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Press release from Business Wire

Telefónica's Net Profit up 2% to 1,656 Million Euros in 1Q10

<p> <span class='bwunderlinestyle'><b>Results for this quarter are in line with the Company's expectations allowing to reiterate financial guidance for 2010.</b> <b>Telefónica also confirms its long-term guidance (2012) as well as its shareholder remuneration commitment through dividend payments</b></span> </p>

Thursday, May 13, 2010

Telefónica's Net Profit up 2% to 1,656 Million Euros in 1Q1001:55 EDT Thursday, May 13, 2010 MADRID (Business Wire) -- In the first quarter Telefónica focused on capturing growth in all markets with intense commercial activity. This triggered an acceleration of Group revenue performance (+1,7% year on year, vs -2,1% for FY2009) and net adds of 8.6 million accesses in the first quarter.Both trends lay the foundations to continue growing in the coming monthsValue customers: The Company now has nearly 273 million accesses worldwide (+4.6% year-on-year). Of its 206 million wireless customers, 30% are contract holders (+12%); while broadband accesses now total over 35 million with year-on-year growth of 25.2% (fixed) and 97.5% (mobile)Growth: Quarterly revenue totals 13,932 million euros. While this line was significantly higher in Europe (+7.4%) and Latin America (+4.2%), Spain consolidates its trends of progressive improvement on a like-for-like basisProfitability: Telefónica maintains high levels of operating profit and cash generation although these were affected by commercial activities and non re-current effects in the quarter. OIBDA totalled 5,114 million euros (-4.1%), the OIBDA margin was 36.7%, and operating cash flow (OIBDA-CapEx) amounted to 3,923 million eurosDiversification: Nearly two thirds of Group revenue and 58.1% of OIBDA were generated outside Spain while the contribution from Latin America (1,577 million euros) and Europe (583 million euros) to operating cash flow increasedFinancial strength: The ratio of debt + commitments to OIBDA stands at 2.3 times. The company has sufficient cash to meet its debt obligations for 2010 and its financial activity this quarter was aimed at pre-financing part of its 2011 debt maturitiesCapEx commitment: A total of 1,191 million euros in the quarter dedicated to transformation and growth projects (fixed and mobile broadband)Regions: Commercial activity in Spain yielded 247,000 new customers in the first quarter. Latin America obtained 3.7 million new accesses (three times the prior year figure) and cemented its status as the largest contributor to Group revenues in terms of organic growth (2.1pp). The UK and Germany led the way in terms of revenue growth in Europe (+5.4% in organic terms and excluding regulatory effects), where over half a million new wireless customers were added in the quarter The results for the first quarter of the year reflect the strategic priorities established by the Company for 2010, which are focused on capturing the growth opportunities in its markets to boost revenue, reinvesting efficiency gains to foster revenue expansion, while maintaining high profitability and strong cash flow generation. Telefónica's results at 31 March 2010 underscore the success of an intense commercial campaign aimed at capturing growth in all the markets where the company operates and boosting the group's growth profile in the coming quarters. The strategy's success is borne out in the top line of the income statement with higher revenue growth (+1.7% year-on-year) and positive trends in all markets, particularly Europe. Also, the group's commercial efforts and the high-quality and attractive services included in its portfolio, helped boost the customer base to 273 million accesses worldwide (+4.6%, 2.6 percentage points more than at 31 December 2009). Of particular note is the performance of the highest value segments and services (wireless contract customers and fixed and mobile broadband). Both trends lay the foundations for continued growth in the coming months and have helped Telefónica's net profit rise 2% to 1,656 million euros. Results for this quarter are in line with the Company's expectations and allow toreiterate financial guidance for 2010. In addition, Telefonica also confirms its long term guidance (2012) as well as its shareholder remuneration commitment through the payment of 1.40 euros per share dividend for 2010, increasing to a minimum of 1.75 euros per share in 2012. Accesses: strong growth in highest value segments and services The sound performance in accesses is largely thanks to the positive results of the intense commercial campaign in the quarter. The number of adds grew 16.9% year-on-year which, combined with customer loyalty initiatives, saw net adds nearly multiplying by 2.6 times the figure of the same period in 2009. Excluding accesses at Hansenet and Medi Telecom in both periods, net adds in the first quarter of 2010 totalled 4.3 million accesses in organic terms. At 31 March 2010 Telefónica reported 8.6 million more accesses than at year-end 2009. This positive trend helped boost the number of Telefónica Group customers to 273 million accesses, growing 6.1% in organic terms or 1 percentage points more than the growth rate at 31 December 2009. By regions, of particular note is the increase in the number of Telefónica Europa (+6.7% year-on-year organic growth) and Telefónica Latinoamérica (+8.1% year-on-year) customers. By segments, we would highlight the growth in wireless accesses (+8.7%), fixed broadband (+8.7% in organic terms) and pay-TV (+9.3% in organic terms). Analysing the performance of accesses in the various business segments, the success of the company's commercial strategy, which focused on the highest value segments and strong growth services, is clear. This strategy is intended to drive and increase the dynamism of future growth. The broadband businesses (wholesale+retail) totalled 35 million accesses at 31 March. The retail fixed broadband business increased 25.2% (+8.7% year-on-year in organic terms) while the mobile broadband business advanced 97.5%. Telefónica Group wireless accesses advanced 4.4 million in the first quarter to 206 million. The contract segment increased to 2.3 million accesses, contributing 53% to total net adds in the quarter and accounting for 30% of total wireless accesses at 31 March. Also worth highlighting is the