Telefonica Moviles, S.A. Q1 2006 Earnings Conference Call Transcript (TEM)

May.11.06 | About: Telefonica Servicios (TEM)

Telefonica Moviles, S.A. (TEM)

Q1 2006 Earnings Conference Call

May 11th 2006, 10:00 AM.

Executives:

Maria Garcia-Legaz, Director of Investor Relations

Antonio Viana-Baptista, Chairman and Chief Executive Officer

Ernesto Lopez Mozo, Chief Financial Officer

Analysts:

Robert Grindell, Dresdner Kleinwort Wasserstein

David Wright, JP Morgan

Bosco Ojeda, UBS

Louis Proctor, Morgan Stanley

Terry Sinclair, Citigroup

Damien Maltarp, Cazenove

Maria Rotondo, Santander

James McKenzie, Fidentiis

Guy Peddy, Deutsche Bank

Operator

Good afternoon ladies and gentlemen, welcome to the Telefonica Moviles First Quarter 2006 Results Conference Call. Operator Instructions I will now hand the conference over to Ms. Maria Garcia-Legaz, Director of Investment Relations. You may begin your conference now.

Maria Garcia-Legaz, Director of Investor Relations

Good afternoon ladies and gentlemen, and welcome to Telefonica Moviles conference call to discuss first quarter 2006 results. Before proceeding, let me mention that the financial information contained in this document has been prepared under international financial reporting standards. This financial information is unaudited and therefore is subject to potential future modifications. This presentation may contain announcements that constitute forward-looking statements, which are not guarantees of future performance, and involve risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of various factors. We invite you to read the consolidated statement including the first page of the presentation, which you will find in our website. We encourage you to review our publicly available disclosure documents filed with the relevant securities market regulators. If you have not received the press release or the power point presentation for the conference call, please contact us in Madrid at 3491-423-4027.

Additionally, let me mention that today’s conference call is being webcast. With us today are Mr. Antonio Viana-Baptista, Executive Chairman; and Ernesto Lopez, CFO. It’s now my pleasure to turn the call over to Antonio Viana, Mr. Viana, you may begin.

Antonio Viana-Baptista, Chairman, Chief Executive Officer

Good morning or afternoon ladies and gentlemen, and thank you for attending the Telefonica Moviles conference call. During the first quarter of this year, we have encompassed a strong growth in customers with the rational management of cash, both in Spain and in Latin America. Net adds in the first quarter reached 4.1 million, the highest number our company has ever recorded in a first quarter. This strong commercial activity was combined with a solid cash generation.

Operating cash flow rose 17% year-on-year to €1.2 billion. Further increases in penetration in our markets and churn containment allowed for a steady expansion of our customer base, while the positive performance of outgoing traffic across most regions led to a solid 18% year-on-year gross in revenues.

We are particularly pleased with the results of the technology migration to GSM in six countries in Latin America, with positive impact on both the volume of gross adds and commercial costs. GSM is a clear driver of the enhanced operating profitability in these countries. Lower SACs also reflect the savings we are obtaining in handset procurement, leveraging Telefonica’s global scale and divisional management operations in Latin America.

Slide #4 shows the outstanding customer growth recorded in most regions. In Spain, we have already surpassed the 20 million customer mark. Net adds in the quarter were very strong, reaching 387,000, almost four times the volume recorded a year ago, and 50% higher than those of the first quarter of ’05. In fact, it has been the highest quarterly gain since the fourth quarter of 2003.

In Latin America, GSM gross adds continue to drive customer growth, representing over 57% of our first quarter gross adds. Total net adds in the region were over 3.5 million customers in the first quarter, 35% above last year’s figure, leading to a 25% year-on-year increase in our customer base. The good performance in these markets and further expansion of Meditel’s customer base in Morocco, has allowed us to consolidate our position as one of the largest players in the industry, with 98.5 million managed customers, 21% more than a year ago. As of today, we have exceeded the 100 million customer mark only at Telefonica Moviles.

Moving to slide #5, consolidated revenue in the first quarter reached €4.3 billion, 18% more than a year ago, underpinned by a solid performance of service revenues. I would like to highlight the healthy 22% growth recorded in outgoing service revenues. The group’s EBITDA in the first quarter reached close to €1.5 billion, while the EBITDA margins stood at 34%. The lower margin versus the first quarter of ’05 is mainly explained by the higher commercial activity recorded in the first three months of ’06 in very competitive markets versus a first quarter of last year with a low commercial activity. Excluding the impact of exchange rate movements, revenue growth would have been over 10%, while the EBITDA would have grown by 6%. Finally, the strong top line growth is encompassed with a robust operating cash flow generation, 1.2 billion in the first quarter of ’06, 17% above the first quarter of 2005.

Slide #6 provides more detailed information on our diversified portfolio, with revenues and OIBDA contribution by country. Our operations in Latin America already account for 50% of total consolidated revenues versus 44% a year ago, and represents 37% of the group OIBDA versus 26% in the first quarter of ’05. This increased contribution is mainly driven by the sound set of results recorded in the Andean and southern regions, with robust revenue and OIBDA growth rates. Also noteworthy is the positive performance recorded in the northern region, where we showed lower losses in Mexico and strong results in Central America.

Let me now review in detail the performance of our main operations, Spain, on slide #7. In a tough competitive environment, Moviles Spain posted a record commercial activity. Gross adds were above 1.5 million for the quarter, 26% more than a year ago. Our strong focus on high value customers is supported by the higher growth of gross adds in the contract segment.

During this first quarter, Moviles Spain continued to promote propositions aimed at encouraging longer commitment from our customers. Handset upgrades reached over 1 million, driven by a retention campaign that reward customer loyalty by offering them very favorable conditions in exchange for our long-term contracts. In the first quarter of ’06, 56% of the commercial actions involving handsets were linked to long-term contracts, which compares to 23% just a year ago.

Prepaid to contract migrations were more than 250,000, leading to a higher rate of the contract segment, which accounts now for close to 55% of our customer base in Spain. The higher rate of the contract segments, commercial actions linked to long-term contracts, and loyalty initiatives based on the new customer segmentations contributed to containing churn at 1.9% versus 2% in the first quarter of ’05 and that 1.3% in the contract segment.

Moving to slide #8, I would like to stress the solid performance of Moviles Spain’s service revenue, which is clearly superior to those reported by most of our peers in Europe. Service revenues were up 4.7% year-on-year. If you break it by components, you’ll see that customer revenues posted a very strong growth plus 6.4% despite a sharp reduction in price, carried out mostly in the second and third quarters of last year.

Interconnection revenues decreased by 1.5% due to both lower termination rates and the decrease in fixed to mobile traffic. Revenues from roaming in remained flat. This is an area where we are already collaborating with O2 as you can see from the joint action that we have announced today in a separate press release to reverse significant roaming benefits for customers. Today, we have unveiled “My Europe”, a comprehensive set of low cost roaming pricing plans for European customers, both for summer promotion and for high users on a permanent basis, which removes charges when receiving calls abroad.

