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Telefonica SA (TEF)

Q1 2007 Earnings Call

May 16, 2007 10:00 am ET

Executives:

Ezequiel Nieto - Head of IR

Santiago Fernandez Valbuena - CFO

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

Antonio Viana - Head of Telefonica, Espana

Jose Maria Alvarez-Pallete - Head of Telefonica, Latin America

Peter Erskine - Head of O2

Analysts:

Luis Prota - Morgan Stanley

Jesus Romero - Merrill Lynch

David Wright - JP Morgan

Terence Sinclair – Citigroup

Christian Kern – Lehman Brothers

Robert Grindle - Dresdner Kleinwort

Unidentified Analyst

Brian Rusling – Cazenove

Javier Borrachero – ING

James McKenzie – Fidentiis

James Radster – New Street Research

Luigi Minerva – HSBC

Presentation

Operator

Welcome to the conference call. At this time all phone party participants are in a listen-only mode until we conduct the question and answer session and instructions will be given at that time. If any phone parties' phone should require assistance during the conference, please press Star then Zero on your telephone.

I would now like to hand over to the chairperson, Mr. Ezequiel Nieto, head of investor relations. Please begin your conference call and I will be standing by.

TRANSCRIPT SPONSOR

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Ezequiel Nieto

Thank you and welcome, ladies and gentlemen. Welcome to Telefonica's conference call. I am Ezequiel Nieto, head of investor relations. Before proceeding let me mention that this phone call contains financial information and data reported under IFRS. The financial information contained in this document has been prepared under International Financial Reporting Standards.

This presentation may contain announcements that constitute forward-looking statements, which are not guarantees 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 company 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.

If you do not have a copy of our relevant press release and slides, please contact Telefonica's Investor Relation's team in Madrid by dialing the following telephone number 34-91-584-4713.

Now, let me turn the call over to our CFO, Mr. Fernandez Valbuena, who will be leading this conference call.

Santiago Fernandez Valbuena

Good afternoon, ladies and gentlemen, and thank you for attending Telefonica's conference call to discuss the first quarter 2007 performance. During the Q&A you will have the opportunity to ask questions directly to our Executive Committee members. As I have today with me, Julio Linares who is our General Manager for Coordination, Business Development and Synergies; Antonio Viana, who is the Head of Telefonica, Espana; Jose Alvarez-Pallete, who is Head of Telefonica, Latin America; and Peter Erskine, who is Head of Telefonica all through Europe, who is connected from London.

Our (inaudible) extended just the 15% mark annually, pushing consolidated revenues to top €13.7 billion this first quarter. In organic terms, total sales went up by close to 8% year-over-year. Operating income before D&A ended the period just about €5 billion, or close to 10% up year-over-year, in line with high commercial efforts to develop growth engines and strengthening market shares.

Organic growth in operating income before D&A stood at almost 6% year-over-year. Operating income at the end of March exceeded the €2.7 billion mark, which is equivalent to an annual increase of 15% in nominal terms, which currently were close to 20% growth range purely organic. Operating cash flow went up by almost 11% year-over-year to surpass €3.7 billion for the January to March period. Operating cash flow organic growth was just below 13% this first quarter.

In slide number four, we turn to the earnings per share. Reported earnings per share reached €0.36 per share or 6.1% above last year's figure. Excluding capital gains, notably those accounted for by the sale of a 6.6% stake in (inaudible) last year. Underlying EPS went up by nearly 23% year-over-year.

Our (inaudible) growth profiled by regions and businesses, which is behind our strong performances, is outlined in slide number 5. From the original perspective, European operations, including both Spain and Europe, represented more than 60% of gross sales and continues to grow in the mid single digit territory despite servicing increasingly mature and competitive markets.

Latin America emerges once again as posting top performance. As the region's revenues grew by more than 12% in organic terms to account for 60% of Telefonica's expansion. From the business perspective high growth services, mainly mobile and fixed broadband, accounted for more than 60% of total revenues with the weight of traditional things being limited to 33%. And more importantly, these same services contributed to more than 90% of the first quarter's organic revenue expansion.

Turning to profitability in slide number 6, we can see that annual growth in operating costs continued to trend down despite strong local commercial activities to stand just above the 8% level in the first quarter. Underlying margins stayed at 37.2% at the end of March, or 0.7% below last year's figure.

