3rd Quarter Results - Part 1

Telefonica SA 11 November 2005 Part 1 Quarterly results January-September 2005 TABLE OF CONTENTS Telefonica Group Financial Highlights Consolidated Results Financial Data RESULTS BY BUSINESS LINES Fixed Line Business â€¢ Telefonica de Espana Group â€¢ Telefonica Latinoamerica Group Mobile Business Cesky Telecom Other Business â€¢ Directories Business â€¢ Atento Group â€¢ Content and Media Business â€¢ Telefonica Deutschland Group ADDENDA Companies included in each Financial Statement 60 Key Holdings of the Telefonica Group and its Subsidiaries Significant Events 63 Changes to the Perimeter and Accounting Criteria of Consolidation This document contains financial information/data reported under IFRS. These data are preliminary, as only full compliance with International Financial Reporting Standards issued at 31/12/2005 is required, unaudited, and thus, being subject to potential future modifications. This financial information has been prepared based on the principles and regulations known to date, and on the assumption that IFRS principles presently in force will be the same as those that will be adopted to prepare the 2005 full year consolidated financial statements and, consequently, does not represent a complete and final information under these regulations. In addition, the IFRS financial information contained herein may not be comparable to financial information published by Telefonica that was prepared under Spanish GAAP. 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 ACCESSES Unaudited figures (thousands) September 2005 2004 % Chg Fixed telephony accesses (1) 41,001.1 37,573.0 9.1 Internet and data accesses 12,549.0 10,593.3 18.5 Narrowband 5,503.3 6,101.6 Broadband 6,251.7 4,082.1 ADSL (2) 5,286.5 3,370.8 Retail (3) 4,438.4 2,851.1 Other accesses (4) 794.1 409.5 Unbundled loops (5) 361.3 72.2 Pay TV 543.4 399.9 35.9 Cellular accesses (6) 93,581.1 58,630.0 59.6 Total Accesses 147,674.5 107,196.2 37.8 (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) T. Deutschland's connections resold on a retail basis and Cable Modem in Peru included. (3) Includes Cable Modem in Peru. TdE Retail includes Terra form 3Q05, Linea ADSL and satellite. TASA Retail includes ISP in the north part of the country. (4) Cable modem El Salvador, WiFi clients, satellite Latam, fiber and leased circuits included. (5) Includes fully unbundled loops and shared loops. (6) Since the cancellation of Movistar Puerto Rico's management contract in September 2004 , its subscriber base is excluded from the Group subscriber base. TELEFONICA GROUP Financial Highlights The most relevant factors of Telefonica Group results during the first nine months of the year are the following: â€¢ Growth accelerated for every line in the profit and loss account compared with first half of 2005: â€¢ Revenues grew by 24.2% year-on-year, OIBDA by 20.0% and OI by 24.5%. â€¢ Net income increased by 36.2% to total 3,253.3 million euros. Basic earnings per share stood at 0.665 euros vs. 0.477 in September 2004. â€¢ In the third quarter alone, revenues and OIBDA were 32.3% and 27.8% higher than those recorded in the July-September 2004 period, while OI and net income increased by 29.1% and 53.3% respectively. â€¢ Operating free cash flow (OIBDA-CapEx) rose once again and profitability improved: â€¢ 13.4% increase in the operating free cash flow (OIBDA-CapEx) compared with the previous year, amounting to 7,613.9 million euros. â€¢ The Group's OIBDA margin stood at 39.9% (-1.4 percentage points year-on-year), 1.8 percentage points higher than in the first half of the year, thanks to solid margins obtained in the fixed telephony businesses and the improvement in the mobile business margin improved margin. â€¢ Significant growth in the Group's total accesses (+37.8% year-on-year to 147.7 million), obtained through intense commercial activity and the incorporation of BellSouth Latin American operators and Cesky Telecom: â€¢ Growth in the number of clients managed by the Telefonica Moviles Group exceeded the 89 million mark as of September (+52.0% vs. September 2004), recording net adds of 2.6 million in the third quarter and 11.01 million in the first nine months of 2005. â€¢ The Group's retail ADSL connections reached 4.4 million (Spain, Latin America and the Czech Republic), vs. 2.9 million as of September 30th 2004. â€¢ The positive contribution of the exchange rates to the Group's results accelerated. As of September forex added +3.0 percentage points to revenue growth (+1.2 percentage points as of June), +3.0 percentage points to the OIBDA increase (+1.4 percentage points as of June) and +2.3 percentage points to OI expansion (+1.1 percentage points as of June). â€¢ Organic growth2 in Revenues, OIBDA and OI reached 9.9%, 6.7% and 16.6% respectively, as a result of the solid performance of operations. â€¢ Telefonica Group upgrades its consolidated revenue growth3 for 2005, from the initial range of 12% to 15% to a new forecast of over 15%. Telefonica de Espana Group also upgrades its 2005 revenue growth target (over 4%, up from +0.5%/+2%). ------------------------ 1 Excludes the adjustments of 300,000 inactive lines in Mexico, not longer considered in the reported customer base as of the second quarter of 2005. 2 Assuming constant exchange rates and including the consolidation of the Latin American assets acquired to BellSouth in Argentina, Colombia, Chile, Ecuador, Guatemala, Nicaragua, Panama, Peru, Uruguay and Venezuela in the cellular business and Atrium in the Telefonica Latinoamerica Group from January 1st 2004. Cesky Telecom has been included in the period July-September 2004. 3 All projections refer to local currency (constant exchange rates) and exclude changes in consolidation other than assets acquired to BellSouth in Argentina & Chile in 2005 (TEM), and Atrium (T.Latam). 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 business, which basically implies that each line of activity participate in the companies that the Group holds in the corresponding business, regardless of whether said holding has already been transferred or not, even though it might be the final intent of Telefonica, S.A. to do so in the future. 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. Starting third quarter 2005, Terra Networks results will be included in the Telefonica de Espana Group and Telefonica Latinoamerica Group results. Hence, Terra Espana, Azeler and Maptel results will be incorporated within the Telefonica de Espana Group, whereas Terra in Latin America will be incorporated in the Telefonica Latinoamerica Group's results. The Terra Networks Group results from the first and second quarter of 2005 and from fiscal year 2004 will be incorporated into Other Companies in the Telefonica Group accounts. Also starting in the third quarter of 2005, the Cesky Telecom results corresponding to the July-September 2005 period will be incorporated as an independent business line, at the closing of its acquisition last June. The economic and financial results of the Telefonica Group corresponding to the first nine months of 2005 reflect a sharp acceleration in the growth of revenues (+24.2% year on year) and the profitability of operations (OIBDA +20.0% year-on-year and OI +24.5% year-on-year), in a quarter characterized once again by the strong commercial activity developed primarily in high growth businesses (mobile and broadband). The solid performance of operations have led to an increase in the Operating free cash flow at a double-digit rate (+13.4% year-on-year) and to record a net income of over 3,200 million euros, up 36.2% on the previous year. As a result, Telefonica Group upgrades its revenue1 growth target for 2005, from the initial range of 12% to 15% to a new forecast of over 15%. The remaining Group targets for 2005 are unchanged: OIBDA1 growth +10%/+13%2, OI1 growth +12%/ +18%2, and CapEx1 around 4,600 million euros. By business lines, Telefonica de Espana Group upgrades its revenue growth target for 2005, from the previous +0.5%/+2% to a growth of over 4%. TPI Group upgrades its revenue3 growth target to +5.5%/+6.5% up from the prior +3%/+5% and changes its OIBDA3 growth target to +7%/+8% from +7%/+9% before. Consolidated financial targets for Telefonica Moviles Group and Telefonica Latinoamerica Group are unchanged. ------------------------ 1 All projections refer to local currency (constant exchange rates) and exclude changes in consolidation other than assets acquired to BellSouth in Argentina & Chile in 2005 (TEM), and Atrium (T.Latam). In terms of guidance calculation, Operating Income and Operating Income before D&A exclude other exceptional revenues/expenses not foreseeable in 2005. Personnel Restructuring and Real Estate Programs are included as operating revenues/expenses. Constant exchange rates as of 2004. 2 In terms of guidance calculation, Operating Income and Operating Income before D&A exclude other exceptional revenues/expenses not foreseeable in 2005. Personnel Restructuring and Real Estate Programs are included as operating revenues/expenses. 3 Constant exchange rates as of 2004. Once again this quarter, the results reflect the diversification of being an integrated operator. The cellular business remained the main contributor to revenues (+41.7% vs. January-September 2004), whereas the fixed operators are the main contributors to profitability, with a significant increase in OI compared with September of the previous year (Telefonica de Espana Group +29.9% and Telefonica Latinoamerica Group+ 34.0%, excluding the sale of CTC mobile business in July 2004). Moreover, it's important to highlight the positive impact of exchange rates, which is emphasized as the year progresses. Thus, to September 2005 the exchange rate effect contributed 3.0 percentage points to the growth in revenues, 3.0 percentage points to that of OIBDA and 2.3 percentage points to that of OI. The positive evolution of revenues is based on the strong growth of its client base. As a result, on September 30th the Telefonica Group managed a total of 147.7 million accesses (fixed telephony accesses, data and internet accesses, Pay TV and cellular accesses), compared with the 107.2 million managed in September 2004 (+37.8%). The Czech operator Cesky Telecom contributed already with 8.2 million accesses. The increase in total accesses was mainly due to growth in cellular accesses. The total number of clients managed by the Telefonica Moviles Group grew by 52.0% compared with September 2004, to a total of 89.1 million. In the third quarter, there was an intense commercial activity (net adds of 2.6 million), although below the one recorded in the previous quarter (net adds of 5.4 million) due to seasonality and the strong impact of the launch of the movistar brand last April. The highest number of additions was recorded in Latin America, due to the significant stage of development of almost all its markets, reaching 65.6 million clients in the region (+75.7% compared with September 2004), whereas Spain contributed with 19.6 million clients, up 5.0% on the previous year, which is an important growth in such a mature market as Spain. By the end of the quarter, Medi Telecom recorded 3.8 million clients (+49.2% year-on-year). Broadband, one of the main levers of growth for the Group, continued to progress notably. By September end, retail ADSL lines in Spain, Latin America and the Czech Republic amounted to 4.4 million, up 55.7% on September of the previous year. By regions, retail ADSL connections in Spain totaled 2.4 million (+67.4% year-on-year). The