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Telefónica Móviles S.A. (TEM)

Q2 2006 Earnings Conference Call

July 26, 2006, 10.00 am EST

Executives:

Maria Garcia-Legaz, Director of Investor Relations

Antonio Viana-Baptista, Chairman and Chief Executive Officer

Ernesto Lopez Mozo, Chief Financial Officer

Analysts:

David Wright, JP Morgan

Louis Proctor, Morgan Stanley

Terry Sinclair, Citigroup

John Karedes, Mann Securities(?)

Bosco Ojeda, UBS

Maria Rotondo, Santander

Guy Peddy, Deutsche Bank

Damien Maltarp, Cazenove

Robert Grindell, Dresdner Kleinwort Wasserstein

James McKenzie, Fidentis

Andrew Hogley, Lehman Brothers

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Telefónica Móviles Q2 2006 results conference call. Operator instructions. I will now hand the conference over to Ms. Maria Garcia-Legaz, Director of Investor Relations. You may begin your conference now.

Maria Garcia-Legaz, Director of Investor Relations

Good afternoon ladies and gentlemen, and welcome to Telefónica Móviles conference call to discuss Q2 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 disclaimer 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 Spain at 3491-423-4027. Additionally, let me mention that today’s conference call is being webcast from out website. 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 and Chief Executive Officer

Good morning or good afternoon ladies and gentlemen, and thank you for attending the Telefónica Móviles conference call. During Q2 we recorded very strong growth rates from top to bottom line, leading to a significant increase in cash flow generation. In Q2, we continue to record very strong commercial activity in most countries where we operate, leading to a fast customer growth. Total commercial actions rose 13% versus Q2 2005's level, even though commercial activity in Q2 last year had been boosted by the launch of the Movistar brand in certain countries. The steady expansion of our customer base and the positive performance of traffic across most regions led to a solid 19% YoverY growth on outgoing service revenues for H1 2006, virtually in line with customer growth. The strong commercial activity in tough competitive environments was encompassed with margin expansion, versus Q2 2005 and the solid increase in cash generation.

We delivered a 29% annual growth in operating cash flow in Q2 2006, reaching €2.2 billion in H1. As we anticipated, we announced our guidance and despite the weak results recorded in Brazil during Q2 2006 the YoverY EBITDA growth increased. We are on track to meet our 2006 growth and continue to be fully committed to achieving our guidance. Slide four shows a strong customer growth recorded in most regions. In Spain, we ended June with 20.7 million customers, 6.6% more than a year ago. Gross adds increased 4% versus Q2 2005 and 15% in H1 2006, driven by the boost in the contract sector. Strong gross adds and lower churn rates led to 378,000 net adds in Q2 2006 in Spain, virtually the same as in Q1 2006 and 24% higher than Q2 2005. In Latin America, gross adds in Q2 were 10% above last year's figure and 21% higher than Q1. The QoverQ increase is mainly due to seasonal factors, as in some markets we had Mother's Day and Father's Day commercial campaigns. The higher volume versus 2005 is driven by GSM commercial action and the strong commercial effort recorded in Venezuela.

As a result and excluding the disconnection of 1.8 million inactive lines in Brazil, total net adds in the region were over 4 million in Q2 and 7.5 million in H1. We manage 76.2 million subs in Latin America, 20% more than in June 2005. Adding up Méditel's customer base at the end of June, we managed 101 million customers in our markets, with a 17% YoverY growth.

Moving to slide number five, you can see that consolidated revenue in Q2 shows a 9.4% YoverY increase and a 13.3% for H1. This growth is mainly driven by the robust performance of service revenues on the back of a very solid growth recorded in outgoing service revenues. In fact, revenues from handset sales in Q2 were down compared to Q2 last year. The group's EBITDA in Q2 2006 was over €1.4 billion, recording a 13.2% YoverY growth. The EBITDA margins stood at 32% in Q2, an increase of 1.1 percentage points versus last year, despite the high commercial activity. If you look for H1, consolidated EBITDA grew 12.4% to €2.9 billion while the EBITA margin reached 33%, pretty similar to last year's level. If we exclude the impact of exchange rate movements, revenue growth would have been 9.4% in H1 2006, while applying the guidance criteria, the EBITDA would have grown by 10.1%. Therefore, we are already within the growth rates provided as guidance. Finally, net income in Q2 2006 recorded a very strong growth, 21%, leading to close to over €1 billion in H1 2006, which is 12.8% more than a year ago.

Slide six shows the high level specification of our portfolio which allows us to post superior growth rates in the sector. Revenues from our Latin American operations account for 50% of group revenues in H1 2006 versus 45% a year ago, while the growing contribution from this operation is even more remarkable at the EBITDA level. They contributed €981 million to group EBITDA in H1 2006 or 33% of the total versus 26% a year ago. This higher contribution is mainly driven by the strong results recorded in the Andean and Southern regions, with robust revenue and EBITDA growth rates. We are also very pleased with the performance we're recording in Mexico which together with the solid results in our central American operations, allows for a positive contribution from the northern region to group EBITDA. Moving to slide seven, I would like to review the performance of our operations in Spain where the market continues to be very competitive. The high commercial activity from all players has let to an estimated penetration rate over 100% for the first time ever.

In this context, Telefónica Móviles Spain posted very strong commercial results consolidating its position as the leading player in the market. The key driver of this positive performance is the decrease in the churn rate. Móviles continues to have the lowest churn rate in the Spanish market. In Q2 2006, blended churn was slightly below 1.6%, showing QoverQ and YoverY reductions. I'd also like to remark, the lower rate in the contract segment which for Q2 stood at 1%. The churn containment shows the good results achieved from a deeper segmentation and customer retention initiatives. In Q2, close to 70% of the commercial actions in the contract segment involving handsets were linked to long-term commitment plans, compared with only 35% a year ago. Our focus on the contract segment is also shown by the positive results achieved in number portability. We had record net adds of close to 77,000 customers in Q2 2006, which is five times more than a year ago. 88% of the total were in the contract segment. All this translates into a strong expansion of our customer base, which in Q2 has even accelerated with the contracts segment amounting to over 55% of our total base versus 50.8% in Q2.

We are the player with the highest proportion of contracts customers in the market. Looking at the performance of revenues by segments, despite the strong price reductions carried out in the last 12 months the YoverY growth of outgoing service revenues in the contract segment continues to be outstanding, especially in the corporate segment. The evolution in the prepaid segment is explained by the impact of price cuts and prepaid to contract migration.

Slide eight includes a detailed explanation of the drivers behind Telefónica Móviles Spain revenue performance, which continues to be outstanding within European wireless industry. In Q2, total revenues reached close to $2.3 billion and were up 1.6% YoverY, highly impacted by the sharp decrease in handset sales. The 19% YoverY decline is due to the lower commercial activity versus Q2 2005 when we recorded a higher handset upgrade with a new Movistar logo being launched and the lower average price of handsets sold. On the other hand, service revenues were up 4.8% YoverY, driven by the very strong performance of customer revenues. Those revenues showed an acceleration in its growth rate to 8.2% YoverY in Q2 versus 6.4% in Q1, underpinned by the larger customer base and the solid increase in traffic. I believe those are the most significant positive news items in terms of the performance of the traffic and the service revenues in Spain. The robust growth in outgoing revenue more than offset lower incoming revenues. Roaming in sales were down over 10% YoverY, impacted by the strong price reductions and the acquisition of Amena by France Telecom. On the other side, the fact that O2 is part of Telefónica is already proving positive for Móviles Spain in terms of higher roaming traffic being steered from these companies.