In nominal terms, margins for our key divisions ranged from the 26.4% posted by Telefonica O2 Europe, which is affected by increasing competition in mobile and the launching of operation in Slovakia to a very solid 48.5% achieved in Spain, excelling in both fixed and mobile.

Let us start the review by business lines with Telefonica Espana in slide number 7 whose performances stand out from other European peers. First quarter financial performance, we made very robust in terms of growth and profitability led by the strength of our commercial activity in both fixed and mobile.

The 95 million EUR drop in the redundancy provision registered this first quarter, compared to the same quarter of last year, has added to this very solid underlying performance. Revenues went up by 5.5% year-over-year to top €5 billion with (inaudible) increasing by almost 11% to just about €2.4 billion. OIBDA markings stood at 48.5% equivalent to a 2.3% annual.

During the first three months of this year Telefonia Espana has consolidated its competitive position in the market up to growing total accesses by 5.5% year-over-year, as shown in slide number 8. Our commercial drive which has been (inaudible), particularly on value customers, remains strong in all business segments. Traditional line loses have been capped at below 30,000 this first quarter, containing the annual decline of fixed telephony accesses at 1.2% which is a reference benchmark in Europe.

On broadband we continue to grow retail broadband accesses ahead of overall market growth and above 30%. And close to 368,000 mobiles subscribers have been added to our network since January 1, pushing the total base up by almost 8% year-over-year.

For a review of the fixed broadband market, now please turn to slide number 9. We have successfully sustained our leadership since the start of the year, keeping our market share constant at 56% with close to 4 million retail connections at the end of the quarter. We have a pipeline of new products pending regulatory approval that we are confident will nurture the market further.

In Pay TV, Imagenio is gradually gaining ground, grabbing more than 40% of additions again this first quarter. Outpacing our peers in the transformation of the business towards broadband and corporate solutions remains key to retain our unique growth profile fixed at 3% in slide number 10. Keeping the lead in broadband net additions, promoting double and triple play, and pushing the introductional value added, are the three main factors behind the 22% increase in internet and broadband revenues.

Becoming a broadband oriented company is helping us to move our client base up the value chain, which led to a total ARPU growth of 7% in the last 12 months. In addition to the broadband, traditional revenues have benefited from the 2% increase in the monthly fee applied in January 1, which contributed to reduce the decline in access and voice revenues below 3%. Overall fixed operating revenues went up by 3.6% annually, a very promising start for the year.

Looking now to the profitability of the domestic fixed business in slide number 11, we can see that underlying OIBDA growth was close to 5% year-over-year or roughly 1% ahead of top line expansion, which is a clear proof that the new integrated management model yields tangible results. OIBDA margin increased close to 0.5% in the last 12 months to 46.5%.

Let's now continue with our mobile operations in Spain which made (inaudible) value growth.

Quarterly commercial performance stayed strong as we added close to 370,000 new customers since the beginning of the year, pushing the total base up by around 7.5% year-over-year. Churn is being kept under control thanks to continuous efforts from loyalty. The mix continues to improve and the results are and will remain positive despite renewed competition.

It is worth mentioning the very solid performance of contract on all operating matrix. Churn, which runs on benchmark levels of 1.1% in the first quarter, complemented the 8% annual increase in gross ads. As such contract net additions almost reached 390,000 clients in the first three months of the year, or 13% above 2006 comparable figure. And over 78,000 contracts were captured through number possibilities, doubling last year's performance.

Please turn to slide number 13 to review mobile usage patterns in Spain, which continued voice stimulation and strengthen ARPU leading to an almost (inaudible) performance. Voice usage grew at a healthy 5%, still showing positive elasticity in allowing the decline in voice ARPU to be capped at 0.4%.

The performance of data ARPU has been very positive with gains this quarter increasing by close to 6% on an annual basis, which is the highest growth rate since the fourth quarter of 2005.

The strength of known P2P SMS revenues up 27% year-on-year, driven by current activity, were behind the boost in data usage. The positive evolution of data ARPU led to a 0.6% increase in total outgoing ARPU. Incoming ARPU performed better than last quarters, based on the reduced 6.9% mobile termination-rate cut, which is in force since last October. Please bear in mind that a new 7.5% reduction became effective in April, adding pressure to incoming ARPU.

