Telefonica S.A Half Year 2006 Earnings Conference Call Transcript (TEF)

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Telefonica S.A (NYSE:TEF)

Half Year 2006 Earnings Conference Call

July 27, 2006, 10:00 a.m EST

Executives

Ezequiel Nieto - Head of Investor Relations

Santiago Fernandez Valbuena - Chief Financial Officer

Julio Linares, General Manager for Coordination, Business Development and Synergies

Peter Erskine - Chairman, Chief Executive Officer of O2

Jose Juan Massolo

Jose Maria Alvarez-Pallete - Chairman, Chief Executive Officer Latinoamerica

Antonio Viana-Baptista - Chairman & Chief Executive Officer Moviles

Giarmund Monsaldo - Telefonica S.A. - CEO of Telefonica de Espana

Analysts

Mathieu Robilliard - Exane BNP Paribas

Terence Sinclair - Citigroup

Brian Rusling - Cazenove

Robert Grindle - Dresdner Kleinwort Wasserstein

David Wright - JP Morgan

Andrew Hogley - Lehman Brothers

Bosco Ojeda - UBS

James McKenzie - Fidentis

Javier Borrachero - ING Barings

Maria Rotondo - Santander

Guy Peddy - Deutsche Bank

Pilau Bertosey - Sanford Bernstein

James Ratzer - New Street Research

Ricardo Seara - BPI

Lawrence Sirra - Redburn Partners

Luis Prota - Morgan Stanley

Terry Sinclair - Citigroup

Operator

Good afternoon ladies and gentlemen. Welcome to the Telefonica's First Half 2006 Results Conference Call. At this time all participants are in listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. [Operator Instructions]. Just to remind you all this conference call is being recorded. I would now like to hand over to the chair person, Mr. Ezequiel Nieto, the Head of Investor Relations. Please go ahead with your call sir.

Ezequiel Nieto - Head of Investor Relations

Thank you. And Good afternoon ladies and gentlemen. Welcome to Telefonica's Conference Call to discuss 2006 First Half results. Before proceeding let me mention that this document contains financial information and data reported under IFRS. This financial information is unaudited and therefore is subject to potential future modifications.

The presentation may contain announcements that constitute forward-looking statements which are not warranties of future performance and involve risks and uncertainties. And actual results may differ materially from those in the forward-looking statements as a result of various factors. We invite you to read the complete disclaimer included in the first page of this presentation which you will find on our website. We encourage you to review our publicly available disclosure documents filed with the relevant Securities Market Regulators.

Following IFRS guidelines, EPI Yellow Page business has been discontinued in 2006 and 2005. If you do not have a copy of the relevant press release on this night, please contact Telefonica’s Investor Relation here in Madrid by dialing the following telephone number 34-91-584-4713. Now let me turn the call over to our Chief Financial Officer, Mr. Santiago Fernandez Valbuena to begin this conference call.

Santiago Fernandez - Chief Financial Officer

Thank you Ezequiel and good afternoon ladies and gentlemen. Welcome to Telefonica's 2006 First Half Results Conference Call. You will have the opportunity to ask questions directly to our key managers during the Q&A session as usual. I have here today with me Julio Linares, our General Manager for Coordination, Business Development and Synergies. Also Jose Maria Alvarez-Pallete, our Chief of Latin America, Alberto Viana Head of Spain, 02:10 Giarmund Monsaldo, the CEO of Telefonica Espana and Peter Erskine, Head of O2’s European operations who is connected from London.

Starting with the summary P&L, consolidated revenues grew by more than 46% year-on-year to top €25b. The incorporation of O2, Cesky Telecom and Columbia Telecom are disclosed to €5.8b to underlying performance. Organic sales growth stood at 7.7% annually, placing Telefonica at the top of the sector in terms of top line performance. January to June operating income before D&A exceeded €9.2b, up close to 41% year-on-year. O2, Cesky Telecom and Columbia Telecom added around €1.8b to total operating income before D&A in aggregate.

Stripping out first, consolidation effects, operating income before G&A, organic growth remained at a very healthy 7.4%. Operating income reached almost €4.9b for the period, 41% ahead of last year's comparable figure in nominal terms or 16.5% up organically. Operating cash flow topped €6b, or equivalent to a 33% annual nominal increase that turned into an 11% organic growth. For its positive contribution to major financial metrics growth stood in the 4 to 5.5 percentage point range. With regard to net profit we've presented in slide number 4. January to June net income reached almost €2.6b, or 40% above last year's figure.

The successful management of non-operating result is helping us keep the growth constant in the 40% range, top to bottom. First half 2006 earnings per share reached €0.55 per share, equivalent to a 46% annual increase. Client expansion has remained strong in the first half across all growth levers, namely broadband, mobile and Pay-TV, sliding top line performance as shown in slide number 5.

In the broadband arena, Group retail Internet broadband accesses grew 47.5%, exceeding 6.7 million connections at the end of June with all companies focused on improving their value proposition in terms of speed, content and pricing to strengthen market leadership. In Mobile, we surpassed 134.5 million clients worldwide, driven by our ability to exploit the current penetration gap in Latin America and fight the best competition in Spain. Finally, we ended the quarter with almost 800,000 Pay-TV accesses, 60% above last year's figure.

Operating performance is fully reflected in the revenue mix with mobile businesses ranking first in terms of contribution to sales expansion representing close to 70% of consolidated, organic revenue growth. As opposed to most peers, while line divisions are incremental to mobile top line growth led by broadband, whose progress is being decisively driven by double and triple-play offers.

In slide 6 we turn to profitability numbers. The rate of growth in operating costs has been cut by close to 6 percentage points in 12 months to just below 10%. Telefonica Moviles and O2 represented close to two-thirds of total expenses in organic growth. Consolidate operating income before D&A margins stood almost at 37% with wireline divisions closing the first half at a solid 41% on aggregate. Mobile margins ended the quarter at 31% affected by subscriber growth and competition. Then the highlight that the underlying margin, that is excluding assets incorporated in 2006, remained flat year-on-year.

The review of operating cash flow is presented in slide number 7. January to June CapEx reached around €3b, close to 60% above last year's comparable figure. Nominal investments were heavily affected by foreign exchange and changes in consolidation, leaving organic CapEx growth almost flat. Operating cash flow was up by close to 33% annually to exceed the €6b mark at the end of June. Major subsidiaries were keeping solid cash flow profiles with growth rates ranging from the close to 7% posted by Telefonica de Espana to the almost 25% accounted for by Telefonica Moviles.