number of retail ADSL accesses in Latin America grew by 60.7% to reach 1.9 million, of which 1.1 million corresponded to Telesp (0.7 million one year ago). In January-September 2005 the operating free cash flow (OIBDA-CapEx) grew by 13.4% to 7,613.9 million euros, driven by the cellular business (+12.2%) and the fixed telephony business (Telefonica de Espana Group +5.1% and Telefonica Latinoamerica Group, +14.4%, excluding the sale of CTC mobile business in July 2004). Revenues amounted to 27,402.2 million euros during the first nine months of the year, 24.2% more than in the same period of the previous year due to the general growth of all business lines, particularly the cellular business. Growth rates clearly accelerated over the third quarter of the year (+32.3% vs. July-September 2004), driven primarily by the positive impact of exchange rates and the incorporation of Cesky Telecom (contributed with 2.3 percentage points to the growth). Hence, in the period January-September, organic growth4 stood at 9.9% (+10.1% in January-June 2005), with a positive contribution by the Group's main three business lines. ------------------------ 4 Assuming constant exchange rates and including the consolidation of the Latin American assets acquired to BellSouth in Argentina, Colombia, Chile, Ecuador, Guatemala, Nicaragua, Panama, Peru, Uruguay and Venezuela in the cellular business and Atrium in the Telefonica Latinoamerica Group from January 1st 2004. Cesky Telecom has been included in the period July-September 2004. The cellular business recorded revenues of 12,050.0 million euros in the January-September 2005 period, 41.7% more than in the same period of the previous year. This variation is due, on one hand, to the incorporation of Latin American operators acquired to BellSouth in 2004 and early 2005, and, on the other hand, to the good evolution of operations, particularly the contribution from Spain (+8.2%), Venezuela (revenues of 993 million euros) and Argentina (revenues of 707 million euros). Revenues from the Telefonica de Espana Group amounted to 8,728.6 million euros over the first nine months of the year ( Terra operations in Spain are contributing with 9.0 million euros) and grew 5.1% year-on-year (+5.0% excluding the effect of Terra), highlighting the performance of revenues from internet and broadband services (+29.1%). Excluding the incorporation of the Terra subsidiaries, the growth rate of revenues slowed down over the third quarter (+4.0% compared with +4.9% in the second quarter and +6.0% in the first quarter), primarily due to the elimination of the positive effect related to 2004 monthly fee increase (revenues from traditional access -2.0%) and to the decline in SIM bonuses (Comprehensive Maintenance Service). In the first three quarters of 2005, the Telefonica Latinoamerica Group totaled revenues of 5,913.5 million euros (Terra operations in Latin American accounted for 54.4 million euros), an increase of 18.1% over the previous year in current euros, with a significant contribution from the exchange rates. It is worth to mention the growing trend in the year-on-year variation rate of revenues over the year (first quarter +4.5%, second quarter +20.6% and third quarter +29.0%). Excluding the exchange rate effect and the incorporation of Terra, the year-on-year growth would have dropped to 6.5%, the same than in the first six months of the year. This increase is explained by the contribution of Telesp, with sales increasing 7.7% in local currency (+7.3% in the first half of the year), reflecting the good performance of the broadband business and the tariff increase that took place last July. By geographical areas, Spain remained the main contributor towards consolidated revenues with 53.6% of the total, although this was down 8.8 percentage points over the same period in 2004. This decline was due to the higher contribution from Latin America (40.8% vs. 33.0% twelve months ago) because of the geographic diversification achieved after the acquisition of the BellSouth Latin American operators .Brazil's contribution remained significant (17.8% of total revenues, up 0.3 percentage points on September 2004). In the other hand, following the acquisition of Cesky Telecom, revenues from the Chezh Republic represented 1.9%, after the consolidation of the period July-September 2005. Changes in the consolidation perimeter following the purchase of the 10 BellSouth operators in Latin America and Cesky Telecom, together with increased commercial intensity by the Telefonica Group and the exchange rate effect, pushed operating expenses upwards to total 16,758.1 million euros by September, 26.8% higher than during the same period of the previous year (+23.2% in the first half of 2005). By items, supplies expenses increased by 32.9% (+29.9% in constant euros vs. +29.2% in June) associated with the cellular business (higher interconnection expenses and incorporation of BellSouth Latin American operators) and with Telefonica de Espana Group due to the purchase of equipment (ADSL and Imagenio). Personnel expenses recorded a year-on-year increase of 7.2% in comparison with the January-September 2004 period (+5.3% excluding the exchange rate effect). The average Group workforce at September stood at 185,763 employees, a 21.3% variation due to the increased workforce from the Atento Group and from companies included in the Group's consolidation perimeter. Excluding the Atento Group, the increase in workforce would have been reduced to 11.3%. With regard to the Telefonica de Espana 2003-2007 Redundancy Program, the provision related to the 1,750 applications accepted in 2005 were already accounted for in the first half of the year for 531.2 million euros. External services expenses recorded a 37.7% increase in relation to the first nine months of the previous year (+33.7% in constant euros, +34.7% in January-June 2005) due to intensified commercial efforts in an environment of high competition and growth in the fixed and cellular business. In the first nine months of 2005, the Telefonica Group reported a gain on sale of fixed assets for 177.6 million euros, primarily corresponding to the items accrued in the first half of the year: capital gains from the sale of Radio Continental, Radio Estereo (both from the ATCO Group), Infonet, the sale of 1.2% of the TPI share capital and the sale of real state. The consolidated operating income before D&A (OIBDA) accumulated at the end of the third quarter amounted to 10,944.5 million euros, a 20.0% growth in relation to the same period in the previous year, accelerating the variation rate of the first six months of the year (+15.3%). Hence, in the July-September period, OIBDA rose significantly versus the third quarter of 2004 (+27.8%). The organic year-on-year growth5 accumulated to September stood at 6.7%, 0.1 percentage points more than that registered to June. Exchange rates made a positive contribution for the second consecutive quarter, adding 3.0 percentage points to the OIBDA growth (+1.4 percentage points in the first half 2005). ------------------------ 5 Assuming constant exchange rates and including the consolidation of the Latin American assets acquired to BellSouth in Argentina, Colombia, Chile, Ecuador, Guatemala, Nicaragua, Panama, Peru, Uruguay and Venezuela in the cellular business and Atrium in the Telefonica Latinoamerica Group from January 1st 2004. Cesky Telecom has been included in the period July-September 2004. In terms of profitability, the cumulative OIBDA margin reached 39.9% at September, lower than the 41.3% recorded in January-September 2004, mostly due to the fall in the cellular business OIBDA margin (-6.6 percentage points to 35.1%). However, it is important to note the improved margin as a percentage of revenues of the Telefonica Group in relation to that obtained during the first half of the year (+1.8 percentage points) also mostly due to the cellular business (+1.9 percentage points). The cellular business OIBDA totaled 4,226.5 million euros in the January-September 2005 period, 38.6% of the total OIBDA and up 19.4% in relation to the previous year. Higher commercial costs in the markets of operations and last April's brand launch justify the lower profitability of the business over the year (OIBDA margin 35.1% vs. 41.6%). However, there was a significant improvement in the third quarter, placing the margin at 38.4% (30.9% in the second quarter of 2005) basically due to the recovery of the Telefonica Moviles Espana OIBDA margin (49.1% vs. 43.3% in the second quarter) and the lower commercial costs in the Latin American operators. The Telefonica de Espana Group (31.9% of total OIBDA) recorded OIBDA of 3,486.2 million euros over the first nine months of the year (Terra operations contributed with 14.8 million euros), an 8.0% year-on-year increase, slowed down versus the first half growth (+10.3%). The cumulative OIBDA margin at September stood at 39.9%, 1.1 percentage points above that recorded in January-September of the previous year (45.9% versus 46.6% excluding the E.R.E provision in both periods). This margin amounted to 46.0% in the third quarter, because no provision had been accounted for in relation to 2003-2007 Redundancy Program. At Telefonica Latinoamerica, OIBDA (24.6% of consolidated OIBDA) stood at 2,688.6 million euros (Terra's Latin American operations contributed with +6.5 million euros), representing a 1.9% increase over the first nine months of 2004. In constant euros and excluding the contribution of Terra Latam, OIBDA declined at 7.5%. This growth rate was affected by the accounting of the sale of the CTC cellular subsidiary to the Telefonica Moviles Group in July 2004. Excluding this effect, year-on-year OIBDA growth stood at 21.4% (+10.2% excluding exchange rate variations and Terra Latam). OIBDA margin, excluding the gain on sale of fixed assets for both periods, amounted to 44.2%, stable compared to the previous year. By regions, Spain represented 60.3% of consolidated OIBDA, down 8.3 percentage points on September 2004. Latin America, however, increased its contribution to 35.6% (33.7% twelve months ago). Brazil remained practically stable with regard to the previous year (18.5% at September 2005 vs. 18.1% in September 2004). The Czech Republic after the incorporation of Cesky Telecom since July 2005, represented +2.3% of the consolidated OIBDA. Depreciation recorded a 14.6% year-on-year growth (+9.2% in the first half 2005) to reach an absolute figure of 4,820.0 million euros in January-September 2005. It must be highlighted that the third quarter included the depreciation of Cesky Telecom. In the first nine months of the fiscal year 2005 depreciation of the cellular business increased by 51.6% year-on-year due to changes in the consolidation perimeter, including 229 million euros associated with the amortization of allocated intangible assets related to the acquisition of Telefonica Movil Chile and BellSouth Latin American operators. As a result of the evolution of OIBDA and depreciation, operating income (OI) for the January-September 2005 period stood at 6,124.5 million euros, a year-on-year growth of 24.5% and 3.2 percentage points higher than January-June 2005. Organic growth6 stood at 16.6% compared with +17.0%7 in June. ------------------------ 6 Assuming constant exchange rates and including the consolidation of the Latin American assets acquired to BellSouth in Argentina, Colombia, Chile, Ecuador, Guatemala, Nicaragua, Panama, Peru, Uruguay and Venezuela in the cellular business and Atrium in the Telefonica Latinoamerica Group from January 1st 2004. Cesky Telecom has been included in the period July-September 2004. 