performance of wireless net adds in Spain (189,000 accesses in the quarter vs. 10,000 in the same period in 2009) and Latin America (+3.7M Accesses). Mobile broadband accesses also increased to 16 million in the quarter. Turning to other growth businesses, retail broadband accesses totalled 16 million with net adds in organic terms of 0.4 million accesses, 30.6% higher than the same period in 2009. Of particular note is Telesp in Brazil which added a record 163,000 new broadband users in the quarter, enjoying the best performance seen in any first quarter since the broadband service was launched. Spain also performed well with 102,000 new customers since January, much higher than the figure for the first half of 2009. The weight of bundled services, in response to customer demands, continues to grow across the group. In Spain 89% of retail broadband accesses are bundled as part of either a dual or triple service package, while in Latin America 57% of broadband accesses are bundled as part of a dual or triple package. Pay TV accesses stood at 2.6 million at 31 March 2010 (+9.3% year-on-year in organic terms). It is also worth mentioning that the company now has pay TV operations up and running in Spain, the Czech Republic, Germany, Peru, Chile, Colombia, Brazil, Venezuela and Argentina. Revenue growth picking up Turning to the Group's income statement, from January to March the pace of revenue growth picked up, following the trend seen in the fourth quarter of 2009, thanks to the intense commercial efforts in recent months and Telefónica's intention to harness growth opportunities in all its markets. Revenue growth has picked up and risen 1.7% in reported terms (-2.1% for full year 2009) putting net revenue at 13,932 million euros. In organic terms growth was 0.9% compared to the same period in 2009 (+2.4%, stripping out regulatory impacts), with Latin America and Europe contributing the most to this organic growth (2.1pp and 0.4pp, respectively). In the first quarter this item was significantly higher in Europe both in reported (+7.4%) and in organic terms and excluding regulatory effects (+5.4%); it also rose in Latin America (+5.4% in organic terms), and built on the progressive improvement in Spain on a like-for-like basis. In fact, for the domestic market we would note, once again, the improved revenue performance of Telefónica España on a like-for-like basis, with a slowdown in the pace of year-on-year decline of 0.6 percentage points, mainly driven by improved wireless revenues. The value of the Telefónica Group's geographical diversification is borne out in the breakdown of its regional revenue, with two thirds of Group revenue being generated outside of Spain (Telefónica Latinoamérica represents 40.4% of the total and Telefónica Europa 25%). Operating expenses rose in the period to 9,021 million euros largely due to higher personnel and external service expenses which totalled 1,842 million and 2,660 million euros respectively in the first quarter, largely due to higher commercial expenses in all countries. The average workforce headcount in the first quarter was 259,209 employees (125,707 employees excluding the Atento Group workforce). Telefónica also enjoyed high levels of operating profit which was however affected by its commercial activities in the quarter to position and boost growth in the coming quarters. Operating income before depreciation and amortization (OIBDA) totalled 5,114 million euros at 31 March (-4.1% in reported terms and -3.4% in organic terms). This was affected by the Group's commercial efforts, regulatory measures and one-off events. Nevertheless, the level of operating efficiency remains high with an OIBDA margin of 36.7%. Latin America and Europe now account for 58.1% of group OIBDA. Operating income (OI) totalled 2,930 million euros (-7.2% in reported terms and -2.4% in organic terms). Profit from associates amounted to 36 million euros (versus 5 million euros in the same period in 2009), mainly as a result of increased profits from the Company's stake in Portugal telecom and reduced losses from its stake in Telco, S.p.A.Net Financial Results at the end of March 2010 amounted to -573 million euros. Sound financial position At 31 March 2010 the company's net financial debt totalled 45,281 million euros. Telefónica maintained its financial strength with a ratio of net debt + commitments to OIBDA of 2.2 times. This ratio rose slightly mainly due to the increase in net debt due to the exchange rate effect (devaluation in Venezuela and appreciation of the Colombian peso vs euro) and higher capex in the period, including the outlay for the acquisition of Hansenet (912 million euros) and Jajah (145 million euros). Between January and March 2010 the company embarked on longer term financing initiatives totalling 2,200 million euros. Of this, the equivalent of 1,800 million euros was invested by Telefónica S.A. to finance its 2011 debt maturities early. Consequently, the Group's cash position now far exceeds maturities falling due this year. At the end of March 2010, bonds and debentures represented 64% of consolidated financial debt, while debt with financial institutions accounted for 36%. With a tax rate of 29.8%, at the end of March 2010 Group tax expenses totalled 714 million euros, while minority interests shaved off 23 million euros from first quarter net profit. As a result, consolidated net income in January-March totalled 1,656 million euros, 2% higher than the year ago figure in 2009 in reported terms, putting net basic earnings per share at 0.36 euros, up 2.6% year-on-year. Finally, Group CapEx in the first quarter stood at 1,191 million euros, in line with the amount invested in the same period the previous year. This was largely earmarked for transformation and growth projects, mainly aimed at meeting demand for fixed and mobile broadband services. Operating cash flow (OIBDA-CapEx) remained high in the quarter at 3,923 million euros (-4.3% year-on-year in organic terms. This performance was driven by the lower contribution by Telefónica España (1,820 million euros), while Telefónica Latinoamérica and Telefonica Europe's contribution was 1,577 and 583 million euros, respectively. Economies of scale and efficient management of operating expenses and investment helped improve the efficiency ratio to 74.5%. This is defined as: (OpEx+CapEx-Internal expenses capitalized in fixed assets)/Revenues.