And now for an update on guidance please turn to slide number 8. After adjustments for guidance calculation, growth and revenues, operating income before D&A and operating income was 40.4, 35.1 and 36% respectively. And now let’s start a review of our major business lines with an analysis of our key developments at Telefonica de Espana. On slide number 9 we present these first numbers.

First half revenue growth stood at 1.8% at the top end of our guidance, positioning Telefonica de Espana as the key benchmark among European incumbent operators in terms of top line growth. These positive results are backed on the strength of Internet and Broadband which added 4.1 percentage points to Group sales growth. The Company's migration towards the provision of better value to corporate clients is reflected in the 0.7 percentage points contribution of data and IT revenues to total sales.

The revenue slow down of reported numbers recorded in the second quarter is the result of three major factors unrelated to underlying business performance. First, the Easter effect, reflecting that Easter took place in April this year as opposed to March in last year. Second, the change in the accounting criteria for Traffic cards which implies lower revenues this year. And third, the fall in the sales at Telyco. If we were to strip out these effects, underlying revenues for the second quarter alone would have grown by 2.7%, or in line with recurrent sales growth posted in the first quarter.

Turning to costs, on slide number 10, domestic wireline total operating expenses were cut by 4% year-on-year based on cost retention across the board. Personnel expenses were down by close to 7.5% as a result of the €150 million no-work provision for redundancies recorded in the first 6 months of the year. Lower inter-connection costs related to the decline of both mobile termination rates and fixed-to-mobile traffic coupled with reduced unbundling costs and the full supplies at Telyco are behind the 0.6% cut in supplies expenses. Finally, the lower commercial activity and the intake on costs of the change in accounting for Traffic cards have led to a 4% decline in extra no-services expenses. Growth in adjusted operating income before D&A reached 8.4% for their reported period with almost 6 percentage points being explained by the lower redundancy provision. We maintain our current operating income before D&A growth guidance and change the 1% to 3% range.

For an update on the performance of the basic operating metrics of the traditional businesses please turn to slide number 11. On the access side, 90,000 lines were lost in the quarter once the free connection fee campaign which ran in the first quarter of the year has not been extended. Regarding the ULL activity, close to 130,000 lines were unbundled in the quarter evenly split between full and shared unbundling. ULL players continued to gain ground in the broadband market at the expense of wholesale ADSL and cable, and represented 11.6% of the total broadband market at the end of June.

The dynamism of full ULL combined with the success of Telefonica's win-back campaigns have kept the downward trend of pre-selected lines, which came below the 2.1m at the end of June.In terms of traffic, the Spanish voice market shrank by another by around 1%. Nevertheless, Telefonica's focus on bundles and flat rates on voice is becoming the trigger for traffic capping voice traffic decline to just over 1%. New pricing schemes are causing positive elasticity as reflected by the 10% rise in inter-provincial traffic in the six months to June, 2006.

Let's now close Telefonica de Espana's review by refreshing its progress on broadband, as presented in slide number 12. Broadband Internet net adds reached 350,000 new connections in the second quarter bringing the total growth in accesses in Spain to 5.85 million at the end of June.

After a boost of more than 0.5 million net new connections in each of the last two quarters the slowdown recorded in the April to June period was partly related to the delays set by the CMT to authorize Telefonica's latest broadband product developments until the revision of current regulatory framework is completed.

Despite the lower commercial flexibility, Telefonica de Espana has been benefiting from retail additions which ended the second quarter at 177,000 keeping broadband market share stable around the 55% level. It is worth highlighting that 340,000 duals and trios, our double and triple-play offerings, have been sold in the second quarter alone, doubling retail net adds, a proof of the success of bundles as a loyalty tool.

Telefonica has continued to improve homogenous content offering with their recent Paramount deal as the best example and has pushed the market segmentation deeper with the launching of a lighter 30 channels product. Telefonica's estimated share of the Pay TV market has increased to 8% with total subscribers exceeding 267,000. Finally, let me add that we are seeing clear signs of increasing demand for both broadband and Pay TV services since the beginning of the third quarter mainly driven by Telefonica's renewed advertising campaigns and promotions.

Let's now turn to slide number 13 for an overview of our fixed operations in Latin America. January to June consolidated revenues were close to €4.7b, or 23% above last year's comparable figure in nominal terms. Organic sales growth would have reached 4.4% once excluded both the €100m contribution of Columbia Telecom which has started to be consolidated in May and the positive impact of currencies which added around 16 percentage points to Telefonica Latin America's revenue growth.

Individual operators top line performances are being supportive to revenue growth across the region driven by broadband, data and information technology services. Telefonica de Argentina ranked first in terms of individual top line trends achieving almost a 10% annual growth rate in local currency with a push on broadband being added to the positive performance of traditional fixed. Local currency revenues for Telesp were up 4.5% in the first half of the year driven by broadband whereas sales at CBC in Chile and TdP in Peru grew in the low single-digit territory despite challenging competitive and regulatory environments.

Broadband, which is key to our future Wireline performance kept expanding in Latin America, as shown in slide number 14. Retail Internet broadband connections in Latin America grew by almost 50% annually to end June close to 2.6 million. The drive on retail broadband connections resulted in very healthy growth rates in broadband revenues across all countries ranging from the 30% posted by Telesp and Telefonica del Peru to the 50% recorded by TASA in Argentina. On aggregate, Telefonica Latin America's broadband revenues grew almost at 35%.

Internet and broadband revenues are increasing their contribution to revenue growth in the last 12 months by an average of 0.6 percentage points, adding between 2 percentage points to 3.5 percentage points to local sales growth.

Price and additional efficiencies remains a top management priority as shown in slide number 15. First half operating expenses increased just 4.5% in the first half of this year decelerating from the 6% price posted in the January to March period. Consolidated operating income before D&A exceeded €1.7b for the period, up 5.3% year-on-year in constant currency terms, once excluding the contribution of Columbia Telecom and ForEx. Foreign exchange rates added slightly less than €270 million to constant currency revenue performance pushing operating income before D&A nominal growth rate to almost 22% excluding Columbia Telecom.

In terms of profitability, Telefonica Latin America reached a 44% operating income before D&A margin for the January to June period, whilst excluding capital gains and Columbia Telecom, broadly stable year-on-year.

Lets now turn to slide number 16 for the analysis of the performance of our major businesses within O2, namely U.K. and Germany. In the U.K. February to June net service revenues grew by 15.1% year-on-year driven by continued strong customer and ARPU growth. We do expect the service revenue growth rate to slow down in coming quarters due to the growth patterns recorded last year which were stronger in the second half. Net additions reached 474,000 new subscribers in the second quarter, more than doubling last year's figure bringing the total client base to the 17 million mark.