Let me now give you more color on the operating results by segments, on slide #9. As I mentioned before, the refocused commercial strategy of the company from the second quarter of ’05 is posting very positive results in terms of commercial activity. Total net adds in the first quarter exceeded market expectations, driven by a positive evolution both in prepaid and contract segments. This trend reflects the much better results from number portability versus those recorded a year ago.

Our focus on the contract segment is showed by the positive net balance recorded in number portability in the first quarter in this segment, versus 45,000 lines lost in the first quarter of ’05. Results obtained in the prepaid segment are also very encouraging. Now, all this translates into a strong expansion of our customer base, which together with the new customer offers launched in the last 12 months to stimulate usage, are driving the healthy growth of outgoing service revenues.

As you can see on the slide, despite the aggressive price reductions, the year-on-year growth of outgoing service revenues in the corporate segment is impressive, at 14%, while the revenue performance in the individual contract segments is also outstanding. Obviously, lower revenues in the prepaid segment are explained by the impact of prepaid to contract migration and lower prices.

If we move to slide #10, it tries to explain the drivers of the strong usage in Spain. Moviles Spain continues to show one of the highest traffic growth rates among its peers. Leveraging the Moviles Star community effect, attractive and transparent tone net pricing plans are boosting usage, with on net traffic already accounting for 44% of our total traffic. During the first quarter of ’06, close to one million new customers signed up these plans, and since we introduced them a year ago, around 20% of our customers have joined them.

On the data side, we’re pleased with the very positive trend of non person-to-person SMS data revenues, which posted a strong growth driven by content and connectivity. In the first quarter of ’06 downloads continued to show high growth rates, over 74%, with music services being the main driver. Revenues from ring back tones surpassed 3.3 million, as an example in the first quarter.

During the first months of the year we have launched new voice and data propositions for our customers, such as the SMS Club, which offers 50% price discounts for on net SMS, or new contracts for the business segments. Finally, regarding 3G, we continue to intensify our network, and that remains our key priority. We now have around 360,000 3G customers.

On slide #11, you can see how the strong usage of voice and data services translates into ARPU. The impressive 20% year-on-year growth in outgoing MOU has led to close to 15% increase in total MOU. However, the 15% reduction in outgoing voice price per minute and the impact from the Christmas promotion, which was in effect until mid February, resulted in a 2% increase in outgoing ARPU. Blended ARPU rose nearly 1% in the first quarter of ’06, driven by a higher component of outgoing voice, and a 2% increase in data. Therefore, more than offsetting a significant decline in incoming ARPU, which was driven by the 10.6% cut in the termination rates.

I would like to stress the fact that despite lower termination rates, which is a trend we’re seeing all across Europe, we are recording positive ARPU growth. I would also like you to notice the healthy growth of non person-to-person SMS data ARPU, plus 25% during the quarter.

If we now move to slide #12, the strong commercial activity recorded in the first quarter of ’06 has led to higher commercial costs. Total SRC and advertising costs accounted for 16% of Moviles Spain’s service revenues, excluding loyalty points, which compares to 14% a year ago. Higher commercial costs, together with increased customer service and network expenses impacted EBITDA, which totaled over €950 million for the first quarter of ’06, leading to an EBITDA margin of 44% versus 47.5% in the first quarter of ’05.

Please keep in mind that year-on-year comparisons for EBITDA in absolute terms, should improve in the next quarters, as we are now comparing a quarter of very strong commercial activity with the first quarter of ’05, when the commercial efforts were very low. You should also note that we increased significantly our efforts following the launch of the Moviles Star brand in April of ’05. And as a consequence, the comparisons in the second quarter will be drastically different.

Let’s now review the performance of our operations in Latin America. We are delivering strong customer growth, enhanced profitability, and a significant increase in cash flow generation. In the first quarter of ’06, we posted robust customer growth, 25%, which has been encompassed with a 36% advance in service revenues, driven by an impressive 48% yearly increase in outgoing service revenue.

The sound top line growth has been coupled with an even higher increase in EBITDA, 57% year-on-year. In euro terms, leading to a margin expansion of 3.5 percentage points despite a 37% growth in commercial activity year-on-year, benefiting from our larger scale and integrated management of operations. If we exclude the impact of ForEx, growth rates remain very strong. Service revenues would grow 19% while EBITDA would rise 37%.

Finally, the operating cash flow generation was very strong, €370 million in one single quarter, just in Latin America, even higher than the total volume we recorded during the full-year of 2005 for the region.

Before reviewing our major operations in Latin America, let me share with you the key takeaways per country, which you will find in the next chart. In Brazil, competition continues to be very tough and Vivo has a selective approach, focusing its commercial effort in key value segments and key areas. In Argentina, we combined robust customer growth with improved profitability. In Columbia, we posted a strong customer growth, while we continued to expand our GSM network and distribution channel to reduce the gap, versus our major competitor. In Venezuela, we delivered impressive results, with solid customer growth and higher profitability.

In Mexico, our efforts to improve the performance of operations are paying off, with a positive evolution of customer and revenue metrics. In Chile, we are achieving ARPU increases with enhanced profitability, despite the proactive customer migration to GSM. In Peru and Ecuador, the launch of GSM led to very significant customer expansion.

Finally, the positive results of our operations in Uruguay, Guatemala, El Salvador, Nicaragua and Panama, showed the benefits of a regional management of operations in the Central American region.

Let’s start the review of our LatAm operations in Mexico, where we continue working in key areas to enhance our competitive position. On the commercial front, we are launching new propositions, offering our customers value for money when they use their cellular phone. Some examples of these new products are pre-paid tariffs at 1 peso per minute and the Movistar Sin Limites plan targeted at contract customers, which offers 479 pesos per month, a flat rate for on-net calls.

Regarding network quality, let me point out the improvement in the ratio of dropped calls that continues its downward trend to 1.34% in March, versus 1.43% in December’05 and 1.68% a year ago. This enhanced quality is being communicated to our customers through brand campaigns aimed at reinforcing the perception of Movistar as a service with nationwide, high quality coverage in Mexico.

As for the distribution channel, we continue to advance in the restructuring process of the specialist channel, while at the same time, retail channels accounts for an increasing proportion of gross adds.

All the measures we have taken during the last few quarters start showing now positive results. Regarding gross adds, although we still need to further expand our distribution channel, the total volume in the first quarter was above the third quarter of’05 figure, and practically in line with those achieved in the second quarter of last year. As you will recall, we refocused our commercial strategy at the end of that quarter. We are particularly pleased with the evolution of contract gross adds, which in the first quarter of ’06 have doubled the volume recorded a year ago. On the other hand, our efforts to reduce the churn rate have translated into 191,000 net adds, more than twice above the second quarter of ’05 levels. Let me stress that the positive evolution of churn, which has come down 1.3 percentage points in the last quarter to a still high number of 4.2%.

