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Press release from Business Wire

Telefónica's First-Half Revenues Rose by 6.3%, Underpinned by the Latin American Business and a Sharp Rise in Mobile Data Revenue

Thursday, July 28, 2011

Telefónica's First-Half Revenues Rose by 6.3%, Underpinned by the Latin American Business and a Sharp Rise in Mobile Data Revenue04:10 EDT Thursday, July 28, 2011 MADRID (Business Wire) -- The Company reiterates all its full-year 2011 business targetsThe Company continues to focus on the quality of its customer base, which grew by over 6% to 295 million accesses at the end of June Consolidated revenues rose to 30,886 million euros in the first half of 2011 thanks to the sharp rise at Telefónica Latinoamérica (+18.4% year-on-year) and the significant increase of mobile data revenue (+18.5% year-on-year), showing a strong dynamism and remaining a key growth driver in all regions Consolidated OIBDA advanced 3.7% to 11,304 million euros thanks to the high level of operating efficiency, leaving an OIBDA margin of 36.6% Telefónica Latinoamérica and Telefónica Europa accounted for 71% of consolidated revenue and 64% of Group OIBDA Net income totalled 3,162 million euros (-16.3%), affected by the non-cash impact resulting from Telco's revision of the value of its stake in Telecom Italia, which reduced net income in the first half-year by 353 million euros The contract segment continued to increase its weight within the overall customer base (+13%) and accounted for 32% of the Group's 227.3 million mobile accesses. Moreover, the segmentation of tariffs by consumption patterns (tiered pricing) and the quality of the network boosted mobile broadband accesses, which totalled 29.8 million at the end of June. Retail fixed broadband and Pay TV accesses also posted respective growth of +8% and +16% to 17.6 million and 3.1 million Especially noteworthy was the performance of Brazil, where the advantages of the integration of fixed and mobile operations boosted growth in the key items (revenue, +6.4% organic; OIBDA, +13.2% organic), while estimated synergies have been upgraded to a new range of between €3,700 and €4,600 million The Telefónica Group invested 3,838 million euros through June, with the development of fixed and mobile broadband services accounting for the bulk of this sum. Spain experienced especially sharp growth in investment (+8.7%) in the first half. Despite the investment drive, cash flow generation (OIBDA-CapEx) stood at 7,466 million euros at the end of June Telefónica (NYSE:TEF) (LSE:TDE) delivered a solid set of first half results, with sharp growth in consolidated revenues in the period (+6.3%) despite the challenging conditions in some of the markets where the Company operates and the significant impact of regulation. This strong growth in revenues to 30,886 million euros was underpinned by the performance of Telefónica Latinoamérica (+18.4% year-on-year) and the significant increase of mobile data revenue (+18.5% year-on-year), showing a strong dynamism which continues to drive growth in all regions. Between January and June, consolidated OIBDA advanced 3.7% to 11,304 million euros thanks to a high level of operating efficiency, while operating income totalled 6,348 million euros (-1.7%) and net income stood at 3,162 million euros (-16.3%), affected by the non-cash impact resulting from Telco's revision of the value of its stake in Telecom Italia, which reduced net income in the first half-year by 353 million euros. Nonetheless, Telefónica provided clear evidence in the first half of its capacity to adapt and act swiftly in order to remain competitive in a changing environment: the Company has negotiated an agreement with Spanish unions, adapted its mobile data tariffs to a model segmented by consumption patterns (tiered pricing) and leveraged its strengths to successfully roll out new business initiatives including the Partners Program. In the results report published today, the Chairman of Telefónica, César Alierta, emphasises that “we remain focused on value and over the coming months will continue to leverage our scale, scope and diversification to achieve our full-year guidance.” Alierta particularly emphasised the performance in Brazil, which he described as “outstanding”, adding that it consolidates the Company's leadership “in a market which will soon become Telefónica's main source of revenue, and where the integration of the fixed and mobile businesses will allow the Company to capture synergies of 3,700-4,600 million euros, a significantly larger amount than initially forecasted.” A quality customer base During the first six months of 2011 the Company focused its commercial strategy on value rather than volume, increasing efforts to improve customer satisfaction and loyalty, while fostering at the same time a strong adoption of “smartphones” and other mobile broadband devices in our customer base, increasing tariff segmentation and widening the range of devices available. This strategy has led to continued growth in accesses (+6% year-on-year in both organic and reported terms) to 295.0 million at the end of June 2011. By region, Telefónica Latinoamérica and Telefónica Europe, with year-on-year organic growth of 8% and 5% respectively, were the main contributors to the growth in Telefónica's customer base. Telefónica's mobile accesses totalled 227.3 million by the end of the first half of 2011, up 8% year-on-year in both organic and reported terms, underpinned by the sustained increase in the contract segment (+13% year-on-year in organic terms), which now accounts for 32% of the total mobile access base (+1.4 percentage points year-on-year in organic terms). The focus of commercial efforts on higher-value customers and on new services is reflected in the contract segment's growing contribution to total net additions, which reached 47% in the first half of 2011. Mobile broadband accesses -accesses with a data rate attached and therefore active users of the service- reached 29.8 million at the end of June 2011. This figure represents a penetration rate of 13% of Telefónica's mobile access base. Telefónica Europa reached a penetration rate of 28%, followed by Telefónica España (23%), while there is huge scope to increase penetration at Telefónica Latinoamérica (7% in June 2011). Retail fixed broadband accesses reached 17.6 million, up 8% year-on-year. Bundles of voice, broadband, and television services remain key to this strategy and especially to churn control. Both in Spain and Latin America, close to 90% of retail fixed broadband accesses are bundled as part of either a dual or triple service package. Pay TV accesses stood at 3.1 million at the end of the first half (+16% year-on-year), representing a pick-up in the growth rate thanks to the success of the commercial repositioning of the service in Latin America and the inclusion of TVA's customers in Brazil from June. Finally, fixed telephony accesses totalled 40.7 million (-3% year-on-year). Analysis of the income statement It is important to bear in mind that Vivo has been fully consolidated since October 2010 (prior to that date, the results of Vivo were proportionately consolidated). Consequently, this has an impact on the year-on-year comparisons of Telefónica's financial results in reported terms. Revenues totalled 30,886 million euros in the first half of the year, up 6.3% year-on-year, pushed by the higher revenues from Telefónica Latinoamérica (+18.4% year-on-year) and from Telefónica Europe (+2.2% year-on-year). By region, Telefónica Latinoamérica remained the main growth driver and was the largest contributor to revenue growth (+2.4 percentage points), which together with Telefónica Europe (+0.1 percentage points), offset the lower contribution from Telefónica España (-1.9 percentage points). This highlights the benefits of the Company's high diversification. In the first half, Telefónica Latinoamérica and Telefónica Europe accounted for 71% of consolidated revenues (+4 percentage points from June 2010), compared to Telefónica España's lower contribution of around 28%. Consolidated operating expenses for the first half totalled 20,306 million euros (+8.2% year-on-year in reported terms). Supply costs were 8,893 million euros, a rise of 2.3% year-on-year in organic terms as a result of increased handset costs in the three regions associated with growing “smartphone” adoption across all markets. Subcontract expenses amounted to 6,311 million euros. Personnel expenses reached 4,139 million euros, rising 5.9% in organic terms, mainly due to higher personnel expenses in Spain, after salaries review linked to 2010 CPI, in Latin America, due to in-sourcing processes developed in Brazil in 2010 and higher inflation in some markets of the region, and in Atento. The average number of employees at the end of June 2011 was 285,089 (23,441 more than at the end of June 2010), mainly due to the larger workforce at Atento. Excluding Atento, Telefónica's average workforce would stand at 133,615 employees (125,792 employees in June 2010). Global initiatives that leverage Telefónica's scale At the same time, Telefónica's global projects continued to make a positive contribution to consolidated results in the first half (274 million euros in revenues and 230 million in OIBDA). In this context, and putting in value the benefits of our scale, it is worth to highlight the announcement in July that Bouygues and Etisalat will join “Telefónica's Partners Program”, a new initiative that makes available to selected operators and under commercial terms a host of services that allows partners to leverage on Telefónica's scale and to cooperate on key business topics (roaming, services