Revenue from interconnection decreased 4.3% versus Q2 2005, reflecting the lower termination rates and the decrease in fixed to mobile traffic. On slide nine, you can see the performance of voice usage and the ARPU. Móviles Spain continued to post strong traffic growth rates leveraging on the community effect. Boosted by higher on-net traffic, total traffic in Q2 was 10% than in Q2 2005, driving H1 YoverY growth rates to 17%, well above customer growth. In Q2 2006, blended MOU rose over 1% versus Q2 2005, mainly driven by higher outgoing MOU. Please notice that YoverY growth rates are impacted by the different calendar of Easter. I would like to remind you that the most relevant price reductions took place in Q2 2005. However, the reduction in outgoing ARPM, flat incoming MOU and the 10.6% cut in termination rates led voice ARPU to decrease 1.7% versus Q2 2005. In communitive terms, the Q1 2006 voice ARPU reached €28.10(?), 0.7% lower than in Q1 2005, again impacted by the significant decline of the incoming components, which more than offset the 1.6 YoverY growth in outgoing voice ARPU.

Moving to slide 10, data ARPU reached €4.2 in Q2 2006, recording a 2.9% annual increase, driven by higher revenues from data connectivity and content. During the quarter, we have seen a progressive uptake of the 5Gb, 1Gb and 30Mb data packages, that we launched in Q1 2006. Around 70,000 customers have signed up for one of these products in Q2, more than twice the figure of Q1. Non person to person SMS data revenues continue to increase contribution to data revenues, accounting for 42% of the total in H1 and growing 23% YoverY. Regarding 3G, we continue to densify our network while we have recently launched on a commercial basis HSDPA. We have roughly 450 base stations with HSDPA functionality, covering 57 cities, much more than our competitors. We expect to close the year with 1,500 HSDPA nodes, and with close to 6,000 UMTS base stations. We now have more than 540,000 3G customers and over 20% of this total are PC cards. This figure represents a 50% growth versus the customer base reported in our previous conference call.

Finally, we're very pleased with the strong growth in the volume of megabits carried throughout our networks. The total volume in Q2 was over 3.5 times higher than the one recorded a year ago, while the (weight of the pressure?) carried down through our UMTS networks and increased to 54% versus 37% in Q2 2005. As a result of higher data ARPU, total ARPU stood at €33 in Q2 2006, slightly lower than in Q2 2005, while in H1 it was €32.40, virtually flat versus last year.

If we move to slide 11, we can see that Movistar in Spain EBITDA in H1 was close to €2 billion, up 1.5% versus H1 2005, reflecting sharp growth posted in Q2, 6.7% versus Q2 2005 and reverting to Q1 trends. The EBITDA margin in Q2 reached 45.4%, 2.2 percentage points up on Q2 2005. Finally, I would like to remark that during recent months we have improved the relative performance versus our major competitors, showing the positive results achieved from the new commercial initiatives launched a year ago. In fact, in terms of net assets in Q2, we have reduced materially the gap versus Vodafone, while we have posted a better QoverQ result(?). This performance has been driven by the strong results recorded in the contract segments, where we achieved higher net adds in the last 12 months. As a result, we have a better customer mix, 55% weight of contract segments versus 51% for Vodafone and lower churn figures, both on post paid, 11.8% on our side versus 12.3% and blended terms - 18.9% on our side versus 20.5%. Regarding ARPU, on a comparable basis, they have been able to better contain the downward pressure despite the strong price reductions we have carried out, as we have minus 1.7% versus minus 2.5% for Vodafone.

Let us now review the performance of our operations in Latin America, where we encountered strong growth in customers with margin expansion and growing cash flow generation. Operating cash flow from the region in H1 more than doubled the H1 2005 figure, reaching almost €550 million and already exceeding the total cash flow generated for the whole year of 2005. The 20% YoverY growth in our customer base has led to a pretty similar advance in service revenue in constant currency, driven by the impressive 29% YoverY rise in outgoing service revenues. The robust revenue growth has been coupled with an even higher increase in EBITA, allowing to expand margins by 2.7 percentage points, despite the 19% YoverY growth in commercial activity. This shows the benefits from the further expansion of GSM, the larger scale of operations and the integrated management of operations. The lower margin versus Q1 2006 is explained by increased commercial actions and the higher provisions recorded in Brazil, which I will explain later on.

On slide 13, we can sum up the key takeaways per country. Brazil, where Vivo posted clearly weak results, we are already taking specific actions to enhance its performance, which should also be improved with the launch of GSM services in the future. In Argentina, we continue delivering robust customer growth with enhanced profitability. Venezuela posted outstanding results, with a very high commercial activity and sound cash generation. In Colombia, while we continued to expand our customer base, we still face the gap versus our major competitor in terms of GSM coverage and distribution, areas that we will reinforce in the coming quarters. In Mexico, we are posting a strong set of numbers, showing the results of the initiatives taken to enhance the performance of operations including a better quality of the new customers. In Chile, customer expansion and ARPU increases led to very strong top line growth and margin expansion.

And finally, in Peru and Ecuador, the launch of GSM has led to significant customer growth. The positive results also of our operations in Central America and Uruguay showed the benefits of the regional management of our operations. On slide 15, we addressed the performance of people in Brazil that showed the impact of a very tough competitive environment which together with Vivo's worse competitive position in handsets, compared to GSM operators, its lack of nationwide coverage and problems related to fraud and roaming, have led to a loss of valued customers, which in turn has impacted the company revenue and EBITDA. In fact, in Q2 2006, Vivo recorded extraordinary provisions for a total amount of €60 million, that is €30 million for 50% of Vivo that we consolidate, related with bad debts from contract customers, mainly derived from some delays in billing.

However, I would like to point out that the current bad debt levels are lower than those recently disclosed by our major competitor in Brazil. On the other hand, following the implementation of a final IT solution for the key regions, and after several attempts to reactivate the usage of customers, Vivo decided to clean up 1.8 million inactive lines from its customer base, most of them from (Centro OSSDCO and Global Telecom, Paranas and Tacatelli?). However the performance has not been similar across regions. In Sao Paolo, we recorded strong customer revenue growth, especially in the contract segment that we aim to defend. Nevertheless, Vivo still maintains its key attributes. It has by far the best network in the country as recognized by Anatel, a strong brand and a solid distribution network. The company has identified several actions aimed at one, retaining its premium customers, both in the prepaid and contract segment, and addressing the mass market more efficiently, and two focusing its efforts in key regions as I mentioned before. Finally, enhancing IT operations and improving our call center service.