Especially positive is the performance in the contract segment, with a churn rate of 2.5% compared with close to 4% in the previous quarters, and 6.7% a year ago. The improved quality of the customers we have acquired in the last months is clearly backed by the evolution of traffic, as you can see at the bottom of the slide. Total voice traffic in the first quarter of ’06 has showed a very different pattern from what we saw a year ago. The seasonal decline in traffic in the months of February has been significantly lower this year, while the recovery in the month of March has been much, much stronger, indicating that activity levels are much better now.

On the next slide, I would like to highlight the outstanding results we are achieving in the contract segment. Now, despite accounting for only 6% of our total customer base, the segment generates 24% of our service revenue, posting a 17% year-on-year growth in ARPU. The better quality of our customer base allows service revenues to grow in line with customers at above 8%. Service revenue growth is driven by 80% year-on-year increase in data revenues and the strong performance of outgoing service revenues, plus 22%, which are partially offset by the 10% cut in fixed-to-mobile termination rates.

The positive performance of revenues is being reinforced month after months with outgoing service revenues showing growth rates above 20%, both in March and April. These sound top line evolution and cost control measures allowed us to reduce EBITDA losses by 57% year-over-year, achieving a 34% normalized EBITDA margin. Let me remind you that the recent approval of the national calling party base, which will be in force from next October and should have a positive impact, both in traffic and revenues from then on.

Finally, let me share with you the 42% year-on-year growth in OIBDA coming from our operations in Central America, to over €40 million in the first quarter. OIBDA margin rose nearly 4 percentage points to 31%, as we leveraged the regional management of these operations from Mexico.

Moving now to our operations in Columbia. During the first quarter of ’06, we further accelerated our commercial activity, driven by the further expansion of our GSM network. Net adds in the first quarter were nearly 785,000, almost double those recorded in the first quarter of ’05, with net adds in the contract segment more than 10 times higher. Outgoing service revenues showed a 15% year-on-year growth in local currency. Service revenues saw a moderate year-on-year growth in local currency on the back of rapid expansion of the customer base, severe fixed-to-mobile diminishing rate cuts and IT systems and platform migrations.

On the other hand, despite the strong commercial activity in the quarter plus 85% year-on-year, the OIBDA margin remained almost flat in the first quarter at 19%.

We move to Venezuela, there we’re posting a very strong set of results. In a market that is growing very rapidly, our share of net adds was over 45% in the first quarter, leading to over 520,000 new customers in the quarter, 95% more than a year ago. The contract segment posted a strong performance, with record levels of net adds.

The outstanding customer growth is being encompassed with a solid traffic increase, leading to a healthy 16% year-on-year growth in ARPU. Service revenue growth was impressive at 51% in local currency and 65% in euro terms. This has been coupled with a strong profitability. Our OIBDA margin reached 42%, plus 1.1 percentage point versus the first quarter of last year, posting a year-on-year growth in absolute terms of 63% in local currency. We are strongly committed to leading the innovation in this market. We introduced EVDO at the end of 2005 and during these first months of 2006, we have seen a strong demand for the services, surpassing 90,000 customers at the end of March.

Moving to Brazil in slide #20, the competitive environment continues to be very tough, with an increased pressure on the high end segments, both in prepaid and contract, not only in terms of SAC and SRC but also in pricing. In this context, and taking into account the lower value of marginal subscribers, a selective commercial approach is a must. Vivo is focused on key customers in key markets. We have reinforced our efforts on retention, recovering usage level for most of our contract customers. Outgoing contract ARPU showed a positive performance, despite a 5% drop in price per minute. Pricing is, and will continue to be a key tool to increase customer loyalty and to promote usage. In the first quarter of ’06, service revenues in local currency remained flat year-on-year. This performance is explained by an 8% yearly growth in outgoing service revenues, offset by a 12% reduction in incoming impacted by the partial guarantee rating. Please also bear in mind, when comparing to other operators, that we do not have a long distance carrier.

Data revenue showed a strong performance, increasing by 27%, backed by an outstanding 98% increase of non-SMS data revenues. I would also like to mention the positive results from the measures we introduced some months ago to enhance network security, which has allowed us to reduce the cases of cloning by 75%. During the coming months, Vivo will implement new commercial initiatives. Among others, I would enhance the enlarging the size of the sales force for the corporate segment, of these specific regions of Brazil. Accelerating handset upgrades for high end customers, be it in contract or in prepaid, review its pricing propositions mainly in the prepaid segments, further develop the data business and exploit advantages of being clearly the leader in terms of network quality in Brazil, as Anatel has repeatedly announced.

Now slide #21 shows the performance of our operations in Chile, where we are recording strong operating and financial results. In a market where wireless penetration has already reached 73%, we are focusing our efforts on the contract segment, which accounts for over 80% of the first quarter net adds. Our customer base has expanded 9% year-on-year, which coupled with superior ARPU increase has allowed us to post 20% year-on-year growth in service revenues. Despite the strong commercial efforts to migrate customers to GSM, which has led GSM customers to account for 57% of our base versus 32% only a year ago, we have enhanced our operating profitability. EBITDA in local currency increased by 41%, versus the first quarter of last year, leading to a 5 percentage point advance in the margin to 30% in this quarter. The enhancement in the normalized margin was even higher, to levels around 53%, as we capitalized on the integration of our assets in Chile. Our operations in Chile are setting clearly a benchmark for the future performance of operations in Latin America.

Finally, our operations in Argentina continued their very strong growth in the first quarter, with net adds of close to 580,000, 38% up on the first quarter of ’05 figures, boosting the customer base by 45% to over 8.9 million.

GSM customers now account for 58% of the total, versus 25% just a year ago. I would like to highlight the solid revenue growth posted in the quarter, driven by higher service revenues on the back of the larger customer base in usage growth. The performance of data revenues was also particularly strong and now represents 21% of service revenues, versus only 11% a year ago. This sound top line growth has been coupled with an impressive 164% growth in EBITDA, leading to a 23% margin, an advance of 11 percentage points versus the first quarter of last year. Normalized margins stood at 46%, well above last year’s figure, showing the efficiency gains achieved by the integration of two Argentine operations as well as lower SAC. We believe that this kind of margin is unique for the region.

I would also like to mention the strong performance we are recording in Uruguay, where leveraging the regional infrastructure sharing in management of operations with Argentina, we have doubled our customer base in the last 12 months. I would now hand over to our CFO, Ernesto Lopez Mozo and he will explain the coming slides.

Ernesto Lopez Mozo, Chief Financial Officer

Thank you Antonio. Good morning, good afternoon. Regarding the evolution of financial results, I would like to focus first on financial provisions and net ForEx and others that you have on slide #23.

In the first quarter of ’06, we recorded net losses of 21 million, mainly related to the depreciation of the Argentinean peso versus the euro. In contrast, in the first quarter of ’05, we posted positive results in effect, since our major exposure was in both the Mexican peso and the Argentinean peso, versus the euro. At that time, both currencies recorded a gain of €2 million. Currently, we remain exposed to the Argentinean peso, since the Mexican currency has been hedged to the issuance of bonds denominated in pesos.