Despite intense competition O2 U.K. continued to perform clearly ahead of peers leveraging both its refreshed brand and an enhanced value proposition and that customer acquisition increasing loyalty and roaming usage. As such, total gross additions were up 29% year-on-year whereas the 12 month blended rolling ARPU was cut by 6% in the last 12 months. In its quest to deliver a top customer experience, the Company has just completed the acquisition of the broadband provider BEA. A move that secures O2's position in the world of converged, mobile and Internet services. Blended monthly ARPU increased by 4.5% annually and blended SAC remained stable.

Operating income before D&A margin for the five months to June clearly exceeded 27%, reflecting current customer growth. The growth margin balance continues to be closely managed with O2 U.K. prioritizing growth where higher value customers can be acquired.

In Germany net service revenues grew by 9.3% annually in the five months to June with ARPU weakness being compensated by solid subscriber additions. The Company added a total 236,000 net new customers in the second quarter under an increasingly competitive environment taking the client base to more than 10 million subscribers at the end of June. 50% of total signs were under contract, 4 percentage points below the level of last year reflecting the rapid growth of the prepaid base. This change in orders mix, the 17% cut in termination rates suffered in December '04 and '05 and pricing pressure driven by competition in new offers are the three main factors behind the 14% annual drop in blended, monthly ARPU.

On a monthly basis the trend of the climbing blended ARPU was broadly stable in the quarter although the future direction of this trend in the second half will increase the growth margin balance. Finally, SAC remains stable for prepay and contract clients as operating before D&A margin for the February to June period stood at 25%. A figure higher than the one expected, mainly due to the slowdown in post-paid, net additions. Growth is expected to be higher in the second half which will impact the margin.

As presented in slide number 18, U.K. service revenue growth has ended in mid double-digits territory for the last two consecutive quarters given the higher than expected client expansion O2 has achieved since the beginning of the year. As a consequence we are upgrading O2 U.K.'s service revenue growth to a new 8% to 11% targeted range. Up from the 6% to 9% originally indicated. Operating income before D&A margin is still expected to end the year stable. Let me take this opportunity to reiterate guidance for O2 Germany which remains unchanged at low double-digit growth in service revenues and stable operating income before D&A margin.

Moving on to Telefonica O2 Czech Republic, performance in slide number 19, you can see that the company's ongoing transformation of it's business model towards broadband, data and value added services for both fixed and mobile is behind Telefonica O2's Czech Republic's successful financial turnaround. First half revenues topped €1b, steady in local currency.

Operating income before D&A increased by close to 5% in local currency terms to exceed €500 million. With the January to June operating income before D&A margin at 48.5% or close to 2.6 percentage points ahead of last year's comparable figure. In fixed broadband Cesky Telecom ended June with 326,000 retail Internet broadband connections, 2.5 times more than the figure reported in June '05. Broadband revenues jumped by more than 52% year-on-year in local currency terms.

Turning to mobile, the focus on customer acquisition and retention and the push on prepaid to contract migration has led postpaid clients to increase by 36% year-on-year significantly improving the quality of the mix. Total subscribers was expanded by close to 8% annually, was the driver behind the 5% annual growth in revenues in local currency.

On slide number 20 we now turn to the financial performance of the first half of 2006. Net interest expense is up only 36.8% despite a 92% rise in average debt. The contribution of foreign exchange has been negligible. Average effective debt service rates which includes interest expense, foreign exchange and interest rate hedging impacts, and the market-to-market of open liability positions has been kept in check.

The 4.5% figure achieved in H1 is however challenging for the second half and we continue to believe that the end year figures will be above 5% following incorporation of around €2 billion of Columbian Peso debt and higher short-term interest rates in Europe, in the second half. On our debt, refinancing exercises, post the O2 acquisition, we are happy to report a lengthening of the average debt maturities to close to six years and the successful refinancing of €12 billion with over 10-year maturities in the capital markets.

On the next slide we've done our best to describe, on a comparable basis, the evolution of our leverage ratios. We hope that the figures and the footnotes provided are self explanatory. The bottom line is that a deleveraging path has been started and that we feel confident that the targets set last May will be achieved as cash flow generation is offsetting new debt conditions to our assets like Columbia, even before the proceeds from the sale of TpI are considered. The roughly €2 billion proceeds from the sale of TpI will be home next Monday.

To sum up, first, our financial performance remained very solid across the P&L with high single-digit organic growth in revenues and operating income before D&A. Second, we are sustaining underlying margins despite strong subscriber growth and intense competitive environments. Third, top line growth is being successfully transferred down the P&L with earnings per share up 46% year-on-year. Fourth, first half key financial metrics are well in line with Group guidance for 2006. Fifth, Wireline divisions are driving broadband penetration with our markets retaining the opposition as essential benchmarks in terms of growth and profitability.

Finally, O2 retained its distinctive growth profile and outperformed in the U.K. with a revised U.K. sales growth upwards. Now, thank you very much and we are now ready to take your questions

Question-and-Answer Session

Operator

Thank you sir. [Operator Instructions]. The first question is from Luis Prota from Morgan Stanley. Please confirm your name and the company please.

Luis Prota - Morgan Stanley

Yes, hello it’s Luis Prota from Morgan Stanley. I have two questions. First is on O2 in Germany. I see that you are sticking to the double-digit guidance for revenues which should imply revenues growing around 11% or so, in the second half. I would like to get your view on what are you expecting to happen in the second half of the year to speed up revenue growth. Is it DSL take up, is less competition, what is your view on that? And the second question is on the new management structure which is suggesting to me a deeper fixed-to-mobile convergence across the board, can we assume that you would like to get a more formal integration of the fixed and mobile assets in Brazil and maybe as well in Europe? Thank you.

Peter Erskine

It's Peter Erskine. On the O2 question in Germany, there is a number of things we were, it's rather than expect to happen, we intend to make happen. No, in that number there is no material revenue at all from DSL. But first of all we would be, we've refreshed our tariffs and we plan to make some launches in the second half of the year which we think will mean we actually put on more new customers in the second half. The first half is quite deliberately modest, by our standards, in net customer growth. We've always said rather than rush out and win any customer, when we didn't see a way to win profitable customers, we would go more modestly. And as a result the margin is up to 25%. In the second half we'll go faster in growth because we believe we've got some strong tariffs that we'll be launching. And that will mean more net customers and as a result the margin will come back down to the stable area. We also think we're now seeing a stabilized ARPU. ARPUs have come down but that is looking more stable now. So we're confident in the guidance towards the end of the year of double-digit growth and stable margin.

Luis Prota - Morgan Stanley

Thanks.