On the other hand, Vivo will deploy a new GSM EDGE network, which will evolve in the future following the 3G wideband and CDMA pattern, and will enhance Vivo's competitive position. Although this issue was already explained last Friday during Vivo's conference call, I'd like to clarify several aspects. Vivo is fully committed to the deployment of a GSM network that will have the same coverage and superior quality as its current CDMA networks. Telefónica Móviles and Portugal Telecom's expertise and track record in successfully deploying GSM networks in several countries in record times will allow us to do it in six months. Its deployment will not effect Vivo's capex forecast for 2006-2009 period. Less than BRL6.2 billion. Network capex needs to deploy a one-on-one GSM overlay, or less than BRL1.1 billion, or roughly €400 million including IT and taxes. This capex will be spread along a two-year period. The communitive capex for the 2006-2009 period includes capex requirements for the full migration of our customer base and further growth in customers and traffic and the deployment of 3G.

Please notice that Vivo existing sites are reusable for GSM and will obtain additional savings in the range of USD $50 million versus CDMA per year for recurrent network capex in the medium term. CDMA capex will be halted from 2007. The fact that we are launching GSM using our existing spectrum in the 850Mhz will allow us to offer superior coverage to our competitors. At the same time, it will allow full national coverage with the existing roaming contracts and to capture roaming in revenues. In addition, it will reduce the risk of cloning. Regarding the potential awarding of additional spectrum, if the opportunity arises, we will explore it. On the other hand, the launch of GSM services will allow Vivo to have a wider range of handsets, with a shorter time to market on available handsets and significantly cheaper than the CDMA ones, leading to significant savings in handset procurement. Just to give you some rough figures, the gap in price between a CDMA and an average GSM handset is around $30-40 in Brazil now. Vivo buys around 9-10 million handsets per year. The size of these savings are not comparable with the differential opex we will face in the sort term for running different networks that should be slightly above $30 million per year at the beginning - roughly 10% of the handset procurement savings.

Customer migration will be a natural process and it has been the case in countries like Mexico, Argentina, Chile and Colombia, with the handset portfolio availability in the distribution channel driving that migration. To sum up, the roll out of a GSM EDGE network, maintaining the attributes of superior network quality will allow Vivo to have an unmatched commercial offering in Brazil with a reduced payback of capex.

If we move to Mexico on slide 16, I'd like to remark that during Q2, we continued to step up our commercial activity, leveraging initiatives carried out over the last few months to enhance our distribution network. Indoor coverage, network quality, customer care and commercial offerings. The Mother's Day and Father's Day campaigns led to higher gross adds in Q2 2006, which were 1.1 million, 9% over the Q1 level and 6% more than a year ago. The growing commercial activity is also reflected in the gross adds recorded in the month of June, which exceeded clearly the 400,000 mark. Higher gross adds were encompassed with a sharp improvement in the churn rates, which enabled us to record net adds of 306,000 in Q2, well above last year's figure. We continue to be very pleased with the performance in the contract segments, where we posted 56,000 net adds thanks to both higher gross adds and a further reduction in the churn rate of almost one percentage point, QoverQ.

We have said that we would not sacrifice quality for quantity, and this policy is leading to better results. As we remarked in Q1, the improved quality of our customer base is being translated into an outstanding growth in traffic, which increased 44% versus Q2 2005 and QoverQ showed a completely different trend than that recorded in 2005. In the next chart, you can see that the strong traffic growth translates into ARPU expansion, reaching 116 Mexican pesos in Q2, a 12% YoverY growth despite a robust growth in the customer base - plus 17%. This positive trend is being confirmed month after month, recording a 17% YoverY ARPU growth in the month of June. The strong performance of ARPU coupled with the growth of the customer base led to a close to 20% YoverY increase in service revenue, in local currency for H1, outstripping the growth in customers, with growth rates over 30% in the months of May and June.

This increase was underpinned by higher outgoing revenues plus 29% in local currency, which I believe is a very good sign. I'd also like to mention the remarkable data revenue performance plus 68% versus H1 of last year. Especially positive is the performance in the contract segment, where we have recorded a 56% growth in revenues. This segment represents only 6% of our customer base but 25% of our service revenues. As a consequence of that, higher revenues and efficiency improvement allowed for a 68% reduction in EBITDA losses in local currency to €9 million for the full Q2 2006, and €33 million for H1 2006. The improvement in EBITDA led also to a reduction in negative operating cash flow of 64% YoverY in H1 in local currency.

I shall now move to the Andean region staring with Venezuela. During Q2 2006, we recorded impressive net adds of over 1.1 million due to the Mother's Day and Father's Day campaign. This has led to a 50% YoverY growth in our customer base, reinforcing our leadership position in the market. We posted a 51% YoverY growth in service revenues in local currency, perfectly in line with the growth of the customer base. The very strong commercial activity in Q2 impacted margins and the growth of EBITDA in Q1, naturally. That still recorded a healthy 35% annual increase in H1 2005 in local currency, totaling €343 million. Regarding our operations in Colombia during Q2, we maintained a base of commercial activities as in previous quarters, capturing nearly 95% of the gross adds already in GSM. I'd like to point out the increasing rates of the contract segment over net adds, accounting for 26% of net adds in H1, up 13% YoverY. Service revenues, though, saw a moderate 6% YoverY growth in local currency, on the back of the rapid expansion of the customer base and severe cuts on fixed to mobile termination rates.

Outgoing service revenues show a 13% YoverY growth in local currency. We are implementing actions and stimulating usage of a portion of our customers that have very limited traffic while analyzing the potential impact of the growing number of customers with multiple SIMs in the market. EBITDA in H1 totaled €50 million, three times the level of a year ago. The margin was 12.7% plus 8 percentage points, versus 1H of last year, with higher commercial activity in the contract segments. As I mentioned before, in the coming quarters, we'll continue working to enhance our distribution channel while expanding GSM coverage. Now slide 20 shows the performance of our major operations in the southern region. In Argentina, commercial activity continues to be very, very strong with net adds in Q2 2006 reaching 572,000. During the quarter, Móviles Argentina focused its efforts on capturing contract customers, driving up net adds in this segment by 81% versus Q1 2006. Strong customer growth led to solid top line performance, driven by higher service revenues plus 34% in H1 versus H1 2005 in local currency and the increasing contribution from data revenues, which doubled versus H1 2005.

Higher revenues, together with lower SACs, led to 168% YoverY increase in the EBITDA in local currency, with a significant margin expansion. EBITDA margin improved by 11 percentage points YoverY, in both Q2 and 1H. Finally, in Chile, despite the high penetration already reached, we increased our customer base by close to 5%, driven by GSM gross adds with 64% of the customer base now already using this technology. Net adds in Q2 reached 180,000, three times the amount of Q1 this year. We're focusing our efforts on the contract segments, which have expanded by 19% in the last 12 months. Móviles Chile posted a solid performance of service revenues, which outstripped the growth of the customer base, reflecting the over 12% YoverY increase in ARPU in H1. This performance translated to EBITDA which outpaced revenue growth leading to a close to 2 percentage points advance in the margin, despite higher commercial costs linked to proactive migration to GSM.