7 The organic growth published in January-June 2005 (+12.6%) was modified given that this figure did not include depreciation corresponding to the intangible assets of BellSouth Latin American operators in the cellular business. The positive results of associated companies stood at 9.6 million euros compared with the 52.0 million euros losses accounted for in the first three quarters of 2004. This improvement was mainly due to the reduction in losses attributable to Sogecable, the positive contribution of Medi Telecom, the higher contribution made by Portugal Telecom and the lower losses of Lycos Europe and IPSE-2000. Financial expenses amounted to 1,129.2 million euros in the first nine months, 7.7% above the same period in the year before, that is, 80.8 million euros more. 165 million euros are due to the 16% increase in the average net debt, and the remaining 87 million euros are related to the increase in the Latam debt (higher after the acquisition of the BellSouth assets and the increase in the interest rates in Brazil) with savings of 171 million euros as a consequence of better exchange and interest rates in the Group. The net free cash flow after CapEx generated by the Telefonica Group amounted to 4,227.7 million euros for the nine months of the year, adding to this figure 84.2 million euros corresponding to net cash received from sale of real estate. Of this 4,854.6 million euros were devoted to financial investments and 2,277.9 million euros for net payment for dividends and treasury stock, totaling 2,770.6 million euros of free cash flow after dividends. Free cash flow stood at 4,517.9 million euros (according to the criteria used at the III and IV Investor Conferences) prior to payments made to amortize commitments related to headcount reduction plan and the ordinary payments to minority interests. The Telefonica Group's net financial debt at the end of September 2005 stood at 28,676.1 million euros. 56% of the increase in debt during the year was due to the free cash flow after dividends of 2,770.6 million euros, 25% due to the appreciation of the dollar and the Latin American currencies against the euro throughout the first nine months of the year, which accounted for 1,240.6 million euros of the increase in debt. The remaining 19% corresponds to the changes in the consolidation perimeter after the acquisition of BellSouth subsidiaries in Argentina and Chile and Cesky Telecom. Total debt (including guarantees and labor commitments for a total of 3,720.6 million euros) amounted to 32,396.7 million euros, equivalent to 2.13 times OIBDA annualized for the period, including Cesky Telecom. The tax provision totaled in the first nine months of the year 1,455.3 million euros (29.1% tax rate), although the cash outflow for the Group will be reduced even further as negative tax bases are compensated for. The results attributed to minority interest deducted 296.2 million euros from the net income for the January-September 2005 period, in comparison with the - 220.2 million euros of the same period in 2004. This 34.5% increase is mainly due to: 1) the participation of minority interests in the net income of Cesky Telecom since July 1st 2005, 2) the positive net income of Terra Networks in January-June 2005 compared with the losses of the previous year (Telefonica S.A. merged with Terra Networks, S.A. in July 2005, by absorption of the second one by the first one) and 3) the higher net income achieved by Telesp. As a result of all the described items on the profit and loss account, the net income for the first nine months of 2005 totaled 3,253.3 million euros, up 36.2% on January-September 2004 after recording a net income of 1,418.2 million euros in the third quarter of the year (+53.3% year-on-year). Cumulative CapEx by the end of the third quarter of the year amounted to 3,330.6 million euros and increased by 38.3% (organic growth8 +19.3%) in comparison with the same period of 2004 due to the generalized growth in all business lines. The year-on-year growth of the Telefonica Latinoamerica Group (+51.0%) and the Telefonica de Espana Group (+16.7%) is due to the greater level of investment in the broadband business. The cellular business grew by a year-on-year 35.8% due to increased network capacity in Spain, Brazil and Mexico and the GSM network deployment in Colombia. However, it should be noted that there is a strong cyclical component to the investment, so that this performance cannot be extrapolated to the full year. ------------------------ 8 Assuming constant exchange rates and including the consolidation of the Latin American assets acquired to BellSouth in Argentina, Colombia, Chile, Ecuador, Guatemala, Nicaragua, Panama, Peru, Uruguay and Venezuela in the cellular business and Atrium in the Telefonica Latinoamerica Group from January 1st 2004. Cesky Telecom has been included in the period July-September 2004. TELEFONICA GROUP Financial Data TELEFONICA GROUP SELECTED FINANCIAL DATA Unaudited figures (Euros in millions) January - September 2005 2004 % Chg Revenues 27,402.2 22,063.0 24.2 Operating income before D&A (OIBDA) 10,944.5 9,121.9 20.0 Operating income (OI) 6,124.5 4,917.4 24.5 Income before taxes 5,004.8 3,817.0 31.1 Net income 3,253.3 2,389.2 36.2 Basic earnings per share 0.665 0.477 39.6 Weighted average number of ordinary shares outstanding 4,890.7 5,013.1 (2.4) during the period (millions) Note: For the basic earnings per share calculation purposes, the weighted average number of ordinary shares outstanding during the period have been obtained applying IFRS rule 33 'Earnings per share'. Thereby, there are not taking into account as outstanding shares the weighted average number of shares held as treasury stock during the period nor the shares assigned to the stock options plan for employees 'Programa TIES'. Furthermore, in line with IFRS rule 33, the weighted average number of shares outstanding during every period, has been adjusted for these operations that had implied a difference in the number of outstanding shares, without a variation associated in the equity, as if those have taken place at the beginning of the first period presented. It consists on the distribution of the paid-in capital reserve by means of delivery of shares in the proportion of 1 share to every 25 shares, approved by the AGM as of May 31, 2005. TELEFONICA GROUP RESULTS BY COMPANIES Unaudited figures (Euros in millions) REVENUES OIBDA OPERATING INCOME January - September January - September January - September 2005 2004 % Chg 2005 2004 % Chg 2005 2004 %Chg Telefonica de Espana Group 8,728.6 8,308.1 5.1 3,486.2 3,228.9 8.0 1,857.9 1,430.0 29.9 Telefonica Latinoamerica 5,913.5 5,005.5 18.1 2,688.6 2,639.7 1.9 1,380.0 1,455.4 (5.2) Group Cellular Business 12,050.0 8,504.3 41.7 4,226.5 3,540.4 19.4 2,546.7 2,432.1 4.7 Cesky Telecom 509.4 - n.c. 252.7 - n.c. 110.0 - n.c. Directories Business 470.4 449.9 4.5 162.1 158.8 2.1 144.4 142.5 1.3 Atento Group 608.6 432.2 40.8 82.6 60.8 35.9 61.9 34.6 78.7 Content & Media Business 878.7 831.9 5.6 167.1 128.4 30.2 146.7 108.8 34.8 Other companies (*) 641.8 946.9 (32.2) (84.7) (172.2) (50.8) (143.8) (303.7) (52.6) Eliminations (2,398.7) (2,415.8) (0.7) (36.6) (462.9) (92.1) 20.7 (382.3) c.s. Total Group 27,402.2 22,063.0 24.2 10,944.5 9,121.9 20.0 6,124.5 4,917.4 24.5 Starting third quarter 2005, Terra Networks results will be included in the Telefonica de Espana Group and Telefonica Latinoamerica Group results. The Terra Networks Group results from the first and second quarter of 2005 and from fiscal year 2004 will be incorporated into Other Companies in the Telefonica Group accounts. Also starting in the third quarter of 2005, the Cesky Telecom results corresponding to the July-September 2005 period will be incorporated as an independent business line, whose acquisition was last June. (*) 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 - September 2005 2004 % Chg Telefonica de Espana Group 925.4 793.0 16.7 Telefonica Latinoamerica Group 643.7 426.3 51.0 Cellular Business 1,461.9 1,076.8 35.8 Cesky Telecom 41.9 - n.c. Directories Business 12.0 12.7 (5.5) Atento Group 26.6 14.5 83.7 Content & Media Business 14.7 17.8 (17.5) Other companies & Eliminations 204.5 67.0 205.3 Total Group 3,330.6 2,407.9 38.3 Starting third quarter 2005, Terra Networks results will be included in the Telefonica de Espana Group and Telefonica Latinoamerica Group results. The Terra Networks Group results from the first and second quarter of 2005 and from fiscal year 2004 will be incorporated into Other Companies in the Telefonica Group accounts. 2004 data of Telefonica Latinoamerica Group and Total Group is adapted to the new accounting criteria (IFRS) for IRUs. TELEFONICA GROUP CONSOLIDATED INCOME STATEMENT Unaudited figures (Euros in millions) January - September July - September 2005 2004 % Chg 2005 2004 % Chg Revenues 27,402.2 22,063.0 24.2 10,042.5 7,593.1 32.3 Internal expenditure capitalized in fixed 338.1 305.0 10.8 112.9 101.7 11.1 assets (1) Operating expenses (16,758.0) (13,212.9) 26.8 (5,735.9) (4,267.7) 34.4 Supplies (7,124.1) (5,361.2) 32.9 (2,571.7) (1,865.3) 37.9 Personnel expenses (4,215.4) (3,931.1) 7.2 (1,291.1) (1,080.5) 19.5 Subcontracts (4,887.4) (3,548.9) 37.7 (1,687.6) (1,201.6) 40.4 Taxes (531.2) (371.7) 42.9 (185.4) (120.3) 54.2 Other net operating income (expense) (203.7) (39.5) n.s. (105.0) (20.9) n.s. Gain (loss) on sale of fixed assets 177.6 18.9 n.s. 13.3 (17.5) c.s. Impairment of goodwill and other assets (11.7) (12.6) (7.5) (4.9) (7.2) (32.5) Operating income before D&A (OIBDA) 10,944.5 9,121.9 20.0 4,323.1 3,381.5 27.8 Depreciation and amortization (4,820.0) (4,204.4) 14.6 (1,727.1) (1,371.2) 26.0 Operating income (OI) 6,124.5 4,917.4 24.5 2,596.1 2,010.4 29.1 Profit from associated companies 9.6 (52.0) c.s. 4.3 (9.7) c.s. Net financial income (expense) (1,129.2) (1,048.4) 7.7 (395.5) (449.9) (12.1) Income before taxes 5,004.8 3,817.0 31.1 2,204.9 1,550.7 42.2 Income taxes (1,455.3) (1,148.8) 26.7 (648.6) (507.8) 27.7 Income from continuing operations 3,549.5 2,668.3 33.0 1,556.3 1,042.9 49.2 Income (Loss) from discontinued 0.0 (58.9) c.s. 0.0 (17.1) c.s. operations Minority interest (296.2) (220.2) 34.5 (138.1) (100.6) 37.3 Net income 3,253.3 2,389.2 36.2 1,418.2 925.2 53.3 Weighted average number of ordinary 4,890.7 5,013.1 (2.4) 4,877.9 4,954.4 (1.5) shares outstanding during the period (millions) Basic earnings per share 0.665 0.477 39.6 0.291 0.187 55.7 (1) Including work in process. Note: For the basic earnings per share calculation purposes, the weighted average number of ordinary shares outstanding during the period have been obtained applying IFRS rule 33 'Earnings per share'. Thereby, there are not taking into account as outstanding shares the weighted average number of shares held as treasury stock during the period nor the shares assigned to the stock options plan for employees 'Programa TIES'. Furthermore, in line with IFRS rule 33, the weighted average number of shares outstanding during every period, has been adjusted for these operations that had implied a difference in the number of outstanding shares, without a variation associated in the equity, as if those have taken place at the beginning of the first period presented. It consists on the distribution of the paid-in capital reserve by means of delivery of shares in the proportion of 1 share to every 25 shares, approved by the AGM as of May 31, 2005. TELEFONICA GROUP CONSOLIDATED BALANCE SHEET