If we move to the net interest cost adjusted by financial provisions and net ForEx, we see that the higher cost of debt, as a result of interest rate increases reputation of the Brazilian Real and the greater weight of debt in Latin American currencies has affected the year-on-year comparison, whereas is pretty similar to the last quarter of last year.

We move to the evolution of net debt in the following slide, slide #24, we have closed the quarter with a level that is pretty similar to where we closed the year 2005. Cash flow from operations was close to 1.5 billion. From there on, we have net interest paid, CapEx paid and taxes paid. Tax cash outflow reached €929 million, mainly related to payments in Spain, in Spain in side debt consolidated fiscal group of Telefonica. Finally, FX movements have reduced the total debt amount by around €87 million in the quarter.

Below we see that we had €218 million reductions in working capital, basically due to payments from CapEx reduced at the end of 2005. And to a lesser degree, we had operating tax payments in Brazil namely if you spell, a tax charge that is based on the number of clients.

Moving to slide #25, we’ll review the main lines below EBITDA. D&A showed a 17% year-on-year increase, mainly impacted by the appreciation of Latin American currencies and the accelerated amortization of intangible assets related to the acquisition of Telefonica Moviles Chile and the Latin American operators acquired in 2004 and early 2005.

Results from companies consolidated by the equity method were positive in the first quarter of ’06 compared to losses of close to €9 million in ’05 first quarter. This performance is driven by the increasing contribution from MediTelecom, which is already recording positive net income. Now let me turn the call back to Antonio.

Antonio Viana-Baptista, Chairman, Chief Executive Officer

So just to sum up, if you go to the final chart, I would like to highlight the following things. We are growing very solidly across all regions, with record net adds while delivering a very strong operating cash flow generation. That is the combination of these two factors that makes us, I believe, a unique company. Telefonica Moviles Spain continues to post superior results within the industry in a very competitive environment, especially when compared to European peers; healthy customer revenue growth driven by steady customer expansion and the impressive increase in usage, retaining solid margins despite records in commercial activity.

We had a remarkably strong result in Latin America. Top line growth backed by strong expansion of our customer base, with an outstanding performance of service revenue, successfully extracting integration synergies and scale economies, sustained expansion of margins in spite of high commercial efforts.

Now, I would like to finish by reiterating our ’06 guidance. We still foresee our revenue growth to be on the 9% to 12% range on a cost and FX basis, and EBITDA growth to be on 9% to 12%. The first quarter of ’06 growth rates are affected, as I mentioned before, by lower commercial activities in the first quarter of ’05 compared with the first quarter of ’06 in most markets. Bear in mind that the launch of the Movistar brand took place in April ’05 and that had also an extraordinary cost of €70 million last year. January to April results confirm enhanced EBITDA year-on-year growth rates that are already in line with the guidance assumptions. So, I thank you for your time, and now we would be ready to take your questions. Thank you.

Question-and-Answer Session

Operator

Operator Instructions. Our first question comes from the line of Robert Grindell; please go ahead with your question, announcing your company name and location.

Q - Robert Grindell

Yeah, hi it’s Robert Grindell from Dresdner Kleinwort in London. Is it possible just to have the revenue number for mobile data in Spain? And secondly, unless I’m mistaken, group’s depreciation excluding amortization fell substantially in Q1 versus Q4. Is there a change in policy there? I wonder what was going on with the decline. Thank you.

A - Ernesto Lopez Mozo

Okay I’ll take the first question regarding the depreciation and amortization. We had an increase that is due basically to the appreciation of the Latin American currencies, the average exchange rate. But you start seeing also that part of the intangibles have already been amortized. For instance customers, right, to give you an example, in the furlong we are no longer amortized, I mean we cleared it completely, that we’re assigned since the acquisition. We should still see these levels of amortization during the year that are high levels, but in terms of intangibles we should be lowering that a lot next year. So, that effect we should partially see, but there’s been no change in policy at all.

A - Antonio Viana-Baptista

Robert, regarding your first question, data revenues in Spain for the quarter have been in the range of €265 million.

Q - Robert Grindell

Thanks very much.

A - Antonio Viana-Baptista

Thank you.

A - Maria Garcia-Legaz

Next question please.

Operator

Thank you. Our next question comes from the line of David Wright, please go ahead with your question and announce your company name and location.

Q - David Wright

Yeah, thanks it’s David from JP Morgan in London. Two questions, first of all, and to quote yourself Mr. Viana, GSM has benefited your scale procurement, improved your efficiency across a great deal of operations. The one stand out set of weak numbers, I think here, versus consensus estimates was Vivo; clearly CDMA seems to be hampering your efforts there. Would it be possible to migrate this customer base over to GSM? Would you consider doing that, and how much might that cost? And then my second question is just on Mexico, you were talking about adding higher value subscribers and then you quote a very strong contract ARPU growth, but you give a blended ARPU for Mexico of just 107 peso, which is obviously much weaker there, AMX’s 186, and you’ve quoted as well 55 minutes of use, again, well below AMX’s 106. So what is the contract ARPU on minutes of use please in Mexico, just to underline that higher quality addition you’re talking about? Thank you.

A - Antonio Viana-Baptista

Well thank you Dave for your questions. Let’s start with Brazil, as we’ve always said, we do not have a dogmatic approach versus technology, which means that we are permanently revisiting our situation. As I mentioned in the presentation, I believe that what really makes Vivo different is the quality of the coverage that it has. Try for yourself in Sao Paulo, in Rio, wherever you want, especially on doing an indoor call. Anatel, on a very objective basis, measures the quality of our network versus the quality of others networks. So, we believe that that is a plus. Obviously, we have other minuses, as you know, the fact that we do not have a nationwide coverage; the fact that the handset prices are more expensive on CDMA. Now, I think that in Brazil what you are witnessing is a mix of two things. You are witnessing the fact that marginal customers are being less and less attractive, and as a consequence of that, the battle is being transferred into trying to steal away the higher value customers where obviously, by the market share it has, Vivo is the one bound to suffer most. That is clearly the situation that we’re having. Yes, we’re having some operating problems, as I mentioned to you in previous conference calls. We have problems in terms of fraud where CDMA is more prone to fraud, but that does not mean that in the case of the GSM operations that is not occurring also in a country like Brazil, but yes, we’re facing some operating problems. Those are not directly linked to CDMA. Now, are we analyzing GSM alternatives? Yes, we are permanently analyzing GSM alternatives, as I’ve told you before.

We are analyzing those alternatives based on two things; the first one is the fact that we are seeing more and more very compelling offers from suppliers, and we’ve seen that to the extent that the cost of building our network in Chile cost us half of what it cost us to do the network in Mexico, and that our network in Columbia cost half of the one in Chile. So there’s clearly a very strong decline in price that makes some analysis that would make it not viable some years ago, maybe now they will make it less unviable, or more viable to that extent. Also, the kind of rotation of handsets that we’re seeing in Brazil makes that a payback that you’d be having and migrating would be probably shorter. And add to that the fact that we have a unique asset in Brazil, which is a capacity on the 850-megahertz frequency in all of our regions. And as you know that would provide you with a superior quality if you are talking of indoor coverage. What we can never do is advocate of being the operator with the better coverage and the better quality in Brazil. That is the key asset that we have and we’re bound to keep it. So are we analyzing other alternatives? Yes, we’re permanently analyzing other alternatives, and I’m sure that we’ll have expansive opportunities to discuss this issue in a couple of weeks in Valencia, where I hope to meet you for the Investors’ day.