I would now hand over the presentation to the CFO of the company, Ernesto Lopez Mozo.

Ernesto Lopez Mozo, Chief Financial Officer

Thanks, Antonio. On slide 21 we have the evolution of the financial results. The explanation in terms of net interest costs is clear, the higher net cost of debt is a result of interest rate increases. Also depreciation of the average exchange rate of some of the Latin American currencies and the greater weight of debt denominated in Latin American currencies. In terms of foreign exchange, we had losses of €73 million, mainly related to the recent depreciation of the Argentinean peso and the Colombian peso versus the euro. Looking to the QoverQ performance, net financial expenses have remained virtually flat versus Q1 2006. In the next slide, we see the evolution of net debt that has been substantially reduced by €1 billion this quarter, reaching €7.6 billion at the end of Q2. Cash flow from operations was close to €2.8 billion. From there on, we have net interest paid, capex paid and taxes paid.

Capex paid referred primarily to capex accrued in 2005 while the tax cash outflows is mainly paid by payments that happen in the spend in Q1 2006, as we explained in previous conference calls. Finally, FX movement has reduced the total lended(?) amount by more than €550 million. In the gap below, the €392 million reduction in working capital is basically due to payments from capex released at the end of 2005 and payments of handsets in the inventory for coming summer companies(?). During the quarter, we have received around €42 million from the sale of spectrum in Chile. A condition that was established by the competition authorities to allow the merger of Bellsouth Chile and Telefónica Móvil Chile. This amount has not been recorded as higher operating revenue, it has been recorded as lower goodwill. In the next slide, we will review the main lines below OIBDA. Please note, as I said before, that the sale of 25Mhz of spectrum in Chile is not reflected in the results, but led to the cash inflow €42 million that we said before. In DNA, we showed a 12% increase YoverY, mainly impacted by depreciation of Latin American currencies and amortization of intangible assets related to the decision of Telefónica Móvil Chile and the ten Latin American operators acquired from Bellsouth in 2004 and early 2005.

Results from companies consolidated by the equity method were close to zero in H1 2006. Accrued taxes went down 18%, with an effective tax rate of 12% in Q2 and 24% in H1. Mostly affected by allowances for (ex product activities?), which were recorded in Q2 2006 for a total amount of €141 million. Obviously for that 21% YoverY growth in net income in Q2 2006 and a 13% growth in H1 2006 and now let me turn back to Antonio to conclude the call.

Antonio Viana-Baptista

So to sum up, I would say the conclusion is the customer growth remains strong across most markets, boosting customer revenues. We continue to deliver on our superior growth profile and strong cash flow generation. Móviles Spain has recorded a strong set of results in a very competitive environment. We believe we achieved an outstanding customer revenue on the back of strong customer and usage growth. The churn containment is leveraging segmented offers and long term commitment contracts and a solid EBITA margin was achieved. We have been capturing growth while improving our operating cash flow in Latin America. The GSM scale is translating into higher customer growth with lower commercial costs. The turnaround plan is already in execution and the GSM deployment should improve Vivo's competitive position and performance for the future. Móviles Mexico delivered very strong results with healthy customer and revenue growths reaching already a very significant scale.

As a consequence of that, we reiterate our 2006 guidance. Finally, I would like to remind you that the merger with Telefónica will take place next weekend and therefore next Friday will be the last trading day of Telefónica Móviles shares. Thank you very much for your attention, now we're open to any questions.

Questions and Answers

Operator

Thank you very much, Mr. Viana. Operator instructions. Our first question comes from David Wright, please go ahead with your question, announcing your company name and location.

Q - David Wright, JP Morgan

It's David from JP Morgan in London. A couple of quick questions, I guess, first of all on Vivo, to try and get some kind of guidance for the margin this year. I guess a pretty obvious question, it sort of contributed a touch under 10% to Móviles Group EBITDA last year. Can you sort of indicate where there is now upside, perhaps, filling that gap? You've obviously kept your group guidance, so what assets do you think are perhaps outperforming your original expectations to meet that Vivo shortfall? So maybe again, to reiterate, some guidance there. Then also on Colombia, please, can you just give us some indication of the ARPU trends there in prepay and contract? Because I think the blended ARPU is showing a pretty frightening decline. I suspect it's more a mix effect, but if you could give us that, that would be very useful. Thank you.

A - Antonio Viana-Baptista

All right, David. Thank you for your questions. Regarding the Vivo guidance, as you recall we have not provided guidance for Vivo for the results of this year. And we will not provide any guidance on that front. Nevertheless, what we see on a month after month basis is that the kind of measures being implemented are likely to produce better results for H2 2006, in terms of fraud, in terms of cloning and obviously in terms of not having those non-recurrent provisions that we registered. Despite what happened in the situation at Vivo, and even though it had the weight that you mentioned in our overall results, we are able to maintain the overall guidance for the group, because some of the other areas are performing pretty well. Spain is performing pretty well and is holding on pretty well to its commitments and in the case of Venezuela and Mexico, I believe that the numbers are very good. We were prudent on the guidance provided in the case of Mexico, we believed that our team is delivering clearly there and that we're achieving good results. We believe that Venezuela is having very, very strong growth and also the southern corner in Argentina and Chile is doing an outstanding performance. As a consequence of that, we believe that we can maintain the guidance. In the case of Colombia, obviously there is an impact in terms of the mix and what you can probably see is the fact that strong growth on prepay has changed the blend in that effect. Also in this moment of very strong growth, I believe that both competitors in the case of Colombia are offering SIM-card-only kind of growth sets, and those growth sets sometimes, although they don't have a significant SAC, they do not also generate that much significant growth in terms of ARPU. We feel that in the case of contracts that we are recovering that situation, especially in the main cities. We need to make a stronger effort on that front to increase our distribution capability that will have to go hand in hand with the expansion of the quality of the coverage of our GSM network.

Q - David Wright, JP Morgan

Are you able to give a Colombian YoverY ARPU? Perhaps contract prepay?

A - Antonio Viana-Baptista

Yes. Yes, just hold on a second please. On the contract side, what you can see is that it is minus 28% of the ARPU, so that compares obviously more favorably with the overall decrease in total ARPU for the company. The rest is the effect of a strong decrease, as I mentioned to you, on a prepay and on the mix of prepay versus contract blend. Okay?

Operator

Your next question comes from Louis Proctor, please go ahead with your question, announcing your company name and location.

Q - Louis Proctor, Morgan Stanley

Hello, it's Louis Proctor from Morgan Stanley in Madrid. I have a couple of questions. First of all on Colombia, could you elaborate a bit on the much lower margins here on a sequential basis? I know that on a YoverY basis it was growing up. And this is despite similar net conditions in previous quarters. What could we expect for future quarters in terms of margins here? And secondly, for Spain, when should we expect the market to slow down, taking into account the above 100% penetration that you have mentioned in your press release, and whether you feel confident in offsetting the subscriber growth, which is the main driver for service revenue growth right now, with ARPU growth to keep on growing, taking into account the launch of Espera(?) and MVNOs by the end of the year. Thank you.