Unaudited figures (Euros in millions) September 2005 2004 % Chg Non-current assets 57,982.2 45,642.4 27.0 Intangible assets 6,872.5 4,564.2 50.6 Goodwill 9,394.4 4,369.1 115.0 Property, plant and equipment and Investment property 27,961.5 23,111.8 21.0 Long-term financial assets and other non-current assets 5,546.5 4,917.9 12.8 Deferred tax assets 8,207.3 8,679.3 (5.4) Current assets 13,905.5 11,979.2 16.1 Inventories 903.8 634.1 42.5 Trade and other receivables 7,459.1 5,652.1 32.0 Current tax receivable 1,561.5 1,226.8 27.3 Short-term financial investments 1,415.0 3,722.3 (62.0) Cash and cash equivalents 2,548.9 722.8 n.s. Non-current assets classified as held for sale 17.1 21.1 (18.8) Total Assets = Total Equity and Liabilities 71,887.6 57,621.5 24.8 Equity 14,924.8 12,086.8 23.5 Equity attributable to equity holders of the parent 12,265.0 10,434.3 17.5 Minority interest 2,659.8 1,652.4 61.0 Non-current liabilities 34,750.8 27,796.8 25.0 Long-term financial debt 23,884.2 17,211.3 38.8 Deferred tax liabilities 1,999.9 1,414.8 41.4 Long-term provisions 7,632.4 7,932.4 (3.8) Other long-term liabilities 1,234.3 1,238.3 (0.3) Current liabilities 22,212.1 17,737.9 25.2 Short-term financial debt 9,094.8 8,275.6 9.9 Trade and other payables 6,061.9 4,596.5 31.9 Current tax payable 2,345.8 1,618.8 44.9 Short-term provisions and other liabilities 4,709.6 3,243.5 45.2 Liabilities associated with non-current assets classified as 0.0 3.6 n.s. held for sale Financial Data Net Financial Debt (1) 28,676.1 (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 - September 2005 2004 % Chg I Cash flows from operations 9,303.8 8,287.3 12.3 II Net interest payment (1) (934.7) (952.7) III Payment for income tax (1,017.1) (151.0) A=I+II+III Net cash provided by operating activities 7,352.0 7,183.6 2.3 B Payment for investment in fixed and intangible assets (3,074.3) (2,526.2) C=A+B Net free cash flow after CAPEX 4,277.7 4,657.4 (8.2) D Net Cash received from sale of Real Estate 84.2 210.8 E Net payment for financial investment (4,854.6) (156.2) F Net payment for dividends and treasury stock (2) (2,277.9) (3,341.4) G=C+D+E+F Free cash flow after dividends (2,770.6) 1,370.6 C.S. H Effects of exchange rate changes on net financial debt 1,240.6 I Effects on net financial debt of changes in consolid. and 970.5 others J Net financial debt at beginning of period 23,694.4 K=J-G+H+I Net financial debt at end of period 28,676.1 (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 - September 2005 2004 % Chg OIBDA 10,944.5 9,121.9 20.0 - CAPEX accrued during the period (EoP (3,330.6) (2,407.9) exchange rate) - Payments related to commitments (665.4) (679.1) - Net interest payment (934.7) (952.7) - Payment for income tax (1,017.1) (151.0) - Results from the sale of fixed assets (177.7) (18.9) - Invest. in working cap. and other deferred (541.4) (254.9) income and expenses = Net Free Cash Flow after Capex 4,277.7 4,657.4 (8.2) + Net Cash received from sale of Real Estate 84.2 210.8 - Net payment for financial investment (4,854.6) (156.2) - Net payment for dividends and treasury (2,277.9) (3,341.4) stock = Free Cash Flow after dividends (2,770.6) 1,370.6 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-sep jan-sep 2005 2004 Net Free Cash Flow after Capex 4,277.7 4,657.4 + Payments related to cancellation of commitments 502.9 542.4 - Ordinary dividends payment to minoritaries (262.7) (764.6) = Free Cash Flow 4,517.9 4,435.2 TELEFONICA GROUP NET FINANCIAL DEBT AND COMMITMENTS Unaudited figures (Euros in millions) September 2005 Long-term debt 24,476.7 Short term debt including current maturities 9,094.8 Cash and Banks (2,548.9) Short and Long-term financial investments (1) (2,346.5) A Net Financial Debt 28,676.1 Guarantees to IPSE 2000 435.7 Guarantees to Newcomm 83.9 B Commitments related to guarantees 519.6 Gross commitments related to workforce reduction (2) 5,465.0 Value of associated Long-term assets (3) (763.0) Taxes receivable (4) (1,501.0) C Net commitments related to workforce reduction 3,200.9 A + B + C Total Debt + Commitments 32,396.7 Net Financial Debt / OIBDA (5) 1.89x Total Debt + Commitments/ OIBDA (5) 2.13x (1) Short term investments and certain investments in financial assets with a maturity profile longer than one year, whose amount is included in the caption 'Investment' of the Balance Sheet. (2) Mainly in Spain, except 86.0 million euros related to the provision of pension fund liabilities of corporations outside Spain. This amount is detailed in the caption 'Provisions for Contingencies and Expenses' of the Balance Sheet, and is the result of adding the following items: 'Provision for Pre-retirement, Social Security Expenses and Voluntary Severance', 'Group Insurance', 'Technical Reserves', and 'Provisions for Pension Funds of Other Companies'. (3) Amount included in the caption 'Investment' of the Balance Sheet, section 'Other Loans'. Mostly related to investments in fixed income securities and long-term deposits that cover the materialization of technical reserves of the Group insurance companies. (4) Net present value of tax benefits arising from the future payments related to workforce reduction commitments. (5) Calculation based on annualized OIBDA. Including Cesky Telecom January-September 2005 OIBDA. TELEFONICA GROUP EXCHANGES RATES APPLIED P&L (1) Balance Sheet and CapEx (2) Jan - Sep 2005 Jan - Sep 2004 September 2005 September 2004 USA (US Dollar/Euro) 1.261 1.225 1.204 1.241 Argentina (Argentinean Peso/Euro) 3.661 3.592 3.504 3.699 Brazil (Brasilian Real/Euro) 3.131 3.639 2.676 3.547 Czech Republic (Czech Crown/Euro) 29.682 - 29.550 - Chile (Chilean Peso/Euro) 719.424 751.880 636.943 757.576 Colombia (Colombian Peso/Euro) 2,941.176 3,267.974 2,754.821 3,215.434 El Salvador (Colon/Euro) 11.038 10.717 10.536 10.858 Guatemala (Quetzal/Euro) 9.639 9.810 9.217 9.823 Mexico (Mexican Peso/Euro) 13.805 13.805 13.065 14.160 Nicaragua (Cordoba/Euro) 20.986 19.402 20.396 20.016 Peru (Peruvian Nuevo Sol/Euro) 4.117 4.225 4.027 4.147 Uruguay (Uruguayan Peso/Euro) 31.192 35.894 28.843 34.002 Venezuela (Bolivar/Euro) 2,645.503 2,352.941 2,590.674 2,380.952 (1) These exchange rates are used to convert the P&L accounts of the Group foreign subsidiaries from local currency to euros. (2) Exchange rates as of 30/09/05 y 30/09/04. RESULTS BY BUSINESS LINES Fixed Line Business TELEFONICA DE ESPANA GROUP Telefonica de Espana Group results for the third quarter confirmed the positive progress recorded over the year. Hence, revenues and OIBDA grew by 5.1% and 8.0% respectively from January to September 2005, compared with the same period in 2004. Excluding the impact of the integration of Terra assets in Spain during the third quarter of 2005, these increases would reach 5.0% and 7.5%, respectively. As a result of the above, Telefonica de Espana Group upgrades the announced 2005 revenue guidance from the initial range of 0.5% to 2.0% growth, to a growth target above 4.0%. The remaining 2005 financial targets remain unchanged. From a commercial viewpoint, the third quarter of 2005 was marked by the launch of double and triple play offers by Telefonica de Espana and by the strengthening of the commercial offer for Imagenio. The promotion of these new products, and of other offers and promotions for broadband services that have been launched represent the main actions of the Company aimed at maintaining market leadership. Below are details of the main products and services launched during the quarter in the broadband business: â€¢ Launch on September 11th of a commercial campaign for a new product range offering digital IP television (IP-TV), ADSL and voice services in a single bundle. The trademark for the bundle made up of these three services is Trio, Duo being the combined client-chosen sale of two of the three services available in a bundle. In just one month of actual marketing, a total number of 345,135 packages was reached. The following must be noted among these new offers: â€¢ Duo 24 hrs. ADSL (1 Mbps) and flat rate for all calls to national fixed line numbers, for 39.90 euros a month. â€¢ Duo ADSL Mini (1 Mbps) and flat rate for all calls to national fixed line numbers, for 34.00 euros a month. â€¢ Duo Imagenio TV and flat rate for all calls to local fixed line numbers, for 19.90 euros a month. â€¢ Duo Imagenio TV and flat rate for all calls to national fixed line numbers, for 25.00 euros a month, currently on promotion for 19.00 euros a month until January 2006. â€¢ Trio Imagenio TV, 24 hrs. ADSL (1 Mbps) and flat rate for all calls to national fixed line numbers, for 51.90 euros a month. â€¢ Trio Imagenio TV, ADSL Mini (1 Mbps) and flat rate for all calls to national fixed line numbers, for 46.00 euros a month, currently on promotion for 38.00 euros a month until January 2006. â€¢ Inclusion of eight new digital TV channels in Imagenio service: Factoria de Ficcion, Paramount Comedy, Intereconomia TV, Nickelodeon, MTV Espana, VH1, Operacion Triunfo and Discovery. Following the addition of these new channels, the current range includes 48 TV and 15 music channels. It is also worth highlighting the fact that, since August, Imagenio is being sold with a new decoder that additionally allows Digital Terrestrial Television (DTT) channels to be watched, and that video on demand servers' storage capacity has been doubled. Different promotions were offered during the summer campaign to encourage the sale of Imagenio and products from the ADSL portfolio. These promotions were mainly based on the application of discounts on subscription and/or monthly fees and on the sale of modems and routers at low prices. Telefonica de Espana continued to develop commercial actions aimed at defending its traditional business, the following being particularly noteworthy during the third quarter: â€¢ July launch of Flat Rates for unlimited local and national calls between fixed line telephones, for 5.00 and 15.00 euros a month, respectively. â€¢ Launch of the International Mini Rate that, for a monthly fee of 3.00 euros, allows international calls to be made to 55 countries at a fixed price per minute, 24 hours a day, with discounts depending on the target country of up to 80% on standard rates. â€¢ Free connection fee campaign between September 19th and 30th for which 109,831 applications were received. Targeting Corporate and SME clients, the following commercial actions were taken: â€¢ Launching in September of a WiFi-GSM PDA handset together with a free annual subscription fee to Zona ADSL WiFi service (ADSL WiFi HotSpot). â€¢ Renewal of promotion Tarifa Plana de Voz en Horario Comercial (Voice Flat Rate for Commercial Hours) for professional and business clients up to December 31st, 2005, of which 194,397 flat rates have been sold up to the end of October. â€¢ Launching in July of Tarifa Plana Plus (Plus Flat Rate) for unlimited national calls between fixed line telephones, and special rates for fixed-to-mobile calls, for a price of 16.00 euros a month. â€¢ Summer promotion of Solucion ADSL PC, including a free printer for purchases above 1,000 euros, and of 'Meses de la Seguridad' (Months of Security) with the commercialisation of Solucion ADSL Filtro de Correo (Anti-spam solution). From a regulatory viewpoint, it is important to note that due to the CMT's delay in analysing the 18 relevant markets, the price-cap formula will be extended for the first quarter of forthcoming year until said analysis has been completed, the details of the formula having yet to be established. It should also be noted the expected approval from the CMT of the commercialisation