Now, let me move briefly onto Mexico. Obviously that when you talk of comparing our ARPU between us and America Moviles, you have to take into account that, as I mentioned also in the presentation, our participation or the share of contract customers over our total base of customers is very, very small. And therefore the blend of customers between contract and the prepaid is quite different from Telcell. It is no secret if I tell you that we have a very small presence in the corporate market.

We’re growing, but we have a very small presence in the corporate market. So, I think that any comparison there to us, it’s no big news that Telcell has a better customer base than what we have. Why am I so positive about what I’m seeing? I’m positive about what I’m seeing, because what I am seeing is real growth in service revenues. What I’m seeing is that the customers that we’re having months after months are spending more. If you compare the growth of our customer base with the growth rate of north of 20%, 22% or 30%, that the service revenues are growing, when you compare one month to the same month a year ago, that is really what makes a big difference. And the kind of difference that you are seeing or that you are witnessing between one and the other, you’re witnessing that the differences are much smaller right now. So, right now honestly I feel much more comfortable with the kind of revenues that we’re having. We have a much sounder base for growth. I’m not saying everything is done; there is a long way to go, a long way to go. But I am quite confident that the steps that we’re taking are steps in the right direction. And as I mentioned to you also in previous conference calls, I’m not willing to sacrifice the base of growth for decreasing quality and for having further problems down the road. So, we’re going at the pace at which we can grow.

Q - David Wright

I guess, if possible then, I totally understand the blending point. Can you give us the contract ARPU and minutes of use?

A - Antonio Viana-Baptista

The contract ARPU rose 17% to 515 pesos, and the contract MOU rose to 351.

Q - David Wright

Thank you.

A - Antonio Viana-Baptista

Okay, so as you see, we have nothing to hide on this issue, but we think that this is the pace at which we can grow.

Q - David Wright

Excellent, thanks very much.

A - Antonio Viana-Baptista

Thank you, David.

Operator

Thank you. Our next question comes from the line of Bosco Ojeda; please go ahead with your question, announcing your company name and location.

Q - Bosco Ojeda

Hi, good afternoon, Bosco Ojeda from UBS. I have a question on roaming. You made an announcement just recently, and if you could guide us to the sort of impact you are expecting on prices on that front. I know you disclosed that 2% of revenues come from incoming, I wonder if you could give us a bit more also on outgoing, and the recent trends there. And also if you could give us an update on the MVNO situation in Spain, where you are having some demands and what kind of timing we could see the entry of these new players. Thank you.

A - Antonio Viana-Baptista

Thank you Bosco for your questions. Let me just Bosco, let me just tell you about the roaming issue; let’s start with the roaming issue in Spain. Obviously what we do is, that we break up three different businesses that we have; we have the customer business, the one that we bill the customers, and that includes obviously what they talk in Spain and what they talk when they are outside Spain. We bill all this traffic to our customers. Then we’ve got another business, which is the incoming traffic that we receive from termination rates; and we’ve got a third business, which is roaming in, which is the usage of our network by third parties that come into Spain on a temporary basis, but that are not our customers. Okay, so what we are seeing is that the kind of performance of the roaming in is staying flat. That means that the fears that some could have regarding the entry of Orange into this market, well yes, we’ve suffered part of that, but we’ve had a great collaboration with O2, and due to that we are having a much better performance on the roaming traffic, and that we feel that the roaming in business is, or seems to be at this point in time, under relative control. Having said that, we believe that there are projects that could drive up elasticity, both for customers that are roaming in, and for customers that are roaming out. So, for customers that are roaming out, what we are introducing is a cheaper tariff that we’ve mentioned on the press release that we’ve made today together with O2, that in the case of Spain, Moviles Star will offer a tariff of €0.50 meaning that this promotion will represent a saving of up to 74% on current prices. So, that is a measure for customers that will be roaming temporarily during the summer. Then there is another market, which is the high roamer service, people that are, on a very frequent basis, outside their home country and normally they go to one or two countries, but then if they are on a professional trip they normally go to the same kind of countries. And there what we are designing, together with O2, are prices whereby what we are proposing to the customers is saying, you have a flat rate, you’ll be having a very low price for calls that you’ll be making and that you will not be paying anything for calls that you will receive when you will be roaming.

Now, this is the advantage of doing this with our colleagues at O2. Why? Because I don’t want to do that with other companies that are not within our universe in order to favor that those companies will get cheaper IOTs, but they don’t bring any benefits to the consumers. That does not create elasticity, that only creates margin for somebody else at the back of my margins, and I’m not interested in that, that’s not what my shareholders pay me for. But doing this in terms of benefits to consumers, I believe that we will see clearly a positive elasticity. Bear in mind that we are not, although we are in the same group, we are in very different situations, the L2 countries are roaming out countries, and our country is a roaming in country. And to that extent obviously the kind of traffic balances are not exactly the same, so we need to be very carefully monitoring this.

We believe that this requires serious IT changes and we are likely to launch this by October. So, since it is a launch that we’ll be doing in October obviously we like to keep our commercial secrets with us, and we’ll be announcing then the specific tariffs by then. But I really believe that the fact that people will not be paying for calls they are receiving will be clearly a very differentiating factor in our product, and I’m sure that others will copy us in the future. Now, the other question that you had was the question in terms of MVNOs, we expect MVNOs to come up in Spain, probably most likely would be the last quarter of this year. We are actively working with some of those, and obviously we want to pick the ones that bring added value, the ones that bring something to the party in the sense of attracting new customers, getting access to different channels of distribution where we may have a very strong position or that can have a strong value proposition to customers. And if that is the case, obviously they will be adding value to us, and the fact that we have a network with high capacity, and the fact that we are also the one developing first our UMTS network that can encompass extra traffic, that will obviously help us in the sense of being competitive in offering services to them.

Q - Bosco Ojeda

Thank you.

A - Antonio Viana-Baptista

Thank you.

Operator

Thank you. Our next question comes from the line of Louis Proctor; please go ahead with your question, announcing your company name and location.

Q - Louis Proctor

Yes, hello, it’s Louis Proctor from Morgan Stanley in Madrid. I wonder if you could give us the SAC and SRC over service revenues in Spain this quarter. And maybe elaborate a bit on what could have been a more normalized EBITDA margin with similar levels of commercial activities on last year. What I’m trying to figure out is what the margin benefit from the big increase in on net traffic that you have reported. And my second question is on your recent mobile internet offer in Spain, why have you decided to go for unlimited download potential with 10 minutes maximum connection in comparison to the Vodafone offer which does not have a time limit, but a 512K download limit. I’m trying to understand what’s the commercial rationale behind that? Thank you.