A - Antonio Viana-Baptista

Thank you, Louis. I would say that one additional comment on Colombia, I think that part was already addressed on the answer to David, but one additional comment on Colombia is that we have increased significantly the weight in terms of gross adds of in contract customers in this last quarter. In this last quarter, the gross adds in contracts were north of 30% and as a consequence of that, obviously, that incorporates a higher subscriber acquisition cost on that front. Also I must tell you that in order for us to be more aggressive on the Colombian market and to retain a larger share of customers, obviously, we are also increasing the kind of relationship we have with our distributors and as a consequence of that, that has an impact on the margin. So I would not say that this is a recurrent margin, but I would just say that Colombia is still on for coming quarters with a relatively low margin for the quarters to come. Okay? Also, we have to be extremely cautious to the extent that the view to the difference in prices between on-net traffic and off-net traffic in Colombia, what you see is you see a lot of customers with multiple SIMs. It is quite normal that if you talk to any Colombian customer, especially on the contract side, you see people that have two mobile phones, even two mobile handsets, not only two SIM cards, but two mobile handsets from difference companies. So that is what explains, basically when you're talking about a penetration of close to 70% in Colombia, that is - I wouldn't say that you can divide it by half, but there is definitely - it's probably one of the countries in Latin America with a stronger percentage of customers with more than one SIM card and they're using it differently depending on the networks that they want to call. In the case of Spain, yes it is a tough market. It is a market where growth is facing some challenges and we have mentioned those challenges to you. Some of them are external to us, that is the case of the roaming in. And in the case of the roaming in, we explained that the roaming in traffic is decreasing. We see that trend likely to continue and that what we're trying to do is to work together with our colleagues in the UK, in Germany, in Ireland, in the Czech Republic mainly to try to identify new opportunities for growth of traffic and as a consequence of that, to mitigate the decrease in terms of the roaming in prices. But that is clearly for a country where roaming in is important like Spain, that has definitely an impact. The coming of MVNOs and of Espera(?), let me try to address that separately. In the case of the MVNOs, we expect them to show up clearly in H2 and we are working actively in order to see how we can take advantage of that and lead some of those initiatives. I obviously for commercial reasons, I would not disclose what those commercial initiatives are, but rest assured that we will have some news on our front on that side, until the end of this year very clearly and we have been making very significant progress on that front. On the Espera(?) side, to be very honest, I do not know where they will stand. We still have to wait and I think that the regulator will also have to wait for some more time to see whether they will really come up as an alternative infrastructure operator or whether they will come up as just one additional MVNO with a very small network of their own. To me, it makes no real difference whether they will come up to market or not and as I believe that the impact will be probably more on the MVNO side and that we have to play that game cleverly and obviously the lessons learned with Tchibo in Germany and with Tesco in the UK are great examples to us and we are actively working with our colleagues in order to implement alternatives that are attractive for us and for the counterparts on the MVNO front. I would also like to stress that the kind of migrations that we have been doing in terms of prepaid to contract, and the implementation of these long-term commitment plans - that is paying off. For an operator with such a unique leading position as ours in Europe, it is key to control churn. We're quite proud of the results that we achieved in churn control and with a very low churn level in the contract segments. That has proven to be for us the best way to treat our commercial activity and to some extent to maintain a lower degree in terms of ARPU. As long as you are able to do that and to still grow in terms of customers and we've grown more than 6% in our customer base since last year, we feel comfortable with achieving big items in terms of EBITDA. On the guidance related to the service revenues or to total revenues in the case of Spain, I'd like to break it up between terminal or handset revenues and the service revenues. In the case of service revenues, we're clearly within the guidance we feel comfortable with, we don't have any problems. The only difference that you may notice is that the kind of revenues on the handset side might be coming slightly lower and that only depends on the fact that we are not pushing 3G handsets. We don't see any extra value on pushing extra subsidies for handsets that our customers do not pick. So obviously if you can force the growth of 3G handsets if you offer them for free or if you offer them entirely subsidized. Does that translate into added value? At this point in time we do not see it. We've been pushing very actively as you see in our numbers, the PC data cards and we're very happy with those results. We'll keep on pushing that, that's an area of low churn and an area of high value as the growth in terms of data traffic on our UMPS network shows clearly in what we have provided. But on the 3G handsets, obviously that will be playing as the prices will be getting closer and as the form and functionality and the interactiveness for the consumers becomes more clear in terms of these 3G handsets versus 2G handsets. So it's likely that we'll probably sell more in H2, more 3G handsets, and as a consequence the revenues from handset sales will take up compared to H1. As I was telling you, we believe that we can maintain the overall guidance on that front.

Q - Louis Proctor, Morgan Stanley

Okay, if I could follow up with a bit more of a specific question on market growth and specifically for the number of net additions you are expecting, should we expect net additions to continue to be positive in Q1 and Q4 this year for Telefónica Móviles?

A - Antonio Viana-Baptista

You should.

Operator

Our next question comes from Terry Sinclair, please go ahead with your question, announcing your company name and location.

Q - Terry Sinclair, Citigroup

Good afternoon, it's Terry Sinclair from Citigroup. Could you help me understand why Spanish MOU growth is so much lower in Q2 than in Q1? And could I ask why the tax charge was so much lower in Q2 than in Q1? And what we should expect for the full year?

A - Antonio Viana-Baptista

Thank you for your question. I'm having a bit of an echo here, can you hear me well?

Q - Terry Sinclair, Citigroup

I certainly can.

A - Antonio Viana-Baptista

Okay. That's better now. Listen, in the case of the MOUs, there are two things that are different when you compare it. When you compare the Q1 2006 that had Easter incorporated, versus Q1 2005 that didn't have Easter incorporated, and as a consequence obviously, since that is almost - in terms of working week, it's almost a full week, that's had an impact in terms of comparing the growth of MOUs. So the growth of MOU in Q1 was stronger than in Q2. In Q2 you have exactly the opposite, you have a Q2 where Easter this year played in the Q2 and last year it played in Q1 so you are comparing less working days in one side versus the other. That has a very clear impact. Also bear in mind that it was during Q2 2005 when we, in the moment that we launched the new brand, Movistar, and the new logo, that we introduced new pricing plans and those new pricing plans, if you go back and you recall our presentations at the time, showed a clear boost in terms of MOU in Q2. So we are obviously comparing already a stronger Q2 of last year with a strong Q2 of this year. That's basically what explains the difference in terms of the growth rates.

Q - Terry Sinclair, Citigroup

Could I just ask though, wouldn't the special plans you have like Mis Cinco and Mi Favorito continue to boost usage as they become more popular?

A - Antonio Viana-Baptista

Well we continue, we've got a great take up from the beginning in terms of those. I don't have the figures here with me, but the kind of - the number of customers, I remember that we had that on the Valencia presentation, that we made on the investors day, that the kind of take up of those pricing plans in terms of percentage of customers is extremely high. So that is already incorporated when you compare it one quarter with the others. Again, you have to be extremely prudent in terms of saying you can do that, but at what cost. I think that what you see in terms of the evolution of our ARPU versus the evolution of ARPU at Vodafone shows clearly that we're managing this very prudently and in terms of enhancing value for our customers, but for our shareholders as well. Okay? So I would now hand over to Ernesto for the tax question that you have.