of retail services based on ADSL 2+ technology in the areas covered by those local exchanges where ULL is available (without having to launch an equivalent wholesale service), and also the communication by Telefonica de Espana to the CMT of 31 new Double and Triple Play offers during the quarter that, with the exception of seven of them still pending, have already been validated. Given the heavy weight of fixed-to-mobile interconnection costs on Company supply expenses, the decision made by the CMT to establish reductions in fixed-to-mobile interconnection prices of between 10.6% and 13.4%, depending on the operator, must be underlined. With regard to the Telefonica de Espana Group profit and loss account, it is worth noting that Terra business in Spain has been included in the Company management perimeter as of July 2005. The effect of this inclusion on the consolidated accounts of the Telefonica de Espana Group, given the significant existing intra-group relationships, is of little relevance as already indicated. Revenues at Telefonica de Espana Group amounted to 8,728.6 million euros during the first nine months of the year, a year-on-year growth of 5.1%. Considering the third quarter on a stand-alone basis, revenues grew by 4.3% to total 2,925.7 million euros. Excluding revenues from the Terra business in Spain, 9.0 million euros in the July-September 2005 period, Telefonica de Espana revenues corresponding to the January-September 2005 period stood at 8,719.6 million euros (2,916.7 million euros in the third quarter of 2005), with a year-on-year growth of 5.0% (+4.0% in the third quarter). Revenues from Telefonica de Espana Parent Company amounted to an aggregate 8,360.8 million euros to September, presenting a year-on-year growth of 4.9%. Revenues for the third quarter of the year stood at 2,800.7 million euros, a 4.2% increase on the same period of the previous year. The slowing down trend of the quarterly revenue growth is due to the disappearance of the positive effect on the growth in revenues by the rise in fees and reductions of bonuses associated with the Comprehensive Maintenance Service (SIM): 4.2% in the third quarter, 4.3% in the second quarter and 6.4% in the first quarter of 2005. Telyco, the sales of which kept up the good performed over the first nine months of 2005, recorded revenues of 361.9 million euros to September 2005, with a year-on-year growth of 18.8%. Telyco's contribution to the growth in Telefonica de Espana Group revenues stood at 0.7 percentage points in the aggregate to September. â€¢ Revenues for Traditional Access grew by 0.4% over the first nine months of the year, as a result of the 4.35% and 2.0% rise in monthly fees in April 2004 and January 2005, respectively. Revenues for Traditional Access fell by 2.0% over the third quarter, mainly due to the following factors: i) the end of the positive effect on revenue growth by the rise in monthly fees in April 2004, ii) the end of the positive effect revenue growth by surcharges implemented by Telefonica de Espana since the third quarter of 2004 on calls made to toll-free numbers from public payphones, having received the appropriate authorization and iii) the fall in the number of lines. The access market in Spain grew by 1.3% at September end, while the estimated market share for Telefonica de Espana dropped by 0.3 percentage points with regard to that reached in June 2005, to stand at 87.0%. The loss of PSTN and basic ISDN access lines over the quarter stood at 65,166 to lead to a total number of lost lines of 180,230 during 2005. These figures do not entirely account the 109,831 applications from September's free subscription campaign, the greatest impact of which will be seen in the last quarter of the year. â€¢ Revenues from Traditional Voice Services amounted to 3,863.5 million euros at September end, with a slight year-on-year reduction of 0.3%. The fall in these revenues over the third quarter stood at 0.8%, which, compared with the 1.8% drop recorded in the second quarter, shows an improvement in the revenues trend, given the 16.2% year-on-year increase in interconnection revenues due to the growth in incoming international traffic over the quarter. As regards voice traffic, the estimated total volume of the market in Spain, expressed in minutes, was down 3.4% to September in comparison with the same period of the previous year. The estimated voice market share of Telefonica de Espana to September end stood at 66.2%, having dropped 0.4 percentage points in the third quarter and 3.9 percentage points over the last twelve months. The estimated total volume of minutes processed by Telefonica de Espana during the first nine months of 2005 amounted to 82,733 million, presenting an 11.0% year-on-year decline. Total outgoing traffic (including internet) amounted to 44,656 million minutes and fell by 13.8% with regard to the same period of the previous year. Traditional outgoing traffic totalled 32,666 million minutes at September end, down by 7.9% year-on-year and slowing down the decline in comparison with the first six months of the year as a result of the lesser market contraction. In closer detail, local traffic in the January-September period dropped by 11.9%, provincial by 11.2%, DLD by 7.6% and fixed-to-mobile by 0.9%. International traffic upheld its positive progress over the year, with a year-on-year growth of 15.6% to September thanks to the success in capturing traffic from the immigrant population to their countries of origin. The number of outgoing minutes to the Internet amounted to 11,990 million to September and continued to show a negative year-on-year variation (-26.5% to September), mainly as a result of the cannibalisation of switched internet traffic by broadband ADSL services. Finally, incoming traffic amounted to 38,078 million minutes, a 7.5% drop compared with the same period of the previous year. With regard to service packages, it is worth noting that the total number of plans, Combinados and flat rates amounted to 2,164,228. Moreover, the number of pre-selected lines remained almost stable over the quarter, recording a net gain of 3,772 lines to reach a total of 2,362,711, which means 16,746 less than at December end 2004. â€¢ Internet and broadband services, which contributed most to Telefonica de Espana revenue growth, totalled an aggregate 1,388.0 million euros by September 2005, with a 29.1% increase year on year. Broadband revenues amounted to 1,234.6 million euros and, after recording a 45.0% growth in comparison to September 2004, now represent almost 90% of this section. Revenues from retail broadband services continued to grow at a strong rate, which stands at 40.7%, totalling 939.0 million euros over the first nine months of 2005. According to our estimates, the broadband market in Spain has grows to total 4,448,553 acceses, presenting net gain of 277,617 in the third quarter and up 54.3% on the net gain of previous year, which shows the drive of this market. The 70.2% of these connections, 3,124,931, are Telefonica de Espana's ADSL accesses (retail + wholesale). At Telefonica de Espana Group level, the net gain of retail broadband accesses over the quarter was 158,516, representing 57.1% of the estimated net gain of the market. This led to an increase in Telefonica de Espana Group's total number of retail accesses to 2,416,323 by September end, implying an estimated market share of 54.3%, 0.2 percentage points up on that recorded in June to reverse the negative trend of this indicator since the last quarter of the previous year, confirming the success of the aforementioned commercial initiatives. The net gain of unbundled loops over the third quarter amounted to 64,322, 37.9% less than that recorded in the second quarter. It is important to note that 77% of this net gain of loops was from the migration of previously contracted wholesale ADSL services. By September end 2005, the total number of unbundled loops stood at 361,284, 8.1% of the total number of broadband lines. Of these, 228,868 (63.3%) were shared access loops, the type that is showing the greatest growth rate. As indicated above, the wholesale ADSL service was affected by the migration to unbundled loops. Hence, there was a net loss of 8,356 wholesale accesses in the third quarter. Value-added services (VAS) of Telefonica de Espana broadband offer, remained a distinguishing factor with regard to the competition's commercial offer. 61.9% of our clients have contracted at least one VAS; the number of operative services amounted to over 2.1 million units. ADSL Solutions are noteworthy among VAS, as a total of 335,950 solutions were operational by the end of September 2005 to give a 19.1% increase in relation to June of the same year. Moreover, Imagenio service has now exceeded the 100,000 client mark. The figure stood at 92,106 at September end, after registering a net gain of 34,616 clients over the third quarter, which is a very similar figure to that recorded in the second quarter, despite the significant negative seasonal component of the summer months. It must be noted that the net gain of Imagenio during this third quarter represented 22% of the total retail net gain of broadband accesses for Telefonica de Espana Group. â€¢ Data Service revenues grew by 5.1% to total 768.9 million euros over the first nine months of the year. Retail data services maintained their level of revenues, growing by 0.1%, despite the 11.9% increase in the number of VPN connections and as a result of the migration of traditional network solutions towards cheaper IP products. More specifically, fiber connections (metrolan) amounted to 3,587, implying a 29.2% increase on those recorded in June. Wholesale services for rental of circuits and transport capacity to other operators, which represented 35.2% of all data service revenues, were almost entirely responsible for the growth of this sector. â€¢ Lastly, revenues from Information Technology services recorded a 40.0% year-on-year growth during the quarter. This behaviour was due to the growth in outsourcing services of desktop positions and systems integration. Overall, I.T. services contributed 218.4 million euros to the total operating revenues of Telefonica de Espana over the first nine months of the year, representing an accumulated growth of 27.6%. There are currently 173 client management centers operated by Telefonica and 114 contracts with clients to outsourcing their communications service/ information systems. These figures have grown by 44.2% and 75.4% respectively year on year The number clients' hosted servers amounted to 2,831, showing a 54.6% increase on the previous year. The number of desktop positions managed has remained practically stable since the last quarter due to the lower activity recorded over the summer months. Telefonica de Espana Group's operating expenses increased by 3.6% compared with last year, to 5,436.0 million euros, as a result of the commercial efforts made and the development of new products that enable Telefonica de Espana to provide the most complete and innovative range of services on our market. Over the third quarter, expenses amounted to 1,638.7 million euros, showing an increase of 5.0%. â€¢ Personnel expenses dropped by 5.2% to 2,098.3 million euros over the first nine months of the year. This fall was a result of lower provisions for the Redundancy Program (E.R.E. 2003-2007) being implemented. Excluding these provisions in the first nine months of 2004 (643.9 million euros including actuarial revision) and over the first nine months of 2005 (524.3 