A - Antonio Viana-Baptista

Louis, thank you for your questions. I think that the rationale is very simple; it is that you need to make an offer that customers understand. And customers understand that there is a finite time for doing a download, for doing a usage. Now customers are trying to have a look at when they are downloading music and saying, “Did I already reach 512K?” that doesn’t make much sense to me; that is not how my customers behave, maybe others behave differently, but ours do not behave that way, if they want to do a download or to have access to E-Mocion during a finite period of time. Normally people do not spend in E-Mocion more than 10 minutes in a row, so I think that, that is a fair sort of pricing, at least from the tests that we have run with customers. We have run extensive tests on that and they prefer this sort of pricing, or this sort of offer. So, we feel comfortable with that. On the SAC plus SRC, plus advertising, if you include all that, in the first quarter of ’06, and I believe that’s in some chart that we presented, on chart number 12, I think that we mentioned that that number now is at 16% of gross service revenues. Okay and that used to be, a year ago, at 14% of gross service revenues. And obviously, as you can see, this has been a quarter of very heavy activity, not only in terms of handset upgrades, which was very, very significant, but also in terms of gross adds. So, as a consequence of that, this number came to 16%. I believe that there is the chart that you can see there, I don’t know whether I can clarify some additional issues you may have.

Q - Louis Proctor

If I could follow-up on both questions, in the case of the SRC, is the 16% a like for like figure against the percentage you were providing on a quarterly basis last year?

A - Antonio Viana-Baptista

Yes.

Q - Louis Proctor

It is -- okay. And on the internet question, is this product giving open access to internet, or it’s based on the well guarded skin?

A - Antonio Viana-Baptista

No, it’s open. As a matter of fact we’re going to be announcing that you can access your email wherever that email is based. You can access Yahoo, you can access Terra, you can access Telefonica, you can access MSN, you can access wherever you want, but it’s open, it’s not walled.

Q - Louis Proctor

Okay, thanks very much.

A - Antonio Viana-Baptista

Thank you.

Operator

Thank you. Our next question comes from the line of Terry Sinclair; please go ahead with your question, announcing your company name and location.

Q - Terry Sinclair

Good afternoon, Terry Sinclair with CitiGroup. A couple of questions on Venezuela and Mexico again; Venezuela, can you help us understand to what extent the growth you just saw was boosted by special offers, should not be read across to the months ahead unseasonably strong, and to what extent is a lead indicator of how it’s going to run this year. And I want to ask a further question on Mexico, but Venezuela first perhaps.

A - Antonio Viana-Baptista

Okay Terry, so can you hear me?

Q - Terry Sinclair

I can certainly.

A - Antonio Viana-Baptista

Okay so on the Venezuela situation, what we see is that the country is going through a boom in consumption. That is a clear situation. Is that likely to last? I don’t see a reason why not. It is not likely to devalue the currency there at this point in time, so I see that consumption is growing heavily, and I do not believe we are the unique company experiencing that. So we feel comfortable with the kind of growth rate that we are experiencing in Venezuela. Also the fact that you are having a stronger currency is helping in terms of handset acquisition prices, and as a consequence of that you’re seeing a good dynamic in terms of consumption. Also you see that people are very eager to consume data services, they’re consuming data services quite heavily, so we’re happy not only in terms of the growth of ARPU, but also in the fact that the new customers are coming into the market and it’s growing very well.

Q - Terry Sinclair

And then a similar question on Mexico really. Lowish net as a rule, but focused, as you say, therefore not lower losses at the EBITDA level. As you look forward across the year you obviously have to balance the requirements of growth and customer investment with the undertakings you made to reach an EBITDA break even. How is that going to run? To what extent do you believe it’s appropriate to make a big push in Mexico? Clearly there was no big push in the first quarter.

A - Antonio Viana-Baptista

Terry as I explained to David right before, what we do not want is to fall into the trap where accelerated growth will generate -- three months down the road, will generate on a higher level of churn, and you’re losing the customers and spending very high SACs for customers that you lose. And that is due basically when you have bad distribution networks. So, our work has been into reinforcing our distribution network. We have been reinforcing that distribution network by eliminating a lot of previous distributors, hiring new distributors that we believe that have better qualities, introducing credit scoring systems for those customers, renegotiating our agreements with the large commercial departments where we can have more direct sales to consumption and they were growing there. And we are also considering the possibility of having our own shops in terms of having direct sales channels for ourselves. So, we are considering all these alternatives. To the extent that I can grow faster, maintaining the quality and not generating extra churn, we will do it. So, if your question is, are you obsessed by EBITDA break-even, the answer is no. I am not throwing money out at the window. I like to do a very careful management of our cash flow, but if we feel that we have opportunities for growing faster, on a sounder basis, we will do it. I think that we keep on having a very positive stance in Mexico, it is the country with a stronger growth in terms of penetration potential, because telecoms in Mexico are quite under developed. I think that the regulators still have a lot to do to create there a very competitive market, which today is not. Some of the measures being taken, like introducing calling party base for all over Mexico, is good news for the industry, it’s good news for the wireless competitor there. And as a consequence, we will be monitoring that very closely in order to see if we can grow faster or not. It’s a matter of qualitative growth.

Q - Terry Sinclair

I’m allowed just one follow-up. I mean, the regulations in Mexico have just changed. Do you see any difference in regulatory policy?

A - Antonio Viana-Baptista

Well, I think it is too soon to tell. We obviously will be watching that situation. That is the only country that I recall where someone that has a close to 80% market share is not considered dominant. It’s quite curious when you compare that to our regulator here in Spain, accusing us of a dominant position when discussing MVNOs. It’s funny, but that’s how life is. So, I’ll be very curious to see if that will change in the case of Mexico or not. But we know what we can account with, and we are operating under a debt basis and trying to maintain our business as much under control as possible.

Q - Terry Sinclair

Thanks very much.

A - Antonio Viana-Baptista

Thank you, Terry.

Operator

Thank you. Our next question comes from the line of Damien Maltarp. Please go ahead with your question, announcing your company name and location.

Q - Damien Maltarp

Hi, it’s Damien Maltarp from Cazenove in London. I have two questions. The first one s on Columbia. On the slide in the presentation, you referred to revenue growth having been impacted by IT systems migration. I was wondering if you could just expand on that and explain what’s happening there? And the second question, just coming back to Mexico again, it appears that you’ve changed the way that you report or calculate your ARPU for that country. Looking historically, it looks like there are some pretty significant differences between the new definition and how it was previously. I was wondering if you could just explain what the main changes are there. Thanks very much.