to multinationals, procurement, devices, etc.). Gains on sales of fixed assets totalled 245 million euros in the first six months of the year, including mainly the positive impact of the partial reduction of the Company's economic exposure to Portugal Telecom (183 million euros). Operating income before depreciation and amortization (OIBDA) for the first half stood at 11,304 million euros, with a year-on-year growth rate of 3.7%, mainly driven by the growth at Telefónica Latinoamérica (+16.6% year-on-year) and to a lesser extent, at Telefónica Europe (+1.2% year-on-year). The reported OIBDA margin stood at 36.6% for the first half (-0.9 percentage points year-on-year). By region, the contribution of Telefónica Latinoamérica to reported OIBDA increased by 5.1 percentage points year-on-year to 46%. This, together with the contribution from Telefónica Europe, meant that 64% of consolidated OIBDA was generated outside Telefónica España in the first half of 2011. Depreciation and amortization totalled 4,956 million euros in the first half, a year-on-year increase of 11.4% in reported terms, primarily due to the full consolidation of Vivo together with the amortization of Vivo's purchase price allocation (171 million euros in the first half). Total depreciation and amortization charges derived from purchase price allocation processes amounted to 564 million euros in the first half (+9.3% year-on-year). In organic terms, depreciation and amortization fell by 1.2% from the same period a year earlier. As a result, operating income (OI) in January-June 2011 amounted to 6,348 million euros, down 1.7% in reported terms and -3.0% in organic terms. Profit from associates stood at -534 million euros in the first half versus +72 million euros a year earlier. This year-on-year change is largely due to the non-cash impact of Telco, S.p.A.'s revision of the value of its investment in Telecom Italia. As a result, the Company has recorded a 505 million euros loss (353 million euros after the related tax effect at Telefónica, S.A.). Total financial expenses up to June 2011 reached 1,165 million euros. Financial positionNet Financial Debt rose by 826 million euros from 2010 year end to reach 56,420 million euros at the end of June 2011. The leverage ratio, net debt over last twelve months' OIBDA (including accumulated 100% of Vivo's OIBDA over last twelve months, excluding results on the sale of fixed assets and adjusted by firm commitments related to the Fundación Telefónica's social welfare activities), stands at 2.49 times at June 2011, and at 2.56 including commitments. During the first half of 2011, the financing activity of Telefónica, excluding short term Commercial Paper Programmes activity and including the extension on the Vivo syndicated facility, rose to above 8,000 million equivalent euros, with the main objective of financing 2011 debt and smoothing our debt maturity profile for 2013 at the Holding level. At the end of June 2011, bonds and debentures represented 62%, on the consolidated financial debt breakdown, while debt with financial institutions reached a 38% weight. Corporate income taxes in the first half totalled 1,271 million euros, which, over an income before taxes amounting to 4,649 million euros, results in an accrued tax rate of 27.3%. Profit attributable to minority interests dragged 216 million euros from net income in the first half, mainly due to minority interests in earnings from Vivo - with a material increase versus the first half of 2010 due to the change in the consolidation method and the sound performance of the Company's net income-, Telesp and Telefónica Czech Republic, which more than offset the minority interests in Telefónica Telecom's losses. As a result, consolidated net income amounted to 3,162 million euros (compared with 3,775 million euros in the first half of 2010) and basic earnings per share stood at 0.70 euros. Both items were affected by the non-cash impact from the revision of the value of Telco SpA's stake in Telecom Italia mentioned before. CapEx stood at 3,838 million euros in the first half of the year (-10.6% year-on-year). It is worth mentioning that the CapEx reported in the second quarter of 2011 includes the spectrum costs in Brazil and Costa Rica, both granted in 2010, while first-half CapEx in 2010 included basically the investment in spectrum in Germany in the second quarter. In organic terms, CapEx increased by 7.3% versus January-June 2010. The Company continues to focus its investments on growth and transformation projects (80% of total investment), fostering the development of fixed and mobile broadband services. Consequently, operating cash flow (OIBDA-CapEx) totalled 7,466 million euros in the first half. Telefónica, S.A.Dirección de Comunicación CorporativaTel: +34 91 482 38 00email: prensa@telefonica.eswww.telefonica.es/saladeprensa