Julio Linares

This is Julio Linares. Thank you for your question. Well it doesn't mean that the new organization is going to have any input on the corporate organization from the point of view of changing or integrating the companies. So both in Spain and in Latin America, wireline, wireless companies will continue as they are doing. Of course what we are trying to get through this new organization is a higher and deeper cooperation between companies so that we will improve the right chain of convergence and services, cooperation and duration among commercial channels. In addition to that, any possible cooperation to improve efficiency through common networks, IT infrastructure and even support functions that will be shared, as well, between companies.

Luis Prota - Morgan Stanley

Okay. Thank you.

Ezequiel Nieto

Thank you, Luis. Next question please.

Operator

Thank you. The following question comes Mathieu Robilliard from Exane. Please confirm your name and your company name. Thank you.

Mathieu Robilliard - Exane BNP Paribas

Yes good afternoon. Mathieu Robilliard, Exane BNP Paribas. Two questions please. First on El Marinjo (ph) as we've seen there is a slower net add here at 16,000 versus around 50,000 the previous quarter. In the same time, the ARPU decline on broadband hasn't deteriorated from the Q1 trend. So two questions there, why is El Marinjo and net adds, why are they slowing down? And what has compensated that slowdown of net adds in terms of supporting the broadband ARPU overall? So that’s really the first question. And finally, in terms of the market share in ADSL. I think in terms of retail you had around 50% in Spain, in Q2, correct me if I'm wrong. My question is do you think that can go back up again, not necessarily up to the 60% you had in Q1 but to something in the middle ground? Thank you.

Giarmund Monsaldo

Okay. This is Giarmund Monsaldo, thank you for the question. Regarding El Marinjo, in our view we have to take into account that seasonality on the TV pay market is very strong in this quarter, as you can see in other large companies in this sector. And all the sales and a large majority of sales are concentrated on the last full month of the year, as happened last year. In the second quarter of this year, according to our estimations the net gain of El Marinjo represented around 40% of total net adds on the Spanish market where our market share is close now to 8%. We think this is a not bad performance consider we are a newcomer. We are new in this market and we are doing perfectly well and well in line with our target of having 1.2 to 1.4m customers in 2009. Now regarding your ARPU question, according to our figures, our connectivity ARPU in ADSL has decreased. Total ADSL ARPU has decreased by 4.9% and connectivity is down by 10% year-over-year the first 6 months of last year. And that’s really now what we have seen in the last year. So we are not concerned on that. It's well in line with our projections.

Mathieu Robilliard - Exane BNP Paribas

Thank you.

Ezequiel Nieto

Thank you. Next question please.

Operator

Thank you, sir. The following question comes from Terry Sinclair from Citigroup. Please go ahead and confirm your name and company name. Thank you.

Terence Sinclair - Citigroup

Yes, good afternoon. It's Terry Sinclair from Citigroup. Two questions. One on Spanish fixed line, one on O2 Germany. First, fixed line. You gave some targets for Valencia for EBITDA growth and sales growth in the next three years and you also stated how you wanted to reduce the fixed cost proportion, I think it's about 43% by 2009. I just wondered where we were with that. You're saying that, on an underlying basis, margins were flat in the first half. It looks to me as though actually a certain amount of progress has been made. How will the curve of margin improvement, redundancy costs and so on play out over the next 12 to 18 months? And then, on O2 Germany, I just wondered if Peter could just clarify the likely duration of any margin debt on the excellent first half number? And also if you just explain why the SMS ARPU numbers are weird? It took a sudden dip and I don't understand why?

Ezequiel Nieto

Terry, would you mind to repeat your first question, please?

Terence Sinclair - Citigroup

Yes. Given the margin, Spanish fixed line, given the margin targets you set out at Valencia and also the reduction in the proportion of fixed costs within your construction for Telefonica de Espana, I'm wondering if you could just say where we were with the progress of reduction in fixed costs? Because there was a clear message there that you would increase the variable, within the cost mix we were going to have more variable costs and lower fixed costs reducing from 47% to 43% over time.

Santiago Fernandez

Well, regarding the cost structure of the market in Spain, we are well in line with our projections in Valencia. I don't have the exact figure right here but we can provide it later, but we are well in line with our projections in terms of total cost projection and the -- to give more picture related to our costs base through more variable costs.

Peter Erskine

On the O2 question, Terry, regarding the margin, I think you should see the 25 as exceptional. We've always said that we've got the lever of growth and margin. We've not, quite deliberately, grown the net new customers in the first half because we weren't as competitive as we wanted to be. We will be getting more competitive in the second half. So I think the margin will, as we've said, come out at year-end broadly stable on last year and we will need to do that in order to get the kind of growth that we want as well. Regarding the SMS, well spotted. We're actually up on the same quarter last year by 4%. The reason we're down, however, on the last quarter is two-fold. First of all, we were using, to hold in there while we got our new postpaid tariffs ready, some free SMS promotions. In other words, the volume had come in but we weren't charging for it. But also what we're finding is we've launched the England flat rate and those customers are actually tending to substitute voice for text. They're making calls because it's a flat rate but the bigger issues is in the quarter we were doing some free SMS in order to hold our own before we launched the new tariffs in the second half year on postpaid.

Terence Sinclair - Citigroup

Thank you very much indeed.

Ezequiel Nieto

Thank you. Next question, please.

Operator

Thank you. The following question is from Brian Rusling from Cazenove. Please confirm your name and company name. Thank you.

Brian Rusling - Cazenove

Yes, it's Brian Rusling from Cazenove. I have two questions, one for Santiago and one for Peter. Santiago, effectively with the completion of the merger with TEM this weekend that presumably frees you up to restart your share buy-back program and given your receipt of monies on TPI, can you help us understand how you're going to push forward the share buy-back over the coming weeks? And then, for Peter, two things; on the U.K., can you outline to us your plans for the link and the shops you've managed to get there and what you're going to be doing with your distribution in the U.K. And then on BEA, can you outline what the time line is before you all have a product in the market that we should expect to see coming in the sort of DSL converged market? Thanks.

Santiago Fernandez

Yes, thank you for the question, Brian. You are indeed right that, with the exchange of Telefonica Moviles for Telefonica shares the territory is now €7b of the remaining part of our share buy-back program. However, there still remains one year and half for us to complete that. We will measure, very carefully, the speed at which we can do. The reason for that being that, because of the sheer size of our debt commitments there are some priorities that we have to attack or entertain first before embarking on any very wide and very aggressive re-initiation of the share buy-back. So, in all likelihood, the first few million euros that come our way from the sale of TPI next week will have to put to their rightful usage - opening the facility that we use for O2. But that is not an obstacle for us to re-initiate in a slow-motion fashion, the share buy-back program which, again, we will finalize at the end of '07 and therefore it is still remains -- there still remains a long time.

