006 Revenues 1,821.6 Internal expenditure capitalized in fixed assets (1) 27.4 Operating expenses (1,326.8) Other net operating income (expense) (10.3) Gain (loss) on sale of fixed assets (2.7) Impairment of goodwill and other assets 0.0 Operating income before D&A (OIBDA) 509.1 Depreciation and amortization (338.8) Operating income (OI) 170.3 Profit from associated companies (0.7) Net financial income (expense) (2.5) Income before taxes 167.1 Income taxes (33.4) Income from continuing operations 133.7 Income (Loss) from discontinued operations 0.0 Minority interest 0.0 Net income 133.7 (1) Including work in process. CESKY TELECOM SELECTED FINANCIAL DATA Unaudited figures (Euros in millions) January - March 2006 Revenues 514.6 Operating income before D&A (OIBDA) 251.5 OIBDA margin 48.9% TELEFONICA DEUTSCHLAND SELECTED FINANCIAL DATA Unaudited figures (Euros in millions) January - March 2006 2005 % Chg Revenues 75.6 71.6 5.6 Operating income before D&A (OIBDA) (4.6) (0.1) N.S. OIBDA margin (6.0%) (0.1%) (6.0 p.p.) TELEFONICA O2 EUROPE ACCESSES Unaudited figures (Thousands) 2006 2005 March % Chg y-o-y March June September December Final Clients Accesses 36,361.9 13.0 32,181.9 32,809.8 33,856.9 35,730.1 Fixed telephony accesses (1) 2,971.4 (6.9) 3,191.4 3,136.1 3,080.4 3,021.6 Internet and data accesses 596.5 (15.8) 708.6 651.8 619.6 613.5 Narrowband 292.4 (51.0) 596.6 510.6 431.2 366.9 Broadband 291.5 197.2 98.1 127.6 175.1 233.7 Other 12.6 (9.3) 13.9 13.6 13.3 12.8 Cellular accesses 32,794.0 16.0 28,281.9 29,021.8 30,156.9 32,095.0 Pay TV 0.0 N.S. 0.0 0.0 0.0 0.0 Wholesale Accesses (2) 573.0 1.3 565.8 550.2 563.8 597.3 Total Accesses 36,934.8 12.8 32,747.7 33,359.9 34,420.8 36,327.4 (1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access; 2/6 Access x30. Company's accesses for internal use included. (2) Includes T. Deutschland connections resold on a retail basis. Note: Cellular accesses, Fixed telephony accesses and Broadband accesses include MANX customers. TELEFONICA O2 EUROPE CONSOLIDATED INCOME STATEMENT Unaudited figures (Euros in millions) January - March 2006 Revenues 2,409.2 Internal expenditure capitalized in fixed assets (1) 34.0 Operating expenses (1,671.8) Other net operating income (expense) (12.5) Gain (loss) on sale of fixed assets (2.3) Impairment of goodwill and other assets (0.5) Operating income before D&A (OIBDA) 756.0 Depreciation and amortization (527.1) Operating income (OI) 228.9 Profit from associated companies (0.7) Net financial income (expense) 13.6 Income before taxes 241.9 Income taxes (83.4) Income from continuing operations 158.5 Income (Loss) from discontinued operations 0.0 Minority interest (17.9) Net income 140.6 (1) Including work in process. Note: Telefonica O2 Europe includes O2 Group (February and March), Cesky Telecom y T. Deutschland. This information is provided by RNS The company news service from the London Stock Exchange MORE TO FOLLOW QRFAKNKDBBKBPPD

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