A - Ernesto Lopez Mozo

Regarding the tax question, we registered a tax allowance for export activities of €141 million. Basically in June, we had an official decree that allows for these kind of tax allowance. This kind of tax allowance basically you can take when you invest abroad. I mean, you purchase a company, you do investments abroad and you have expectations of rendering services to them that you will bill or (inaudible) in dividends and so on. So basically with this decree, we were able to claim under IFRS this tax allowance and this related to the acquisitions of the companies from Bellsouth and the acquisition of Mobiltel so it's related to these ones. In terms of the recurring rate, it should be similar to the ones that we've seen in the past quarters. But we could be seeing some sort of allowance like this in future years, but it would be decreasing, because basically the European Union basically gives the guideline for this allowance to be reduced YoverY. So we don't expect to have more like this, I mean as Móviles this year, but we could have more in coming years. But at I said, it will probably be reduced.

Operator

The next question comes from John Karedes(?), please go ahead with your question, announcing your company name and location.

Q - John Karedes, Mann Securities(?)

Thank you very much, it's John Karedes from Mann Securities in London. Can I just ask Mr. Viana, first of all congratulations for taking responsibility of both fixed and mobile assets in Spain. May I ask, given this, what do you expect the incremental benefit for Telefónica Móviles is in Spain?

A - Antonio Viana-Baptista

Well, I think that it's a bit premature to answer that question. What we believe is that this kind of organization as explained in the press release that was issued, is for us to be more flexible and to have the capability of targeting every possible opportunity that converging services may offer in Spain and in Latin America as well. And it will allow us to try to boost even further a different profile in terms of service revenue growth compared to our competitors in Europe and in other parts. So obviously we're doing that. We expect that to prove positive, we expect obviously to have a better integration of sales channels on that front. But for the time being, we're not providing any guidance specifically on the numbers that you can expect from that. As you can imagine, it is a bit early for us to do a clear assessment on that, but I'm sure that we'll have the opportunity of talking in the future and to review that and to keep you up to date with our views on that evolution.

Operator

The next question comes from Bosco Ojeda, please go ahead with your question, announcing your company name and location.

Q - Bosco Ojeda, UBS

Hi, it's Bosco Ojeda from UBS in London. I have a question on Mexico. Basically, you seem to be addressing the issues that happened in the past and I was wondering if you see room over there for an acceleration of the expansion or at some point in time will you think this is the right pace to grow and that's why things are starting to get a bit better? The question is basically about what is giving it the pace of growth and whether there could be at some point of time some room for an acceleration. Thank you.

A - Antonio Viana-Baptista

Thank you, Bosco, for your question. I'm quite positive on Mexico to be honest. I think that the team there did a terrific job. I think that we are getting the different components of our offer where they should be. That means that right now we have no problem whatsoever in terms of quality of the coverage and that starts to be recognized. If you now go to Mexico, you see that they have a campaign where we focus exactly in terms of the customer experience and in terms of the service level that we're offering to our customers. And so we have a much more credible offer then before. We're also doing a good job in terms of the contract side, as I mentioned in the presentation it's taking more and more importance also on the corporate segments we're doing an excellent job there. This is not by chance that we're seeing our main competitor in Mexico introducing new offers, more aggressive on that front, if that would not be harming them they would not be introducing those offers very clearly. So it's good news. I think that the Mexican market has a lot of room to grow and what we do not want is to get into the pitfall where we were a year ago or a year and a half ago. So we are developing our distribution network, that is the most difficult thing to do, that is what takes more time and that's where you have to be persistent, prudent but keeping the pace. So that's exactly what we're doing. We are increasing the number of outlets, even in prime locations where probably the short-term level of sales could not justify them but that we want to be there in order to prove to the market that to make the market more aware of our presence, we believe that the sales on the month after month basis are proving to be right. I recall a year ago that we said we were targeting to 500,000 gross adds per month for the end of Q2. Well we're not there. We are slightly behind. We are on the 440,000 or whatever. But I'm comfortable with what we are reaching. I believe that we have still lots of challenges ahead in terms of developing a distribution network for a company that, as we said, aimed to a much larger chunk of the Mexican market. But I think that the pace is improving, the control of the churn is much better, the kind of information we have on our customers, with the (inaudible) warehouses(?) they have in Mexico, is I would say probably a good example for every operator in Latin America. And as a consequence of that, I'm quite confident on the way that things are performing. In the month of June, we had EBITDA breakeven. No, I'm not obsessed with EBITDA breakeven, I think it's a great sign - it's a sign that you have critical mass, obviously. It's a sign that we are already on a good track. But our main objective is to keep on growing until we reach a more significant part of the market. In Mexico, for the group for Telefónica group it's clearly a priority. And hopefully we'll be doing well in the coming quarters.

Operator

The next question comes from Maria Rotondo, please go ahead with your question, announcing your company name and location.

Q - Maria Rotondo, Santander

Hello, Maria Rotondo from Santander in Madrid. I have two questions, some of my questions have been answered. On Venezuela, I would like to understand the reason for such a hard drop in the margins. Also considering that you are migrating to GSM in Brazil, if you would be considering switching to GSM also in Venezuela? And on Chile, I want to understand the sharp increase in ARPUs. What's the reason for that? Okay? Thank you very much.

A - Antonio Viana-Baptista

Thank you Maria for your questions. Well in the case of Venezuela, clearly what you witnessed was a strong growth in commercial activity. We are very positive on the evolution of the commercial activity in the case of Venezuela and if it would not be for that, if you'd just take the normalized EBITDA margin, including SAC and SRCs, what I could tell you is that Q1 has been a normalized margin of around 67% and it's exactly the same number in Q2, so the difference is just we're speeding up. We're speeding up in terms of commercial activity and in terms of capturing a larger share of the market where the penetration is clearly boosting. On the GSM in Venezuela, yes we are considering migrating to GSM in Venezuela. We believe that the kind of reductions that we had in terms of the base station costs have been quite attractive, quite interesting in the case of - just to give you an idea - for instance if you compare our Mexican cost of a base station with the Colombian cost of a base station, which was basically a year and a half later, we got a decrease of 37%. One base station in Mexico cost around $60,000 an in the case of Colombia around $38,000. Well, if you take the average of 2005 for all the GSM implementations we had, we have an average cost of base stations of $45,000 roughly and then in the case of Brazil we're down something like 22-23%, over that figure, in dollar terms with taxes included in the case of Brazil, which as we know has higher taxes than in other countries. So that's quite good news and that's quite encouraging us to take a similar step in the case of Venezuela. Probably with not the same degree of urgency as in the case of Brazil, but yes we're implementing it. You had one question in Chile, Maria?

Q - Maria Rotondo, Santander

Yes, I was very surprised by the very strong increase in ARPU in Chile. I would like to understand that, where did it come from?