Peter Erskine

Regarding, Brian, the U.K. questions, as far as The Link, the deal is virtually done. I would be disappointed if by sort of very early next week, it may even be tomorrow we're not signed up with our DSG colleagues. It would need to go over the next four weeks we estimate through both the U.K. and the European Competition Commission, but plans in terms of execution are well advanced in terms of we picked about 100 stores of the estate that we will convert to O2 stores. Some half of those are an overlap where we have a current store. So we will shut one or the other, as it were, and the other 50 will be net new. So basically, the O2 estate will improve by somewhere between 50 and 60. On the remaining roughly 200, we've had very good response from all the known suspects who are very interested in buying the stores. So whereas we thought, frankly, when we announced the deal that we would have a reasonable size, orphan stores, as we call it, that is stores that because of their lease folks didn't want, we think that will be very much smaller than we anticipated. So far as BEA, we've obviously bought it and I would envision that we will be launching products under the O2 brand from them early next year and obviously we're working out now what those products will look like although we have some clues. But I would think early next year you'll start to see some activity in the market.

Brian Rusling - Cazenove

Peter, can you just outline what the financial impact of The Link and BEA coming on is? Is there a margin hit that comes on with those joining your little Group?

Peter Erskine

Small. Very trivial. I don't think you would notice it.

Jose Juan Massolo

Sorry this is Juan Massolo. I wanted to back to a question of Mathieu Robilliard I think I missed one of your questions was regarding Broadband market share in Wireless Spain. As we mentioned, our Broadband market share, retail total market share is around 55%, has been stable for the first six months of the year and our estimates are that we will end at a similar level for the rest of the year. The data we have from July, even though it is almost one month, is very promising regarding sustaining this market share and also is very promising in terms of more sales for the overall market. Thank you.

Ezequiel Nieto

Thank you. Next question, please.

Operator

Thank you. The following question comes from Robert Grindle from Dresdner. Please go ahead and confirm your name and company name. Thank you.

Robert Grindle - Dresdner Kleinwort Wasserstein

Yes, it's Robert from Dresdner Kleinwort. Is there any update on the progress to allocate the goodwill from O2? Are you still planning to announce the impact of the Q2 results and is there any idea, at this stage, how much and, when you do the acquisition of the TEM minorities, will you have to allocate goodwill 10 times also for that or is that a completely different story? Thanks very much.

Santiago Fernandez Valbuena

Yes, thanks for the question. The BPI, work in progress, is still work in progress and it will take a bit of part of the second half of the year for it to be completed on the O2 case. We will, of course, give full disclosure about that but it is a major project and we sort of will leave no stone unturned before we re-complete it. It is not likely that we will be able to give full disclosure about that on the Q3 numbers, although that might still be possible. Certainly, and especially after the recent reorganization it is likely that a full disclosure will be given with the full-year results. On the terminologies, I don't think we have an issue as it is increasing this year that we already have and it is unlikely because of the share exchange that a major impact will be felt.

Robert Grindle - Dresdner Kleinwort Wasserstein

That's great. Thanks very much.

Ezequiel Nieto

Thank you. Next question, please.

Operator

Thank you. The following question comes from David Wright from JP Morgan. Please go ahead and confirm your name and company name. Thank you.

David Wright - JP Morgan

Yes, it's David from JP Morgan in London. Could you just help me a little with the fixed line provisions, please? Just I'm getting myself confused a little bit here, but if you could just perhaps give us the provision for Q1 and Q2 separately for both this year and last year? And then, could you also give us some indication, I think there was 1,250 or so employees that came through the scheme in the first half and another 44 or so from Terra. If you could give us some indication of, I think original guidance was 1,400 to 1,500 this year, of when we should expect the remaining employees to come through as a provision and whether we should still be looking for another 200 or so this year? Thank you.

Ezequiel Nieto

Let me start with the last part of your question. Our current position for Terra and [TASA] is between 1,400 and 1,500 employees. So that's --and we have plans underway to get to this level of employees signing up for the redundancy program. Let me check for the provision quarter-by-quarter.

David Wright - JP Morgan

Maybe you could also give us some indication of when we should expect the remainder then, Q3 or Q4, please.

Ezequiel Nieto

By quarters, I don't have that information, quarter-by-quarter for the rest of the year. Regarding the total provision for the first half of the year, we have the exact number is €387m. The number for people that sign off for this program is 1,237 employees and the average cost is around €302,000. This is for Telefonica Spain. Now, for Terra, the total cost was €4.5m. Again, this is for the first half of the year, and the number of people that signed off was 44, so the average cost was much lower. It was €101,000.

David Wright - JP Morgan

Do you have the Q2 number? I'm just struggling to find it a little. Maybe I can bring this off-line but, if you have it handy, it would be very useful?

Ezequiel Nieto

In the first quarter the total provision was €94.9m and, in the first quarter of last year it was €121m. So, again, the first quarter of this year is €94.9m and the first quarter last year was €121.5m. So you can run the arithmetic's to get the second quarter of both figures.

David Wright - JP Morgan

Okay. I think I'm missing H105 as well, sorry to be -- sorry to trouble you on this.

Ezequiel Nieto

Sorry, which one are you missing?

David Wright - JP Morgan

You've given us H106, could we have H105?

Ezequiel Nieto

David, if you don't mind, we will call you back with these numbers because they are not provided in our numbers but we cannot find this information right now.

David Wright - JP Morgan

Yes, I think I struggled a little too. Thanks, Ezequiel. Thank you.

Ezequiel Nieto

We'll come back to you. Next question, please.

Operator

Thank you. The following question comes from Andrew Hogley from Lehman Brothers. Please go ahead with your question and confirm your name and company name. Thank you.

Andrew Hogley - Lehman Brothers

Good afternoon, gentlemen. Andrew Hogley from Lehman Brothers in London. Peter, I wondered if you could elaborate a little bit on the competitive environment in the U.K. You've clearly done very well this quarter in terms of net additions and particularly contract net additions versus France Telecom and Vodafone. I wondered if you could share a thought about the market development over the next six months?