million euros related to all employees who have joined the Redundancy Program in 2005), personnel expenses would have grown by 0.3%. Telefonica de Espana Parent Company workforce at the end of September was placed at 33,932 employees, after a net reduction of 1,113 employees since the start of the year. â€¢ Supplies expenses grew by 9.1% over the first nine months of the year to stand at 2,242.8 million euros. Over the third quarter, however, the growth in these expenses was moderated considerably to stand at 4.4% as a result of the lower mobile handset sales at Telyco, as summer campaign took place in advance, and by the evolution of equipment purchases and special projects at Telefonica de Espana, which grew by 33.9% in the third quarter compared to their 61.1% growth in the second quarter. â€¢ External Services expenses grew by 12.6% to total 950.1 million euros in the aggregate to September end as a result the intense commercial campaign developed by Telefonica de Espana to face the demanding competitive environment. In fact, Telefonica de Espana's commercial expenses increased by 15.1% over this period in relation to the same period of the previous year. The combined efforts of the Company towards the growth in revenues and efficiency was seen in an operating income before depreciation and amortization (OIBDA) of 3,486.2 million euros, presenting a year-on-year growth of 8.0%, 2.3 percentage points down on the first half of the year as the effect of the lower provisions for the 2005 in comparison with those of 2004 is getting diluted, as was hinted at in the second quarter. In order to make a comparison with the guidance, excluding the effect of the inclusion of Terra assets in Spain, the OIBDA totalled 3,471.3 million euros, which represented a growth of 7.5% in relation to January-September 2004 (1,329.8 million euros in the third quarter with a growth of 3.3% in relation to the same period in 2004). This growth rate, excluding exceptional revenues/expenses not foreseeable in 2005 and in 2004, would stand at 8.5%. It is important to note that the positive impact of the lower provisions for the 2005 Redundancy Program (compared with those accounted for in 2004 together with the actuarial revision) contributed 3.8 percentage points towards said 8.5% growth; this effect is to lessen in the fourth quarter, to reach 2.7 percentage points of growth by the end of the year. This diminishing effect, together with other non-lineal effects (rise in subscription fees and reduction in SIM discount both in April 2004, and application of the 2005 price-cap on June 30th 2005) means that growth in OIBDA for the January-September period cannot be extrapolated at the end of 2005. The OIBDA margin stood at 39.9% over the first nine months of 2005 compared with the 38.9% recorded in the same period of 2004. Excluding the effect of E.R.E. provisions over the first nine months of 2005, the margin for the January-September 2005 period would increase by 6.0 percentage points to reach 45.9%. Comparing this margin with the comparable margin of the same period in 2004 (excluding the E.R.E. provision for the first nine months of 2004 and the actuarial revision), a 0.7 percentage points drop is recorded at September 2005 as a result of the greater commercial and supply efforts during the year. The OIBDA for the Telefonica de Espana parent company amounted to 3,454.2 million euros, up 7.7% year on year. CapEx totalled 925.4 million euros, showing a 16.7% increase in comparison with the previous year. The CapEx to revenues ratio stood at 10.6%. TELEFONICA DE ESPANA GROUP SELECTED OPERATING DATA Unaudited figures (Thousands) September 2005 2004 % Chg Fixed telephony accesses (1) 16,180.8 16,345.5 (1.0) Internet and data accesses 5,404.7 4,718.2 14.5 Narrowband 1,745.7 2,378.7 (26.6) Broadband (ADSL) 3,124.9 2,157.8 44.8 Retail (2) 2,416.3 1,443.8 67.4 Unbundled loops (3) 361.3 72.2 n.s. Pay TV 92.1 3.6 n.s. Total Accesses 21,677.5 21,067.3 2.9 (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 Terra from the third quarter of 2005, Linea ADSL and satellite. (3) Includes fully unbundled loops and shared loops. TELEFONICA DE ESPANA PARENT COMPANY OPERATING REVENUES Unaudited figures (Euros in millions) January - September July - September 2005 2004 % Chg 2005 2004 % Chg Traditional Access (1) 2,122.0 2,112.5 0.4 708.7 722.9 (2.0) Traditional Voice Services 3,863.5 3,876.0 (0.3) 1,280.5 1,290.9 (0.8) Domestic Traffic (2) 996.1 1,089.3 (8.6) 300.2 346.2 (13.3) Fixed to Mobile Traffic 870.0 903.7 (3.7) 289.5 309.4 (6.4) International Traffic 354.4 294.3 20.4 120.1 108.8 10.4 Intelligent Network, other voice 222.5 171.4 29.8 77.3 63.4 21.9 consumption and bonusses (3) Interconnection (4) 716.9 646.0 11.0 263.0 226.3 16.2 Handsets sales and others (5) 703.7 771.3 (8.8) 230.5 236.7 (2.6) Internet Broadband Services 1,388.0 1,075.5 29.1 484.6 378.0 28.2 Narrowband 153.5 224.0 (31.5) 45.9 67.0 (31.5) Broadband 1,234.6 851.5 45.0 438.8 311.0 41.1 Retail (6) 939.0 667.2 40.7 335.2 244.7 37.0 Wholesale (7) 295.6 184.3 60.4 103.6 66.3 56.3 Data Services 768.9 731.4 5.1 253.9 243.3 4.3 VPN, Leased Circuits and Broadcasting 497.9 497.6 0.1 163.3 159.3 2.5 Wholesale 271.0 233.8 15.9 90.6 84.0 7.9 IT Services 218.4 171.2 27.6 73.0 52.2 40.0 Total operating revenues 8,360.8 7,966.5 4.9 2,800.7 2,687.3 4.2 (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 - September July - September 2005 2004 % Chg 2005 2004 % Chg Revenues 8,728.6 8,308.1 5.1 2,925.7 2,804.8 4.3 Internal expenditure capitalized in fixed 107.5 97.2 10.6 32.8 30.9 6.1 assets (1) Operating expenses (5,436.0) (5,247.5) 3.6 (1,638.7) (1,560.4) 5.0 Other net operating income (expense) 31.8 49.5 (35.8) 9.9 11.9 (16.3) Gain (loss) on sale of fixed assets 59.9 33.1 81.2 15.9 3.6 n.s. Impairment of goodwill and other assets (5.6) (11.5) (51.1) (1.0) (3.1) (68.2) Operating income before D&A (OIBDA) 3,486.2 3,228.9 8.0 1,344.7 1,287.7 4.4 Depreciation and amortization (1,628.3) (1,798.9) (9.5) (520.2) (564.5) (7.9) Operating income (OI) 1,857.9 1,430.0 29.9 824.5 723.2 14.0 Profit from associated companies (2.3) (0.4) n.s. 0.1 (0.0) c.s. Net financial income (expense) (341.6) (376.3) (9.2) (76.3) (147.8) (48.4) Income before taxes 1,514.0 1,053.2 43.7 748.3 575.4 30.1 Income taxes (493.5) (351.3) 40.5 (245.9) (200.5) 22.7 Income from continuing operations 1,020.5 701.9 45.4 502.4 374.9 34.0 Income (Loss) from discontinued 0.0 0.0 n.s. 0.0 0.0 n.s. operations Minority interest (0.4) (0.2) 149.4 (0.5) (0.1) n.s. Net income 1,020.1 701.7 45.4 501.9 374.8 33.9 (1) Including work in process. RESULTS BY BUSINESS LINES Fixed Line Business TELEFONICA LATINOAMERICA GROUP Results at Telefonica Latinoamerica in the first nine months of 2005 continued to grow significantly year on year. In addition to the good progress of the fixed telephone operators, Telefonica Empresas America (TEA) and TIWS, the positive effect of exchange rates has continued to increase, mainly due to the generalized appreciation of Latin American currencies against the euro, in particular the Brazilian real (+16.2%), and except for the Argentine peso, which depreciated slightly year on year (-1.9%). Furthermore, the results of Terra's Latin American operations (Terra Latam) have been consolidated in the Telefonica Latinoamerica group since July, contributing 1.1 percentage points to revenue growth and 0.2 percentage points to OIBDA growth. By September end, Telefonica Latinoamerica managed 28.1 million lines, 7.4% up on September 2004, after the inclusion of Terra's ISP accesses in Latin America (+3.9% excluding Terra Latam accesses). This outstanding growth rate was recorded mainly thanks to the increase in broadband lines (+97.6% year on year; +60.0% excluding Terra Latam) thanks to the commercial efforts made in general by all the operators. Fixed telephony lines increased with all operators thanks to the marketing of different products and traffic plans adapted to meet the needs of different client segments, leading to 21.7 million fixed telephony lines at Telefonica Latinoamerica (+2.6% year on year). Over the first nine months of 2005, Telefonica Latinoamerica generated revenues of 5,913.5 million euros, an 18.1% increase in current euros (+6.5% in constant euros and excluding the effect of the inclusion of Terra Latam). This growth in constant euros is equal to that reached during the first half of the year and is basically due to greater revenues from Telesp that, with a 7.7% increase in local currency, reflected the increase in fixed telephony lines and rates, the good progress of the Broadband business and, to a relatively lesser extent, the growth in value added services and new businesses. TASA also recorded a significant increase and, despite the lack of tariff indexing, grew by 10.4% in local currency thanks to the higher number of lines and to voice traffic. CTC and TdP continued to record small revenue growth compared to September 2004 (+1.4% in local currency in both cases), despite the negative effect of the productivity factor at TdP and the strong competition in Chile. Lastly, although with lower relative weight in the group as a whole, TEA and TIWS recorded significant growth rates of 8.2% and 18.4% in constant euros, respectively. At the end of the third quarter, Telefonica Latinoamerica's operating expenses stood at 3,174.3 million euros, +18.1% in current euros compared with the same period in 2004. This growth was reduced to 5.9% in constant euros and excluding the inclusion of Terra Latam, below the growth in revenue. A growth in expenses associated with greater commercial efforts, mostly sales commissions and customer care expenses, was maintained by all operators. However, the good progress of bad debts continued, with a slight increase of 2.7% in bad debt provision, that translates in a 9.5% fall in constant euros and excluding Terra Latam, thanks to good recovery management and the larger volume of prepaid and consumption control lines in the operators. Telefonica Latinoamerica recorded a result for the disposal of assets of 77.5 million euros, primarily corresponding to the capital gains generated by the sale of Infonet, which took place during the first quarter of the year. As a result of the above, Telefonica Latinoamerica recorded an Operating Income before Depreciation and Amortization (OIBDA) of 2,688.6 million euros, 1.9% higher year-on-year in current euros (-7.5% in constant euros and excluding the contribution of Terra Latam). This progress was influenced by the sale of the cellular division of CTC to Telefonica Moviles in July 2004, which generated capital gains of 425.5 million euros. Excluding this effect, there was a 21.4% growth in OIBDA in current euros (+10.2% in constant euros and excluding Terra Latam). The OIBDA margin as a percentage of Revenues stood at 44.2% (excluding gains on sale of fixed assets), maintaining the level recorded in September 2004. Telefonica Latinoamerica obtained operating income (OI) of 1,380.0 million euros, 34.0% above that of 2004 having excluded the Telefonica Movil Chile sale (+20.8% in constant euros and excluding Terra Latam). Financial results stood at -238.8 million euros, 18.2% down on September 2004, mostly due to the reduction of operator debt. In addition, the negative result due to exchange rate differences was reduced (-78.9%), reflecting the improvement of Latin American currencies. Greater investment in broadband, which was necessary for the expansion of this business in the region, placed Telefonica Latinoamerica's CapEx at 643.7 million euros, a