A - Antonio Viana-Baptista

Let me just check the number, please. Okay, I would say that in the case of Chile, what you have is that you're starting to have a more mature market, a market where you have not only a higher penetration but that high penetration has remained stable for a longer period of time. So as a consequence of that, you start having a growth really in terms of traffic, in terms of on-net traffic and in terms of overall traffic clearly in the case of Chile and also in the case of our contracts, we're capturing much more customers. And that the community effect that we're having in Chile with our on-net traffic, that's clearly paying off in terms of growth of ARPU.

Operator

Your next question comes from Guy Peddy, please go ahead with your question, announcing your company name and location.

Q - Guy Peddy, Deutsche Bank

Yes, good afternoon gentlemen, it's Guy Peddy from Deutsche Bank. Just wanted to talk about a couple of little things. One on Venezuela - I know people have said this. I'm trying to work out whether we should assume your level of competitive intensity continues at this pace and why should this market not deteriorate like other markets, like Brazil have. Because I remember two years ago you decided to accelerate customer growth in Brazil, forgave margins and never got them back. On a second point, I just wanted to focus a bit on your domestic strategy. It seems like you sort of held back a bit on the commercial activity in Q2. You've highlighted about UMTS and you did about 16% of revenues as commercial activities. Given you said that you were going to spend more on 3G UMTS, given you're going to have more competition from probably Amena in H2, who've probably been rather apathetic, given you've got MVNOs and given you've got Oakesera(?), it's probably fair to assume that that 17% level is likely to pick up I would suggest, and I just wanted to understand that it would be in your expectations as well. Thank you.

A - Antonio Viana-Baptista

Thank you, Guy. Before answering your question, let me just add one thing to the question that Maria had. On Chile, I forgot to mention, in the case of Chile, when we acquired the Bellsouth operation, we were prevented from doing special on-net offers before we would sell the spectrum that we had. So the spectrum sale occurred as their (net dimensions?) had an impact in terms of reducing the goodwill occurred exactly now. And as a consequence of that, we have introduced new, more aggressive terraced plans that have boosted the on-net traffic in the case of Chile, after we sold the spectrum as the regulator had mentioned. So I apologize, Maria, for not having included that. On your two questions that you have, on the case of Venezuela, I think it's a more rational market environment than is the case with Brazil. You've got basically two and a half players, because of the new GSM operator who is still small. The other operator is running on the CDMA front also. That's why I was saying that they do not have the same sort of pressure so I believe that there is clearly a more benign market. We have a very, very strong community effect in the case of Venezuela. If you look at the numbers and the profile in terms of SMS at the profiles in terms of on-net traffic, that is quite a unique situation compared to different markets in the case of Latin America. So I think it's a much more healthy market. We want to take advantage of that, we want to reinforce our position on the key customers. Well if other players will come into the Venezuelan market it may suffer. Yes it may, you are right, so we better have a strong position before they get there. That's exactly what we are doing on that front. But one can always see the positive side of things or the less positive side of things. But we're trying to reinforce our strong position in this market for the future and we believe that it's a market with a lot of potential as it is showing. On your question on Spain, regarding the commercial activity, let me try to say it again. Maybe I did not explain myself correctly. What we do not see at this point in time is quite a demand at comparable prices for 3G handsets. Obviously if you subsidize them heavily, you have more clients asking for 3G handsets, just because it's cheaper. But that costs shareholders some money. We had not reduced our commercial activity. We had very strong gross adds in this quarter. It was a quarter of really strong gross adds, great results in gross adds. And great results in retention plans where obviously part of it incorporates rotation of handsets. So in the results, I think that they speak for themselves. We get great results in terms of net adds, good results in terms of ARPU behavior compared to the rest of the markets, so we are happy with that. So we are not slowing down on our commercial activity and if I misled you with some sort of mention of that, I should correct myself. I don't think I said it, but we're clearly steaming ahead in the case of the Spanish market. We believe that there is still a lot of market to capture, that people are starting to understand the benefits of this on-net effect within Spain and they are capturing the message of being part of the Movistar community and that is clearly paying off. And as a consequence of that, we keep on fostering that. Obviously with more competitors, should Amena relaunch their brand as apparently they could do in H2 2006, should MVNOs come up, obviously we have to be prepared for that and we have to have the full ammunitions for competing on that front and for retaining the best of our customers and keeping on capturing customers. So we probably will see an EBITDA margin that is not only due to the Christmas campaign but due to our summer campaign will probably be not as strong as in Q2. That is normal, that has always been the case in the case of Spain. But we feel confident that we will meet the guidance that we are providing in the case of EBITDA, in the case of service revenues very clearly and in the case of handset sales. It will really depend on the attractiveness of 3G handsets and on the need for doing that. We're focusing a lot, as I told you before, in terms of data services, PC cards for our customers, we believe that's great service and customers are appreciating that. We've great take up on that front with a low churn and we keep on doing that. On the 3G handsets, some of the handsets that we're seeing for Christmas, they look great. I have to say that they look great and as a consequence of that we will probably be selling more 3G handsets on the Christmas campaign compared to what is sold now. But we're not reducing whatsoever our commercial pressure on that. So I apologize if I may have misled you on that front.

Operator

The next question comes from Damien Maltarp. please go ahead with your question, announcing your company name and location.

Q - Damien Maltarp, Cazenove

Thanks very much, it's Damien Maltarp from Cazenove in London. Two questions, the first one, earlier you mentioned that you're seeing some benefits in terms of roaming in from the O2 acquisition. Could you just update us on the cost synergies from that acquisition? And how they're progressing against your expectations? And the second one that is perhaps slightly premature as well, but in the context that you'll be offering converged products, I assume you've been talking to the regulator about what your obligations will be in terms of offering wholesale equivalent products, be it on a retail minus basis or something else, could you update us on those conversations and what kind of wholesale products you'd be obliged to offer in the market? Thanks very much.

A - Antonio Viana-Baptista

Thank you, Damien, for that. Let me just address a couple of issues there. We have been working clearly with O2 on several fronts. I believe that those issues will be addressed also at the Telefónica S.A. conference call tomorrow, but clearly we're seeing good progress in terms of the traffic steering in the case of roaming. We're seeing good progress in the relation that we're having with the handset suppliers, not only in terms of price but also in terms of time to market, in terms of exclusivity, of handsets that we are introducing here and there we're making very, very clear progress and I believe that our stance and our relation with suppliers of handsets in that front is quite different. There's still a long way to go, still a lot of progress to be made on that front, but they were very positive about that. On the MNCs front, on the Multi National Corporations front, that's something that takes more time to mature and obviously we're making progress there because it is in the interest clearly of everybody. It's in the interest of the O2 team, in the interest of the Telefónica Móviles team, it's in the interest of everybody, so making good progress on that front. But I'm sure you will have more updates on those numbers from the overall Telefónica perspective tomorrow. On the offer of converged products, we are not at this point in time discussing specific products at the regulatory front. What has been announced today has nothing to do - it's not a merger of units whatsoever, so there won't be a merger of Telefónica Móviles Spain with Telefónica Wireline Spain. Those will keep being different companies, (on each line?) and obviously we believe that there may be value in using comparable channels of distribution in creating a common product. We will address those issues with the regulatory authorities as the moment will come. But obviously I do not believe that it would be wise of us to discuss what kind of products we'll be launching in the coming months. We have already launched some pilots on that front. If you see the Spanish market you'll see that we are already launching some products. It's too soon to tell with the kind of results that one can achieve. But we believe that there's going to be opportunities to explore on that front.