Peter Erskine

Yeah, I mean, I want to say at the beginning, we're very pleased with the quarter. I think you know though, it's not a flash in the pan. We've been continuing with the momentum, so it isn't a one-trip wonder. Having said that, we're not complacent at all I mean we would expect, although we always do, that companies of the quality of Voda and Orange must come back but we were very surprised to see their negative net adds and virtually no service revenue growth. As you know, we grew 15%, Voda 1% and Orange 0%. The next half-year, I think, remains very competitive indeed but we're confident. In our plans, and we've got continuity, the brands strong. We know we've got good value propositions out there. We're very confident in our guidance. I think exactly how much we grow in the second half will obviously depend on what the market looks like but we are very much pulling the lever of growth. The margin in the first half is slightly down as we would have expected and, frankly, if good profitable customers are out there we will continue to take them. T-Mobile, I think, had a good first quarter this year when they launched their Flex T so they're back, although as you saw, they've had an enormous margin holiday. It's almost a margin sabbatical as it went that low, and I think bluntly now we're seeing very little activity from Virgin or 3. They're not putting on a lot of net adds but I'm sure, in the second half, the big guys will come out fighting. I just can't believe Voda and Orange will continue to have such poor quarters. But we're very confident, our plans are in place, we'll continue to grow and I was pleased to be able to up the guidance for us to 11% service revenue growth. As you know, we come out the first half in the mid-teens and we do lap a very powerful second half last year. But we're very confident delivering that guidance.

Andrew Hogley - Lehman Brothers

Okay.

Ezequiel Nieto

Thank you. Next question, please.

Operator

Thank you. The following question comes from Bosco Ojeda from UBS. Please confirm your name and company name.

Bosco Ojeda - UBS

Hi. Bosco Ojeda from UBS. I have a question on your fixed line business. It looks to me on the bundling side it is gaining some traction and I was wondering if you could let us know some details on that front? Whether you anticipate much more demand on for space and on the switches, whether you think some people are getting prepared for a slightly more stronger launch on the coming quarters or these will just be a bit more stabilizing at some point of time? What are the trends over there? And, related to this, do you think the fixed line business, next year, can be on positive territory in terms of revenues or do you anticipate a bit more pressure? Thank you.

Santiago Fernandez Valbuena

Regarding the unbundling question, we don't see any big wave for new -- for location requests coming on. To give you an idea, we have right now 625 central offices with unbundling facilities. We have a request collaboration for an additional 10. So what's going on right now is that the operators are using the capacity they have already had in the past so that's our one trend. Now, of course what also we are seeing basically is a move from line sharing and bundling to full unbundling. This is something that we have been weak since the last quarter of last year and, right now, the net adds are 50/50. So that’s another trend to consider. And the third trend is that there is immigration going on between the power wholesale ADSL product that Gigafacele (ph) product towards unbundling. Right now, we have roughly the same number of lines in Gigafacele wholesale, ADSL and bundling, roughly 700,000 lines. Your second question regarding the revenue guidelines, we still believe that the range was -- the long-term range was between 0.5% and 2%. Top line growth is achievable and, regarding this year we think [inaudible] we are well in line with 1.8% growth in the first half. So it will be almost, well you can never say. It would be very difficult not to meet that. That guideline will be on the top of the range. Thank you.

Bosco Ojeda - UBS

Thank you.

Ezequiel Nieto

Thank you. Next question, please.

Operator

Thank you. The following question comes from James McKenzie from Fidentis. Please confirm your name and company name. Thank you.

James McKenzie - Fidentis

That's right. My name and company are right. I just wanted a question on ‘02. You seem, or -- sorry, Telefonica Moviles, you saw a big fall off in interconnection or -- sorry, roaming revenues, which was down about 10% in Spain in the second quarter. In part, they attributed that to the new roaming plans that have just been announced. I was wondering if in ‘02 you'd seen a similar sort of fall-off in your roaming revenues and, if not, if that's something that we should be thinking about for the second half of the year?

Peter Erskine

It's too early, frankly I mean, we only launched the offers, I think, in July, in fact I know in July, so.

James McKenzie - Fidentis

Okay.

Peter Erskine

And I think so far as should we see a similar fall-off? No I mean the way our marketing people are using these is that it's part of a consumer's pricing so they may pull a lever on roaming rates but they, perhaps, therefore don't feel the need to pull a lever on something else. So we sincerely hope, although it's yet to be proven there is elasticity there as well as once people realize that the cost of calling when they go abroad is much more modest. We know today, the vast majority of people turn their mobile off as consumers when they go abroad so we see quite a big opportunity there.

James McKenzie - Fidentis

Okay, so, I mean in, you haven't seen a great fall-off in revenue in the second quarter?

Peter Erskine

No we haven't.

James McKenzie - Fidentis

Okay. Thanks.

Ezequiel Nieto

Thank you. Next question, please.

Operator

Thank you. The following question comes from Javier Borrachero from ING. Please confirm your name and company name. Thank you.

Javier Borrachero - ING Barings

Good afternoon. It's Javier Borrachero from ING. I've got a question on Latin America, particularly on Telesp. First if you could quantify, in the press release you mention about some positive one-off items in Q2, so maybe if you could quantify these sort of extraordinary items. And then also, in light of the recent regulatory that was in Brazil of the monthly fee and the long-distance calls, to what extent you are confident that you will meet the guidance for, well, for the Latin American unit? Thank you.

Jose Maria Alvarez-Pallete

Thank you for your question, Javier. Regarding your question, this extraordinary item in Telesp those are the dividends that were paid five years ago that have not been asked for, deferred to the shareholders and we are accounting that. The amount that is, I think, is 80 million [inaudible] as a one-off for the first half of this year. And, considering your second question about the guidance, yes, we stick to the guidance that we have provided. It would -- we have had some impacts on the first half of the year that we think that we can fight back in the second part of the year especially in Telesp. We are confident that some new products that we are going to be launching in the second part of this year will be successful and, on top of that, we have been finding some one-time impacts like the World Cup in Telesp and the Easter effects. So, yes, we stick to the guidance, probably in the lower part of the range but yes, we stick to the guidance.

Javier Borrachero - ING Barings

Thank you.

Ezequiel Nieto

Thank you. Next question, please.

Operator

Thank you. The following question comes from Maria Rotondo from Santander. Please go ahead with your question and confirm your name and company name. Thank you.

Maria Rotondo - Santander

Yes, Maria Rotondo, Santander in Madrid. I have a question for Telefonica Latin America also. I would like to understand to what degree the TeleLatinoamerica launch bundling offers in Brazil, Colombia and Chile because those markets you have one on one Wireless operations and considering the very impressive success of bundling offers in Spain. So I was wondering, from a regulatory point of view, if you can launch triples in those three markets and even bundle with mobile, no?
And the second question is on Telesp also. If you can give us maybe some guidance for year-end in terms of revenue growth especially considering also the new price increase we saw in Brazil? And that's all. Thank you very much.