A - Antonio Viana-Baptista

Okay, Damien. Thank you so much. On the Columbian issue, it’s basically that as we are migrating customers from CDMA into GSM and as we are introducing GSM networks in Columbia, obviously we are also introducing other platforms in Columbia. And as a consequence of that, we are in a mixed situation. We have customers that are migrating from CDMA into GSM. That migration is going very positively, as you can see in the percentage of customers that are turning on to GSM. But we still do not have a GSM coverage that will be nationwide. So, we still need to do an extra effort in the course of this year and that’s included in our CapEx plan for expanding our GSM coverage, not only nationwide but also identifying the coverage in the main cities. So, that is one of our top priorities that we are having. Also, on introducing these new platforms, we’re introducing platforms like the platforms for the recharges, for the top ups of our customers. And implementation of new platforms in any country is not without risk. So, we’ve had some problems in terms of the startup. So, that occurs and we’re not hiding that situation now. It’s back on track so we are quite positive on the way that Columbia will operate.

We also need to bear in mind that if you look at what Columbia is today, versus what Columbia was two years ago, it’s basically a different world. It’s growing so, so fast, with the kind of sales volume that is so huge in tent of a complete order of magnitude of what it used to be two years ago. The kind of distribution network that we had is not enough. We need to reinforce our distribution network, not only in terms of capillarity but in terms of extra skills that you need to bring up to these people as the penetration in Columbia is now on the range of 48% or 49%, if I recall correctly. On your other question, in terms of ARPU, I would say that our ARPU includes revenues from fees, monthly subscriber fees, traffic outgoing, roaming and inter-connection fees. It excludes handset sales and revenues from incoming roaming as you know. Loyalty programs are not considered as lower revenues in the ARPU calculation. Now the only difference is that we are no longer including traffic promotions in ARPU. We have provided comparable data for the last five quarters on this issue.

Q - Damien Maltarp

Okay, thanks. So, can I just follow-up on one other unrelated topic? On the tax that you paid 930 million, how much of that actually related to Telefonica Moviles Group companies? Is it possible to split that out? Thanks.

A - Ernesto Lopez Mozo

Okay, now basically, as I said this payment that is due in Spain, right, there we can, that is consolidated a group, and as we have explained before, we still have tax assets and we expect to use them, let’s say, the following two years. So, it’s more of time issue, rather than not utilizing the tax issues, right? So, I mean, at the end of the quarter, we still have a net asset tax position in the group. But it’s similar to what happened last year and what we have said in past conferences, that we expect the two-year usage for our taxes.

Q - Damien Maltarp

Okay, thanks.

A - Antonio Viana-Baptista

Next question?

Operator

Thank you. Our next question comes from Maria Rotondo. Please go ahead with your question, announcing your company name and location.

Q - Maria Rotondo

Hello, I am Maria Rotondo, from Santander in Madrid. And my first question will be on CapEx for the group. I was really surprised to see the strong becoming CapEx, I know the first quarter is not really very relevant, but, having a 5% CapEx return in Spain, that is still quite lower than it was before, and in Mexico, it’s more or like2% or 3%. Also, I know your guidance for these used to have CapEx below last year level, last year it was 2.2 billion, I believe it’s correct. So, I just wanted to know if maybe your expectation now will be more positive in terms of CapEx, which would go for a 20% of gain CapEx maybe in 2006 now also because you mentioned the decline in cost of equipment on networks you’re seeing right now. And I would like, if you could give me some guidance, more detailed guidance, on what could be the CapEx expectation for this year, also, continuing Venezuela, Meditel has just entered Venezuela and if you would consider switching from CDMA to GSM in Venezuela, no? Considering that. So that was the first question based on CapEx. And then second question is on, if you could maybe give us some guidance in Mexico on what could be the impact on calling party pays, now, talking as a reference to other countries, where we’ve seen this change. And now, I have a very small question. If the ARPM in Spain, is very well when you were presenting if you had a 15% fall this first quarter? I just want to check that figure. And thank you very much.

A - Antonio Viana-Baptista

Maria, thank you for your questions. Let me start with the CapEx one. The guidance that we have given on CapEx was that last year, our CapEx for the whole Telefonica Moviles group was €2,330 million and we said that assuming constant foreign exchange rates, that the CapEx this year will be below that figure. And I would reaffirm that yes, it will be below that figure, under the assumption of constant foreign exchange rates. Also in the case of Spain, we said that our CapEx this year, which would be mainly focused besides IT, would be focused on the extended GSM plan that we are implementing and also on bringing total UMTS base stations to a range around 6,200 base stations for the end of the year. That we would assume that CapEx would be below €800 million, and that we stick to that number, so there’s no change in guidance whatsoever. What is normal also is that you see some seasonality here, you see some seasonality where in the first months of the year normally there is not a lot of CapEx going on, sometimes due to climatic issues, sometimes due to other sort of issues with the suppliers. But that doesn’t change whatsoever our guidance for CapEx for the year.

You mentioned also in your CapEx question, a question of American Moviles entering Venezuela, we’ll have to see, I think it will take some time, I think that some approval on a governmental level would be required, and then a tender offer for these shares of account that they will have to occur. So, we have to sit and wait and see how that unfolds, I think it’s still too soon to extrapolate some conclusions out of that. What I’m very happy with is the fact that our Venezuelan operations are extremely strong, that we keep a very strong customer base that we have a very sound distributor network. So, I’m happy with that situation and I think that that is a strong position to face any competitor, and obviously American Moviles is a rational competitor. On the case of Mexico and the introduction of calling party pays, how that will affect ARPU, the answer is I don’t know. I don’t know because I don’t know the behavior of the customers. Customers have been used to have their phone, it’s like the roaming story, customers disconnect their phone when they go from Mexico to Monterrey because they are in a different area, and since they are in a different area they would be charged for calls that would be made to them. Now that situation will no longer occur. So is it likely that they will leave their phones on? Yes. Is it likely that traffic will increase? Yes. Is it likely that ARPU will increase? Yes. Is it likely that that will create more competition to the long distance carriers in Mexico? Definitely, yes. But what is the net effect of that? I think it’s too soon to tell, to be honest. And you had a final question, if you can repeat that please.

Q - Maria Rotondo

Well a clarification because you were mentioning I think a 15% gain in ARPM in Spain, but I’m not sure I listened well, so I just wanted to check that figure, you were addressing on just revision.

A - Antonio Viana-Baptista

It is 15% if I recall correctly, drop in outgoing voice ARPM. Okay.

Q - Maria Rotondo

Okay.

A - Antonio Viana-Baptista

We mentioned that there was a 15% decrease in outgoing voice ARPM. Bear in mind that when you look at last year, in the first quarter we were not still very active with the pricing plans and with pricing initiatives. Then in April, we launched Moviles Star, and after we launched Moviles Star in the second and third quarter, we started introducing new pricing plans that brought down, if I recall correctly, last year around 12% decrease in outgoing ARPM. That was the €0.01 per minute, the Mi Favorito, Mis Cinco and all these sort of plans that we launched, we’re very happy with those, people continue to use extensively new pricing plans that we are introducing. But the biggest drop in ARPM occurred in the second half, or second and third quarter of last year. So, when you are comparing the first quarter of ’06 with the first quarter of ’05, well obviously you see a 15% drop in ARPM, that’s nothing due to some very aggressive pricing plans introduced in this first quarter. No, that did not occur, we put more and more emphasis on another thing, which is the community effect. Because you air more, you pay less, that’s what we’ve been saying to our customers, and the fact that we have more than 20 million customers in Spain creates this huge community effect, and people are very sensitive to this message. It’s a very simple, and very direct and very powerful message.