Operator

Your next question comes from Robert Grindell, please go ahead with your question, announcing your company name and location.

Q - Robert Grindell, Dresdner Kleinwort Wasserstein

Hi, it's Robert from Dresdner Kleinwort in London. Just to ask, what were your total data revenues in Spain in Q2? And what is the cost of the HSDPA rollout across the Spanish footprint? And are you getting the 3.6Mb per second from day one? Thanks very much.

A - Antonio Viana-Baptista

Well you'll get the 3.6Mb per second from September if I recall correctly. In terms of the cost of the HSDPA rollout, hold on a second please I have it here, in terms of debt cost we're talking about a number in the range of €2,000 per base station. That's how much it costs you to upgrade one base station from UMTS obviously to HSDPA. So it's clearly a marginal cost. It has some difficulty in terms of implementation in terms of the software implementation. It is not easy from an installation point of view and we want to do it while providing super quality to our customers and fine-tuning the networks. That's why it will go at this pace that we are announcing. But we are comfortable with that. That will fit within the overall capex numbers that we have estimated for Spain and for the whole of the group. On the data revenues on the Q2 2006 total data revenues in Spain were €258 million.

Operator

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

Q - James McKenzie, Fidentis

I'm calling from Fidentis in Madrid. I've got two questions on your slide number eight. Just looking at customer revenues, customer revenues have accelerated quite substantially from Q1. You talk about, I mean, this being despite the Easter effect, I wonder if you could give some of the reasons behind that acceleration? Is it just an increase in the average client base? And if so, it is an acceleration that you would expect to continue into H2 2006? And then looking at the roaming in revenues, you have obviously good reasons for why that's fallen. I wonder if you could break that 10.3% down between a loss of traffic that you’ve seen because of the net reduction from your international partners and price reductions and what we might be expecting from that going forward?

A - Antonio Viana-Baptista

Thank you, James. I think that what you see is not only in terms of growth on the revenue front. What you see is two effects. One is the quality of our customer base, the fact that now we've got 55% of our customers on the contract front, the fact that we have been capturing good customers even on the portability side. We've been capturing clearly good customers and that provides a boost to the quality of growth. I think there's a chart that also shows a very strong growth, despite the decrease in ARPM, a very strong growth in terms of the revenues coming from the corporate segment, where we are having a very sound performance there. The other thing you have to consider is - and we have seen that in the case of a Vodafone in the course of last year - is that when you've got the three or four quarters, one after the other, in a row, where you've got strong positive net adds, you've got the growth of the average customer base that in the case of the Q1 versus Q1 was in the range of 5%, Q2 versus Q2 the average customer base has grown 6% and is of higher quality. That's basically what explains the issue. Your second question was on?

Q - James McKenzie, Fidentis

On roaming-in revenues. I was just wondering if I could get some sort of breakdown of that 10.4%?

A - Antonio Viana-Baptista

We're not providing that. I think it's a bit soon to have that kind of discussion. I think that everybody is testing a bit to what extent bringing lower tariffs in roaming is bringing in positive elasticity, definitely there are two clear different markets, the business travelers and the holiday travelers, if you want. And this is the kind of elasticity that you can find in one and in the other, we assume it will be different. We probably would like to have that discussion later on in the year after we see how summer will evolve and what is the evolution of roaming in, in the summer. We obviously have incorporated in our estimates and it is within our guidance that the effect of roaming in will be stronger during the summer period in terms of a decrease in prices. But that's already incorporated in our guidance and we - let me say it again - even with that, we reiterate our guidance.

Operator

The next question comes from Andrew Hogley, please go ahead with your question, announcing your company name and location.

Q - Andrew Hogley, Lehman Brothers

Good afternoon gentlemen, Andrew Hogley from Lehman Brothers. A very quick question, you've mentioned the strong up take of laptop data cards a couple of times. Can you give an indication of the type of ARPU you're achieving on those products? Then secondly, still in the Spanish markets, can you give some color around your thoughts around how you view France Telecom versus Vodafone in terms of the competitive environment, clearly from your comments you seem to have been up against Vodafone most strongly over the recent quarter?

A - Antonio Viana-Baptista

Andrew, thank you for your questions. On the first one, we're not providing for the moment any data on ARPU for data cards. We believe that there is still a long way to go in terms of customers using it, trying it, getting used to it and then getting addicted to it. So those are different stages and we're still not in the addict stage, if I can put it that way. And don't misinterpret me. But I believe that there is quite some room for growth in this area. So probably within the coming quarters, we'll be more likely to share that type of data. I think that's the kind of data that we could provide now would be meaningless for the time being. But let me just draw your attention to this one slide there that clearly talks about the growth in terms of traffic volumes that we have and within that growth, it explains also the percentage that is on UMPS. Obviously that has a lot to do with data cards. On your second question, Vodafone or France Telecom, well I think it's no news. I think that Vodafone, besides being the number two competitor, it has a more consistent stance in the case of the Spanish market now for a longer period of time. They have a team stabilized here, a high quality team, they are performing very well and they have been very consistent with the kind of offers that they have been making. We may agree with some of the things they do, we may not share some of the views that they have, like in the case of the 3G handsets. I mean, they should have a different view but I believe that they have been pretty consistent. France Telecom is basically a newcomer to the Spanish market. Amena have been here, now we have an Amena that is France Telecom and obviously it's still getting up to pace to what they want to do. What I can tell you clearly is that you've already seen a much more aggressive Amena in Q2 when compared to Q1. That is very clear. They were much more maybe dormant is the wrong word, but they were not as active in the market in Q1 as they were in Q2. Obviously we expect them to become more active and apparently they have mentioned that they would migrate to the Orange brand at some point in time and doubtless that would be another extra step that they will be taking in terms of aggressiveness in the market. So I think it'll be unfair at this point in time to compare Vodafone to Amena. Thank you. If there are no more questions, I would like to thank you all for being present at this conference call. Thank you for all the insights and for the kind of advice that you have provided to us during all these years with Telefónica Móviles and within the investor relations that we have. Thank the whole team of Telefónica Móviles for the great jobs they're doing and I'm sure that under the new organization with Telefónica we will keep on delivering on the guidance that we have promised to you, and are hoping to deliver a high quality performance as before. Once again, thank you all for your collaboration and I hope to be in touch with you soon.

Operator

Ladies and gentlemen, thank you for your participation, this concludes today's conference and you may now disconnect your lines. Thank you very much.

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Source: Telefónica Móviles, Q2 2006 Earnings Conference Call Transcript (TEM)
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