Santiago Fernandez Valbuena

Thanks for the question, Maria. Considering this bundle offers towards the triple that we have been launched, we have been launching in the region, in Telefonica in Chile and in Telesp. In Telefonica Chile we have launched dual bundles, Voice plus Internet, from the beginning of the year and, as you know, since last June, we have launched a new set of triple bundles along with the new satellite TV services and we are having success, we are happy with the result. As of Telesp, we already counted dual bundles, Voice plus Internet, last April and we have been launching again with significant success this new offer and we are working very hard to have three offer with satellite TV before year-end. The launching of services in Argentina will probably take place during the first quarter of next year in 2007. And, in Columbia Telecom, we are getting ready for that. We are preparing and upgrading the number for that and we think that we should target the last part of this year to launch part of the offers. And, considering the guidance again, we stick to the guidance in terms of Telefonica in Latin America. We think that in Telesp we should come along with this impact that we have been sharing with you in spite of the fact that the tariff increase is going to be slightly negative. But, again, we are very confident that the new products and the offers that we are doing, together with the pick-up of ADSL that we have been having in the first half of this year, would compensate this negative impact on the tariff increase. So, again, we are confident and we stick to our target.

Maria Rotondo – Santander

Sorry this is Maria, maybe you can specify if you can, combine that with mobile offers like Telefonica with Ono in Spain, quite a good offer in those four markets, if it is possible in those countries?

Antonio Viana-Baptista

Yes, we are working to that. I mean again, not a specifically commercial offers, several initiatives were launched in terms of working together with Telefonica Moviles especially in Turin, commercial channels and also our organizational project. But, for the time being, we are preferring to design of the projects and we will be submitting those to the Regulators in the different countries and some of them will have to be opened to third parties and some of them we think we would be doing that by ourselves.

Maria Rotondo – Santander

Okay. Thank you very much.

Ezequiel Nieto

Thank you. Next question.

Operator

Thank you. The following question comes from Guy Peddy from Deutsche Bank. Please go ahead and confirm your name and company name. Thank you.

Guy Peddy - Deutsche Bank

Yeah, it's Guy Peddy from Deutsche Bank. Thank you very much. Really, couple of questions for Peter please. Firstly, in the coming weeks and months we've got mobile termination cut announcements from both the German and U.K. Regulators. I'm just wondering if you could give us a feel for what you're assuming in your '06 revenues for any impact for that or what scales of decreases we should be looking for '07? And, secondly, more of a clarification on Germany. But you mentioned, Peter, that you expect ARPU to stabilize as you move into H2 but I'm just noticing that E-Plus has just launched a new contract tariff. You yourselves are just about to announce new contract tariff packages. I doubt any of those are price-inflationary and given that elasticity is very much negative, I'm just trying to work out how we get to stable ARPU. Thank you.

Peter Erskine

Well, the second one's relatively easy to answer. First of all, if you launch, I'm not saying this is what we're going to launch, if you launch big packages for big users actually your ARPU does go up and also you'll have seen in our net adds for the first half, the mix is weaker than normal. There's more prepaid, so, again we very much felt that we need to re-energize our postpaid so those were in hirer off to customers. That's how I'm very confident that we can, in the second half, get the blended ARPU stabilizing those two factors. So far as termination rates, the U.K. Ofcom is looking at 2G and 3G and I think we're looking at quite nominal amounts. What I would guess that they may well be doing is you are aware of course that Orange and T-Mobile is an accident of history to do with the fact that they were 1800, have always had a slightly better termination rate. Well I think that will get equalized. And I think the other termination rate that may well be looked at is, as you are aware 3 have a very high 3G termination rate. They may well be encouraged, that is, forced to get that down over a sensible period of time. But we're not expecting in the U.K., anything material from conversations with Ofcom. Germany, as you know, works in a fairly voluntary group that E-Plus did not want to play ball with the conversations that were had. I don't know where that's going to come out but our guess is that it's going to be a reasonable reduction and that's what we've factored in. I think it's round about December/January of this year.

Ezequiel Nieto

Thank you. Next question, please.

Operator

Thank you. The following question comes from Pilau Bertosey (ph) from Sanford Bernstein. Please go ahead with your question and confirm your name and company name. Thank you.

Pilau Bertosey - Sanford Bernstein

Yes, good afternoon. It's Pilau Bertosey from Sanford Bernstein. Could I just confirm, in the Spanish Broadband market were you able to launch the DSL products that you were planning to launch in the first quarter and second quarter? Are you able to launch those in the second half? The second question I had is on Colombia. Could you tell us whether you will need to pay all of the 350 billion concession fee in 2006 or should we assume that only half of that will be paid in 2006? And then, finally, if you could remind me of what the Telesp revenue growth guidance is for 2006? Thank you very much.

Jose Juan Massolo

Well this is Juan Massolo. Thank you for the question. Regarding the Spanish Broadband regulatory process, as you know, we are waiting for the approval of several products we have presented to the National Regulatory Authority. As you know, the National Regulatory Authority have been focused, during the last month, in analyzing all the relevant markets. Now this process is going to be concluded and is concluded in the majority of cases, so we are confident that the products we have presented in the past and in the last weeks will be available for market in pole position the rest of the year, so we are confident that that will happen. Of course, we do not have that authorization to go forward with the marketing campaign. Thank you.

Antonio Viana-Baptista

On your second question about the, I guess, that you are referring to the [inaudible] past payments that where contemplate it, contracts, those on track. We will be paying the amount I think it is by October and no revision has been done on that. And on your question regarding guidance revenue for Telesp, there is no guidance revenue for Telesp. We have just the guidance for the new revenue guidance for the fixed line in Latin America and, again, we are confident that we will be meeting that.

Pilau Bertosey - Sanford Bernstein

Good I just follow up on Telesp, should we assume a slow down of the growth rate in the second half compared to the first half of the year, please?

Antonio Viana-Baptista

We think it's going to be sustained in spite of the fact that the tariff increase is going to be a slightly negative because of the new revision that has been happening there, I think, at the end of June and is starting to be apparent in July and last year that was positive. But the pick-up in ADSL, again, together with the labor days, we do not think that this is going to be implying a reduction so we stick again to the growth rate that we are having and that have contemplated in the guidance.

Pilau Bertosey - Sanford Bernstein

Thank you very much.

Ezequiel Nieto

Thank you. Next question, please.

Operator

Thank you. The following question comes from James Ratzer from New Street Research. Please go ahead and confirm your name and company name.