year-on-year growth of 51.0% (+24.8% in constant terms and excluding Terra Latam). Despite this growth, the significant volume of OIBDA obtained led to an operating free cash flow (OIBDA-CapEx) of 2,045.0 million euros, a 14.4% increase without the effect of the sale of the cellular subsidiary in July 2004 (+6.8% in constant euros and excluding Terra Latam). The Group's workforce stood at 28,423 permanent employees at the end of September, an 9.2% increase compared with September 2004, due basically to the acquisition of Atrium in Brazil, the inclusion of Terra Latam (around 1,000 employees) and the insourcing of employees by Telesp and TASA. Telesp On July 4th 2005, the new tariffs approved by Anatel came into force, leading to a 7.27% rise in Local Telephony, 2.94% in DLD and 7.37% in the public payphone business. By September 30th, Telesp managed 15.7 million lines, which was a year-on-year growth of 2.8%, driven by the increase in its retail ADSL plant that, with a year-on-year growth of 51.5% and a net gain of over 100,000 lines during the third quarter of the year, totalled 1.1 million retail accesses. Total fixed telephony lines remained almost at the same level as in June, with a recorded net gain over the quarter of 11,506 lines, to stand at 12.4 million. Voice traffic (42,889 million minutes) decreased 3.6% year on year, in line with the drop recorded at June. This evolution was affected by the greater use of mobile telephony, a drop in the Intrastate Long Distance market and the change to the lines mix (by September, 18% of fixed telephony lines corresponded to prepaid or consumption control lines), which affected fixed-to-mobile and long distance traffic. Note, however, the increase of local fixed-to-fixed traffic, which grew by 1.5% thanks to the higher number of lines. Internet traffic, despite slightly improving in relation to June, continued to shrink (-15.8% year on year) due to the continued migration of the best clients to ADSL and the greater use of off-peak rates. Revenues in September stood at 3,441.0 million euros, a 7.7% increase in local currency in relation to the same period in the previous year, thanks primarily to the increase in revenues from the traditional business (+6.5% in local currency) and also to the increase in revenues from the internet business (+25.9% year on year) that contributed towards 7.4% of Telesp revenues (compared with 6.3% in the same period of 2004). The good progress of revenues from the traditional business reflects the greater number of lines in service, the increase in fixed-to-fixed and fixed-to-mobile tariffs, the increase in value-added services and the good progress of the public payphone business. Telesp operating expenses remain under control, with a 6.2% increase in local currency that is below the growth of revenues. This increase is associated with i) higher personnel expenses (+6.4% in local currency) due to the increased workforce following the acquisition of ATRIUM and the insourcing of employees by some subsidiaries and areas of the Telefonica Group, leading to savings on outsourced services, ii) interconnection through the increase in fixed-to-mobile tariffs, linked to greater revenues, iii) outsourced services (+10.6% in local currency) due to the increase in prices of contracts, higher ADSL and family lines sales, and an improvement in customer care. The positive evolution of bad debt provision is maintained, with a drop of 14.1% in relation to last year, thanks to good recovery management and to new products aimed at spending power and at client needs. Telesp's operating income before depreciation and amortization (OIBDA) at September amounted to 1,567.4 million euros, a 9.7% increase in local currency thanks to the growth in revenues. The OIBDA margin stood at 45.5%, 0.3 percentage points up on the first half of the year and 0.8 percentage points up on the same period of 2004. CapEx accumulated to September amounted to 354.4 million euros, a 20.9% growth with regard to the previous year in local currency. This increase was primarily due to the launch of new products and to ADSL. The operating free cash flow (OIBDA-CapEx) stood at 1,213.0 million euros (+7.3% in local currency with regard to the same period of the previous year). Telefonica de Argentina In a context with frozen tariffs, TASA management efforts adapted to an environment of increasing activity and consumption enabled the growth in fixed telephone lines and voice traffic to continue (3.8% and 8.6% respectively), contributing towards the 10.4% increase in revenues. By September 2005, TASA managed 5.4 million lines, 3.5% up on September 2004, thanks to the year-on-year increase in fixed telephony lines (+3.8%) and to the growth in retail ADSL lines (+94.3%), which stood at 217,931. There was a net gain of ADSL lines over the third quarter of 39,533 compared with the 29,307 of the second quarter. As a result, TASA remains the leader in the broadband market in the Southern area of Argentina. Voice traffic per line maintains a remarkable growth rate (+5.1% in relation to the same period of the previous year), although it slowed down with regard to the first half of the year (+7.2% year on year) due to the smaller increase in total incoming traffic (+24.5% year-on-year variation compared with +31.9% to June). However, the growth of total outgoing traffic remained stable (+1.3%), with the increase in total Fixed-to-Mobile traffic (+31.0%) being particularly noteworthy, in line with the country's quickly developing cellular business. The good progress of operating variables enabled TASA to maintain its growth rate in revenues (+10.4% in local currency), which stood at 653.4 million euros. Broken down by business, revenues from the traditional business grew by 8.7% year on year, due to the good performance of lines in service and traffic processed. Revenues from the internet business (Narrowband + Broadband) rose 33.1% in local currency to contribute 8.7% of revenues (+1.5 percentage points up on September 2004), thanks to the expansion of ADSL lines, the revenues of which increased by 92.1% year on year in local currency, offsetting the decrease in the narrowband business. The increase in operating expenses slowed down to 12.2% in local currency (+18.0% at June), mostly thanks to the smaller increase in personnel expenses (+3.8%) despite the application of salary increases agreed with the unions and the insourcing of temporary employees with the subsequent saving on some external services. The growth of expenses is basically explained by the increase in external services (+21.9% in local currency) associated with the generation of revenues (greater commercial activity -customer care-, the increase in quality plans and facilities maintenance). The bad debt to revenues ratio was reduced to 0.7% (1.0% in the first half of the year) thanks to the good performance of recoveries and the growing prepaid plant (around 29% of fixed telephony lines), thus limiting bad debts. The positive progress of revenues, together with the ongoing cost containment, enabled TASA to accelerate the growth rate of its operating income before depreciation and amortization (OIBDA) (+4.7% in local currency; +2.3% in June) to stand at 363.6 million euros. The OIBDA margin stood at 55.7% of revenues, 0.2 percentage points up on that of the first half of the year. CapEx grew by 9.0% year-on-year in local currency to September, to stand at 81.3 million euros, having devoted around 35% to ADSL development. The increase in OIBDA, together with investment control, led to a growth in the operating free cash flow (OIBDA-CapEx) of 3.5% in local currency with regard to the same period in 2004 to stand at 282.3 million euros. Telefonica CTC Chile On January 1st 2005, the distribution of the product and client portfolio for the business sector between CTC and T-Empresas Chile was reviewed. Due to this, Telefonica CTC Chile's 2004 results are shown on comparable terms with the new segmentation. As a result of the business restructuring and re-segmentation analysis carried out, on September 22nd CTC announced that it was to acknowledge a net, pre-tax extraordinary charge to its long distance business equivalent to 16.9 million dollars (around 4 million dollars in revenues and 13 million dollars in operating expenses) in the results of the third quarter, associated with international traffic. At September 30th, CTC managed 2.9 million accesses, 1.8% up on the same date in 2004 thanks to the progress of fixed telephony and ADSL lines that offset the fall in the narrowband business. The growth rate of fixed telephony lines accelerated (+3.4% compared with September 2004), having recorded a net gain of 80,362 lines over the previous twelve months thanks to the commercial emphasis placed on new minutes plan, prepaid plan and consumer control packages. Broadband remained the main driver of growth at Telefonica CTC. By the end of the third quarter, there were 242,106 retail accesses, up 51.3% on September 2004. CTC continued to make significant commercial efforts aimed at the widespread implementation of broadband in Chile. Total long-distance traffic continued to fall nationwide, due to the replacement effect of the mobile telephony and the Internet. Long distance traffic carried by CTC dropped 14.5% year on year. Despite the decline in this market, CTC maintained its relative shares of traffic (46.9% in domestic long distance and 33.0% in international long distance). By the end of the third quarter of 2005, revenues stood at 644.1 million euros, 1.4% higher than in 2004 in local currency. Revenues from the traditional business fell slightly in comparison with 2004 (-0.6% in local currency), given that the good performance recorded in revenues from local telephony and interconnection did not offset lower long distance and equipment sale revenues. Revenues from the Internet business (narrowband and broadband) continued to record strong growth rates and contributed 7.8% of total revenues (+1.9 percentage points in comparison with September 2004), driven by the good performance of Broadband revenues (+49.1% year on year in local currency). Operating expenses increased by 2.5% to September in local currency as a result of commercial, installation, customer care and infrastructure maintenance efforts, which resulted in a 9.5% increase in external services expenses, as well as an increase in supply expenses (+2.2% year on year in local currency) due to heavier traffic to mobiles, which did not offset the 9.2% drop in personnel expenses. As a result of the improvements to debt recovery systems and policies, there was an improvement in the bad debt provision that fell 9.5% in local currency in comparison with 2004. By September end 2005, the operating income before depreciation and amortization (OIBDA) stood at 268.8 million euros, not comparable with the OIBDA obtained in the same period of 2004 that included the results of the sale of the CTC cellular subsidiary to Telefonica Moviles in July 2004, generating capital gains of around 425 million euros for CTC. Excluding this effect, accumulated OIBDA to September 2005 would only have fallen by 7.5% in local currency to stand at a margin of 41.7% of revenues (4.0 percentage points lower than in the same period 2004). Accumulated CapEx to September was 66.4 million euros, an 8.8% increase in local currency with regard to 2004, mostly due to the growth in the broadband business to which around 32% of the investment was devoted. operating free cash flow (OIBDA-CapEx) stood at 202.4 million euros (11.2% down on 2004, excluding from 2004 the sale of the cellular subsidiary). Telefonica del Peru By the end of the third quarter of 2005, the total number of accesses continued with its positive trend at Telefonica del Peru (TdP), showing a growth of 13.6% year on year, almost in line with the growth rate recorded in June 2005. The intense commercial activity undertaken was reflected by: i) strong growth in fixed telephony lines (2.3 million lines, +10.4% year on year), generating a net gain from July to September of 52,065 lines, ii) significant increase in retail Broadband lines, exceeding 310,000 clients (a year-on-year increase of 86.5%) after obtaining a net gain of around 34,200 clients during the past quarter and over 100,000 year to date. The increase in the numbers of pay TV subscribers should also be noted, which grew by 14.1% to total 432,172 customers. Revenues of Telefonica del Peru stood at 765.9 million euros at the end of the third quarter of 2005, a year-on-year increase of 1.4% in local currency. This increase can basically be explained by higher revenues from the internet business (Broadband+Narrowband) that grew by 42.1% in local currency thanks to the good performance of Broadband revenues (+61.2%) as a result of the increase in lines. The Internet business increased its weight in the total revenues, from 6.7% in of September 2004 to the current 9.4%. Revenues from the traditional business fell 1.6% year-on-year in local currency (vs. -2.0% in June 2005). The positive change in cable TV revenues (+7.9% year-on-year growth in local currency) and improved management of the public payphone infrastructure (more profitable locations), which generated a 4.3% year-on-year increase in revenues, was unable to offset the drop in revenues from observed traffic since the application of the new productivity factor in September 2004 (10.07% vs. 6% previously applied). Total accumulated traffic reflected a year-on-year decrease of 2.5%, given that the growth in voice traffic (+2.7%), basically promoted by the good behavior of local Fixed-to-Fixed (+2.5%), International Long Distance (+30.2%) and incoming interconnection (+14.0%) traffic, was unable to offset the year-on-year drop in internet traffic (-39.7%) due to market orientation towards Broadband products. Operating Expenses accumulated to September 2005 grew by 0.2% in local currency (vs. +1.2% in June 2005), basically as a result of greater commercial activity, that implied an increase in external services expenses of 5.8% in local currency. In the positive side, the drop in supply expenses is worth noting (-8.7%), mostly due to the lower interconnection costs as a result of less fixed-to-mobile traffic and the reduction on Fixed-to-Mobile interconnection rates. The reduction noted in bad debt provision (-47.5% year on year) is also worth noting, helped by the higher percentage of prepaid and consumption control lines in September 2005, compared with the same period of the previous year (58.2% at September end 2005 vs. 51.5% in September 2004). Operating income before depreciation and amortization (OIBDA) amounted to 320.0 million euros, with a year-on-year drop of 1.2% in local currency (vs. -3.5% in June 2005), mostly due to the provision made for extraordinary contingencies, embargos and others. The OIBDA margin stood at 41.8% to improve the margin recorded in the first half of the year by 1.4 percentage points. CapEx (83.1 million euros) recorded a year-on-year increase of 74.2%, due to a better accounting management of investments, the effect of which will be eased by the end of the year. As a result of the drop in OIBDA and the strong growth of CapEx, operating free cash flow (OIBDA - CapEx) fell by 13.9% in local currency. Telefonica Empresas America As in previous quarters, the results from the first nine months of 2005 are shown in comparable terms with those corresponding to the same period of 2004 as a result of the change in the Telefonica Empresas America (TEA) consolidation perimeter to include TLD Puerto Rico operations and the new segmentation of business and wholesale clients at Telefonica Empresas Chile. Revenues accumulated to September 2005 amounted to 444.8 million euros, a 15.0% growth (+8.2% in constant euros) in comparison with the same period in 2004. By product lines, Data and Internet services remained the highest contributors with a weight of over 62% of total revenues and a 12.1% increase in constant euros in comparison with the same period of the previous year. More than 50% of revenues from this caption came from Brazil. With regard to the other products lines, the good performance of International Services is also worth noting, with a year-on-year growth of around 14% in constant euros, primarily from higher revenues from T-Empresas USA, Colombia and Argentina. The operating income before depreciation and amortization (OIBDA) accumulated by TEA to September 2005 amounted to 65.8 million euros, a 101.4% increase on 2004 (+80.6% in constant euros). The OIBDA margin stood at 14.8%, a 6.3 percentage point improvement. The CapEx recorded by TEA amounted to 36.1 million euros in September 2005, 14.7% up on that recorded in the same period of the previous year in constant euros, due mostly to the investment in equipment devoted to clients. Hence, the operating free cash flow (OIBDA - CapEx) exceeded the level reached in the same period of 2004 by more than four times (352.2% variation in constant euros) to stand at 29.6 million euros. By country, Brazil recorded the greatest relative weight within the TEA Group (39% of revenues and 58% of OIBDA). By September 2005, its revenues totaled 173.5 million euros, with a 21.3% growth in local currency in relation to the September 2004 aggregate. The September OIBDA amounted to 42.1 million euros to record a 46.9% growth rate in local currency. As for the remaining operators concerned (Argentina, Chile and Peru), Telefonica Empresas Argentina recorded revenues of 53.2 million euros (+14.4% year-on-year in local currency), while Telefonica Empresas Chile became the second operator in the TEA Group in terms of revenues (87.4 million euros) and OIBDA (23.8 million euros). Telefonica Empresas Peru recorded year-on-year falls in both revenues (-1.3% in local currency to 46.5 million euros) and OIBDA (-7.9% in local currency to 7.2 million euros). In other countries where Telefonica Group is not the incumbent operator (the US, Colombia and Mexico), it is worth noting the figures of T-Empresas USA, which recorded revenues of 51.3 million euros, which represents a 16.5% improvement in local currency in relation to the same period in 2004. Telefonica International Wholesale Services (TIWS) Revenues accumulated to September amounted to 134.0 million euros (+17.4% in current euros and +18.4% in constant euros). High growth rates were recorded in all lines of business, although revenues from the international IP service continued to contribute most to revenues (56%), with an 18.4% increase in constant euros. OIBDA recorded a year-on-year increase of 40.3% (+38.0% in constant euros) to total 41.5 million euros, improving the year-on-year margin as a percentage of revenues by 5.1 percentage points to reach 31.0%. TELEFONICA LATINOAMERICA GROUP SELECTED OPERATING DATA Unaudited figures (Thousands) September 2005 2004 % Chg Telesp 15,704.7 15,283.8 2.8 Fixed telephony accesses (1) 12,446.4 12,350.9 0.8 Internet and data accesses 3,258.4 2,932.9 11.1 Narrowband 2,038.4 2,087.7 (2.4) Broadband (ADSL) 1,084.4 715.6 51.5 Retail 1,084.3 715.6 51.5 Telefonica de Argentina 5,421.9 5,236.5 3.5 Fixed telephony accesses (1) 4,476.7 4,312.8 3.8 Internet and data accesses 945.2 923.8 2.3 Narrowband 632.5 739.3 (14.5) Broadband (ADSL) 278.1 150.7 84.5 Retail (2) 217.9 112.2 94.3 Telefonica CTC Chile 2,920.9 2,868.6 1.8 Fixed telephony accesses (1) 2,462.2 2,381.9 3.4 Internet and data accesses 458.7 486.7 (5.7) Narrowband 152.0 272.2 (44.2) Broadband (ADSL) 268.3 180.5 48.7 Retail 242.1 160.0 51.3 Telefonica del Peru 3,111.1 2,739.0 13.6 Fixed telephony accesses (1) 2,302.1 2,085.0 10.4 Internet and data accesses 371.9 270.7 37.4 Narrowband 51.5 94.5 (45.5) Broadband (ADSL) (3) 310.5 166.2 86.8 Retail 310.1 166.2 86.5 Pay TV 437.2 383.3 14.1 GRUPO T. LATINOAMERICA 28,061.7 26,127.9 7.4 Fixed telephony accesses (1) 21,687.4 21,130.5 2.6 Internet and data accesses 5,937.2 4,614.1 28.7 Narrowband (4) 3,322.2 3,193.7 4.0 Broadband (ADSL) (3) (5) 2,396.4 1,213.0 97.6 Retail (2) 1,854.4 1,154.0 60.7 Pay TV 437.2 383.3 14.1 (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) TASA includes ISP in the north part of the country. (3) TdP cable modem included. (4) Includes Narrowband ISP from Terra Brasil and Terra Colombia. (5) Includes Broadband ISP from Terra Brasil and Terra Mexico. TELEFONICA LATINOAMERICA GROUP SELECTED OPERATING DATA Unaudited figures (Euros in millions) January - September 2005 2004 % Chg Telesp Revenues 3,441.0 2,747.6 25.2 OIBDA 1,567.4 1,229.3 27.5 OIBDA margin 45.5% 44.7% 0.8 p.p. Telefonica de Argentina Revenues 653.4 602.9 8.4 OIBDA 363.6 354.1 2.7 OIBDA margin (1) 55.7% 58.7% (3.1 p.p.) Telefonica CTC Chile Revenues 644.1 608.0 5.9 OIBDA 268.8 711.1 n.c. OIBDA margin 41.7% n.s. n.c. Telefonica del Peru Revenues 765.9 736.4 4.0 OIBDA 320.0 315.5 1.4 OIBDA margin 41.8% 42.8% (1.1 p.p.) Telefonica Empresas America Revenues 444.8 386.8 15.0 OIBDA 65.8 32.7 101.4 OIBDA margin 14.8% 8.4% 6.3 p.p. TIWS Revenues 134.0 114.2 17.4 OIBDA 41.5 29.6 40.3 OIBDA margin 31.0% 25.9% 5.1 p.p. Note: OIBDA before management fees. Data for Telefonica de Argentina include the ISP business of Advance, while those of Telefonica del Peru includes CableMagico. (1) Net of fixed to mobile interconnection. TELEFONICA LATINOAMERICA GROUP CONSOLIDATED INCOME STATEMENT Unaudited figures (Euros in millions) January - September July - September 2005 2004 % Chg 2005 2004 % Chg Revenues 5,913.5 5,005.5 18.1 2,221.3 1,722.5 29.0 Internal expenditure capitalized in fixed 31.7 30.0 5.8 12.9 10.6 22.3 assets (1) Operating expenses (3,174.3) (2,687.0) 18.1 (1,194.9) (921.4) 29.7 Other net operating income (expense) (164.4) (136.2) 20.7 (70.8) (40.2) 76.3 Gain (loss) on sale of fixed assets 77.5 426.8 (81.9) (3.2) 417.3 c.s. Impairment of goodwill and other assets 4.7 0.6 n.s. 6.8 0.0 n.s. Operating income before D&A (OIBDA) 2,688.6 2,639.7 1.9 972.2 1,188.9 (18.2) Depreciation and amortization (1,308.6) (1,184.2) 10.5 (468.6) (393.1) 19.2 Operating income (OI) 1,380.0 1,455.4 (5.2) 503.5 795.8 (36.7) Profit from associated companies 3.1 0.1 n.s. 0.9 (1.2) c.s. Net financial income (expense) (238.8) (291.9) (18.2) (83.3) (80.4) 3.7 Income before taxes 1,144.4 1,163.7 (1.7) 421.1 714.2 (41.0) Income taxes (253.1) (206.6) 22.5 (110.1) (151.0) (27.1) Income from continuing operations 891.4 957.1 (6.9) 311.0 563.1 (44.8) Income (Loss) from discontinued 0.0 0.0 n.s. 0.0 0.0 n.s. operations Minority interest (108.5) (310.0) (65.0) (37.0) (246.9) (85.0) Net income 782.9 647.1 21.0 273.9 316.2 (13.4) (1) Including work in process. This information is provided by RNS The company news service from the London Stock Exchange

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Telefonica SA (0TDE)

Thursday, 23rd May 2024

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HL. QQ. AJB

Another day and another round of takeover talk with Hargreaves Lansdown being eyed by private equity suitors. AJ Bell also advances on upbeat earnings news whilst QinetiQ upgrades its profit guidance, too.

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