Q - Maria Rotondo

Okay, thank you very much.

A - Antonio Viana-Baptista

Thank you, Maria.

Operator

Thank you. Our next question comes from James McKenzie, please go ahead with your question, announcing your company name and location.

Q - James McKenzie

I’m calling from Fidentiis in Madrid. The question I think is very similar to what we were just talking about. Looking at the 15% drop in ARPM, presumably a lot of that is because of the discounted on net traffic. Would you be able either to give us a statistic maybe excluding the relevant interconnection costs for that fall, or potentially look at the overall costs of interconnections and what percentage of revenues they represented in the first quarter last year and the first quarter this year?

A - Antonio Viana-Baptista

Okay James, thank you for your question. As I mentioned before, and maybe I did not explain, maybe I did not explain myself clearly enough, our 15% reduction is in outgoing voice ARPM. As a consequence of that, that has only a relation between us and our customers, it has nothing to do in terms of terminations. So it’s what we bill to our customer, 15% reduction in outgoing voice ARPM. Okay, obviously as I mentioned also, what we have is also an effect until mid-February because we kept the Christmas promotion, we kept that until mid-February, which was quite an aggressive offer in that sense. Okay, but when we’re talking about a drop in ARPM, we’re talking about the decrease in outgoing ARPM only, okay, outgoing voice ARPM.

Q - James McKenzie

My question was more, since there’s now a much higher proportion on net traffic the amount of costs related to that revenue that you have to pay away to other operators will evidently have fallen. I mean, I think, I mean there are two ways of looking at it, either you could look at a net ARPM, net of the interconnection costs paid away, or if you could give us an idea of what interconnection costs have done as a whole?

A - Antonio Viana-Baptista

Well I think that in terms of those costs there was more or less a stable situation, there was nothing, any dramatic change on that front. Okay, so I think that the most important thing is the introduction of new pricing plans.

Q - James McKenzie

If you were to take net revenues less interconnection costs the margin would have been pretty much stable over the period.

A - Antonio Viana-Baptista

I’m not sure, I would need to have a look at it. But it is possible that that would have occurred or that some minor change would have occurred. But honestly, the way we look at it is not that one.

Q - James McKenzie

Okay.

A - Maria Garcia-Legaz

We have time for one more question.

Operator

Thank you, our final question comes from Guy Peddy, please go ahead with your question and announce your company name and location.

Q - Guy Peddy

Hello, this is Guy Peddy from Deutsche Bank in London. I just wanted to focus a little more on your margins domestically, building a little bit on what James was saying, actually, it seems like your margins normalized, OIBDA margins, about a step down in Q1, two percentage points relative to like Q3 and Q4 last year. Even though you suggested that commercial expenses are probably going to be more comparable for the rest of ’06 with ’05, perhaps adjusting a little bit in Q1, this would suggest that your margins are still going to be under quite considerable pressure. Can you just confirm whether my reading of what’s going on with your margins is correct? Thank you.

A - Antonio Viana-Baptista

All right. Guy, good afternoon. If I can draw your attention to chart #12, I think that it really explains where we stand right now. If you take our normalized EBITDA margin you’ll see that excluding commercial costs that came down from 66% to 64%, okay on gross service revenues. Right, then you have to take into consideration that we spent 16 percentage points in commercial activity, as you can see on the left-hand side of the chart, commercial activity was huge compared to last year, 26% in terms of gross adds, an increase in handset upgrades, and also a huge effort in terms of retaining customers. We have not had any question on that, but if there is one thing I’m very proud about our Spanish operation, it is the quality of the customers we are bringing in, and that reflects into the churn.

We’re having a 1.2% churn, which is best in class in terms of the contracts and it gets more and more difficult to obtain those numbers when 55% of your customer base are already in contracts. So, we’re doing a really good job there, but that has a cost also. So, we include that as a commercial cost, and there’s a consequence of that, that brought our margins down to 48% of our gross service revenues. So, you see that there is one part that is due to the fact that your prices have been affected, as I mentioned to you, in terms of ARPM, in terms of the termination rates that came down, 10.6%. Also bear in mind that right now we have some inefficiency, if I might say, to the extent that we are running two networks at the same time. We are running a 2.5G network and we’re running a 3G network. No matter how low or how marginal those costs are in terms of energy or in terms of sometimes different size or different locations, but that has a cost obviously, and that cost also affects our operating margin. That explains the decrease from the 66% to the 64%.

Then you have to take into consideration the fact that all this extra commercial effort brought our prices – I’m sorry, spent 16% of our gross service revenues versus 14% a year ago. But as you can see, this has allowed us to have a very, very strong commercial position in the market, a very, very strong performance in terms of net adds, and also keeping churn down. It would not have been possible to have this kind of results in terms of net adds had we not had a very good performance in terms of churn containment. Because as you can see, the growth has increased 26%, and the number of net adds have basically multiplied by four. That is due to the fact that we are really doing a good job in terms of loyalty programs and in terms of retaining our customers, of having more activity on our call centers, calling on customers, on fighting number portability, we’re being more successful there, on anticipating number portability risks and managing that situation. So, that is what is driving our margin, on the one side some extra costs that we’re having, as I explained to you and on the other side, that the extra commercial costs. I don’t know whether this answers your question.

Q - Guy Peddy

Well I was just looking for -- it’s a very good answer, but I was just looking more for an indication of direction, to be honest with you. I’m just at a mixture of trying to understand whether the commercial costs you’re spending are going to do down, therefore supporting your margins, or whether the commercial cost as a percentage of sales you expect to be relatively static, and therefore your margins will continue to go down because your normalized margins are declining.

A - Antonio Viana-Baptista

Well, I wouldn’t say that our margins will continue to go down, the guidance that we gave was that the margin this year would be lower than the margin last year. And I do not think that you can extrapolate this trend and draw a line and kind of say if they drop by this, a couple of points for a quarter this is how much they’re going to drop. You won’t see situations like other operators in Europe where they have decreased their margins by 16 percentage points or some things that I heard today in other countries. No, you won’t see that here in Spain. You can be rest assured about it. I think it’s just the fact that we feel comfortable with this position and we’re having this competitive stance at this point in time.

Any more questions? Okay, so if there are no more questions, I would thank you all for your questions and for your time. Tomorrow, you have the opportunity of listening first in the morning, to Peter Erskine on the KPIs of ’02 and in the afternoon, to the theme of Telefonica overall, in terms of explaining the overall results of the group and we look forward to meet you in a couple of weeks in Valencia, where probably we can share with you much more about the company, about how we see the future and about the initiatives we’re taking. Once again, thank you so much for your time.

Operator

Ladies and gentlemen, this concludes today’s conference. You may now disconnect your lines. Thank you.

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