James Ratzer - New Street Research

Yes, good afternoon. It's James Ratzer from New Street Research. I have two questions, please. The first one was just regarding your unit in Germany, Telefonica Deutschland. It seems to me there's quite a valuable asset base there in terms of exchanges you've unbundled but the subscriber base is declining at the moment, I was wondering whether you'd be willing to consider a deal with one of the other resellers in Germany? We've just seen QSE team up with Tele2. Is that kind of transaction something you'd consider and, if not, I was wondering if you could let me know what the future is for that asset, please? And then the second question was just regarding O2 in the U.K. I was wondering if you could just bring me up-to-date with where we are with the roaming contract with 3 and the impact this is actually having on your financials? Thank you.

Peter Erskine

Sure. Telefonica Deutschland, in a way, I can answer your question in one line with, we're in the process of merging it with O2 Germany. And we very much, we said before, we became part of Telefonica O2 wanted to get into Broadband and this would be very much of the joint offering. In fact, we'll be launching services to customers in September/October time. Are we considering any deals? No, but we're always open-minded to anything that would create value but I think we very much want to become a strong player in the German market in fixed and mobile and, Telefonica Deutschland, we're very confident we can reverse it's fortunes by marketing it to the O2 base and offering them good value. We've been very clear on the 3 roaming contract. We didn't win that one. The prices were extremely aggressive and it's been won, I'm not sure we're at liberty to say by who, by Orange. That volume will start to decline really from October/November and probably be off our system by the second quarter next year.

James Ratzer - New Street Research

And what's the total revenue impact of that, please?

Peter Erskine

We never said. We can't say. It's private. It's not that material.

James Ratzer - New Street Research

Okay. Thank you.

Ezequiel Nieto

Thank you. Our next question, please.

Operator

Thank you. The following question comes from Ricardo Seara from BPI. Please go ahead with your question and confirm your name and company name.

Ricardo Seara – BPI

Yes, hello, good afternoon. It's Ricardo Seara from BPI in Porto. I have a question on domestic fixed line. You said that the guidance suggested for calculation is 8.4 sorry, the change in the first half OIBDA is 8.4 adjusted for guidance calculation and your targets are, is between 1 and 3%, I was wondering if we could, over the next quarters, have an upwards revision in this guidance for the year 2006. Thank you.

Santiago Fernandez Valbuena

Thank you for the question. As you know, our redundancy program provisions are loaded on the first half of the year. So, to give an idea, this April 0.4% growth in adjusted for guidance purposes OIBDA, as an implied 6.2% growth due to this lower redundancy provision versus last year. So, as the year will continue, we'll see that this growth will diminish dramatically and we are confident and, again, we don't see the need to up-grade this, the OIBDA will be on the upper part of this range. Thank you.

Ezequiel Nieto

Thank you. We have time for a last question, please.

Operator

Thank you. The last question comes from Lawrence Sirra from Redburn Partners (ph). Please go ahead and confirm your name and company name. Thank you.

Lawrence Sirra - Redburn Partners

Hello, Lawrence here from Redburn Partners in London. I have a question on Spain. The first one is regarding total business revenues. As we saw from France Telecom and BT, some erosion in business revenues in U.K. and France, I was wondering if you could give us some guidance regarding business revenues in Spain because it seems that your network is a bit less migrated to new technologies such as IPM and PLS. The other question is regarding your targets in domestic mobile. You said that your guidance while calculating with only three operators. I would like to know if there is any update on your with if you are entering the Spanish mobile market? And also, on termination, as we saw that the in the Netherlands and in France, the Regulator has started to become a bit more aggressive. And I remember your target in Valencia on the termination rate cuts, could we expect to see a difficulty for you to reach your 3% to 5% revenue growth per annum from now to 2009? Thank you.

Santiago Fernandez Valbuena

Yes, Lawrence, this is Santiago Fernandez. On the Telefonica mobiles in Spain question, I would invite you to revisit the conference call that was held yesterday by Antonio Viana where I think ample tribute was given to that specific question.

Lawrence Sirra - Redburn Partners

Can you, I was, I heard the conference and I don't remember that, the answer.

Antonio Viana-Baptista

The issue on the guidance that we provided, I think I say yesterday, we explained in quite detail that we expect the same growth in terms of revenues. We believe that the only area where we are not making the growth in revenues is in handset sales, just because it don't sell enough demand for more expensive handsets on the 3G front. We don't think that they are appealing enough for the consumer choice. That's the only thing and we're not going to subsidize more heavily handsets that there would not be easily sold as others.

Lawrence Sirra - Redburn Partners

So you're not updating your guidance with the fourth player? With the,

Antonio Viana-Baptista

We are maintaining our guidance. We believe, and as we said in Valencia, that the MVOs, they will come to Spain and that was incorporated in our guidance. We believe that that will occur in the second half. To be very honest with you, with what we've seen from Exfera or better saying what we have not seen from Exfera we can conclude that there will be no more than another MVO basically. So it doesn't make much difference to the guidance that we are providing. So we stick to the same number.

Lawrence Sirra - Redburn Partners

And on termination rate cuts, you were expecting something like from 7% termination rate cuts per annum. Do you think that could be worse?

Antonio Viana-Baptista

No. We, I don't recall that we were expecting that kind of number. We said that the average ARPM of incoming traffic would be coming down 13% that we calculate per year in '06/09. That's the guidance that we provided in Valencia and we see no reason to change it.

Lawrence Sirra - Redburn Partners

Okay. That's fine. Thanks.

Antonio Viana-Baptista

Thank you, Roger.

Santiago Fernandez Valbuena

Regarding the question in large corporations, unfortunately we are not deciding guidelines specifically therefore business lines within Telefonica Spain. In Valencia, as you may recall, we mentioned that we have long-term estimation of 2% annual growth and our figures are well in line with that long-term trend. Regarding Brazil AP in this segment, of course, it's something that we are promoting and the expectation is very high. Already 90% of the traffic is appeared in this and plans we are providing solutions for all of this.

Lawrence Sirra - Redburn Partners

But could we say that today you generate on the fixed line half of your revenue from business customers?

Santiago Fernandez Valbuena

Can you repeat that, sorry? Sorry, as you may recall, we don't provide this, the price of revenues among the pipeline. Sorry.

Lawrence Sirra - Redburn Partners

Okay.

Santiago Fernandez Valbuena

Okay, ladies and gentlemen, with this we are going to bring this conference all to a head. We appreciate your presence and for those of you who will be able to take a few days off on the coming holiday session, please enjoy, and we will be able to report on Q3. Thanks very much.

Operator

Ladies and gentlemen, thank you for your participation today. This completes today's conference call. You may now disconnect your lines. Thank you.

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