The key financials for the domestic mobile business are presented on slide number 14. In terms of sales, service revenues increased by a healthy 6.7% on a comparable basis, driven by the 8.4% rise in customer revenues, backed by solid customer in outgoing ARPU growth. In our connection revenues, we were favored this quarter by the Lobo mobile-termination rate cut, growing 1.5% on comparable terms. And, Lobo revenues, climbing by 20%, affected by lower prices ahead of EU regulation.

In terms of profitability, OIBDA performed well again this quarter, after growing by 7.9% year-on-year. The margin remained flattish at 44%, despite higher commercial in handset upgrades.

Moving now to Europe, in slide number 15, we can see that operating revenues went up by close to 47% annually, to the €3.5 billion mark. Competition in the mobile space, increasing commercial expenses related to the change of Lobo’s fiscal year for March to December, and the launching of the Slovak operations in February, have had an impact on the year-on-year cost comparison, and led to reduced OIBDA growth of 23%.

Consequently, OIBDA margin was cut close to five percentage points on an annual basis. We expect OIBDA to improve throughout this year.

In the UK, revenues continue to trend positively, driven by customer and ARPU growth. In Germany, we are pro-actively attacking competition in pricing pressures, which are pushing our ARPU downwards, along with termination-rate regulation. In Eastern Europe, broadband is upsetting the decline in the traditional fixed businesses in the Czech Republic, while mobile growth remains healthy, focused on post-pay. And the launching of operations in Slovakia has shown solid progress, servicing more than 400,000 clients by mid-April.

We turn now to slide number 16 for a summary of our UK performance. From an operating standpoint, O2 UK ended March with 17.8 million mobile subscribers, or up 8.6% on an annual basis. Client retention has been at the forefront of commercial strategy, as the almost 11% of annual growth in post-paying customers shows, pushing contracts to account for 35.5% of the total base, as of March 31.

The close to 1% increase in blended ARPU, along with client expansion, had prevented a close to a 10% rise in revenues. Generally (inaudible) the margins to 24%, roughly four percentage points below last year's figure, driven by the focus on retention and the effect of the change in the fiscal year that I have already mentioned. Margin levels for the coming quarters are expected to be higher than the first quarter reported figure.

In slide number 17, we present O2 Germany's results. The company provided mobile services to 11.2 million mobile subscribers at the end of March, which is up close to 11% year-on-year, amid a very competitive scenario. Client growth was biased toward the pre-paid segment, which fostered a 12.5% annual increase. These weaker client needs, coupled with pricing pressure and a 20% termination rate cut, led to a 15% annual reduction in ARPU for this first quarter, with revenues down by 3%.

We expect the gradual recovery of momentum once planned initiatives to push customers in ARPU growth to both O2 (inaudible) brands hit the market in the coming quarter. The Genion SML targets, launched in November of last year, have been a good start, delivering higher minutes of usage and ARPU.

OIBDA margin stood at 19.1%, which is a decline of 0.5 percentage points from last year's level. In addition to the change in the fiscal year, (inaudible) to O2 franchise, the higher volumes in retention and the decline in revenues are the factors behind point-gap performance. We expect the OIBDA growth to be reversed as the year progresses.

We move now to slide number 18, to close with a review of our European operations with the Czech Republic. Local currency revenues grew by 2.6% year-on-year with OIBDA margins vanished, once excluding Slovakia's start-up costs. Increasing the value proposition for both text and mobile clients is behind the solid financial performance of Telefonica Czech Republic. On the fixed side, retail broadband connections increased by just about 54%, driven by speed upgrades and product innovation, with a recent launch of Triple Play and a mobile-broadband convergence solution being the first examples of new integrative products.

As such, retail broadband sales went up by more than 56%, nearly stabilizing fixed revenues overall. On the mobile side, foreign (inaudible) and elasticity led to the 4.8% growth in mobile revenues.

Now, for the review of our Latin American properties, please turn to slide number 19. During this first quarter, we are keeping our strong leadership in the development of the broadband market across the region, through the gradual launch of Double and Triple Play offers, and we are successfully sustaining mobile momentum in major markets, lining up client expansion, revenue growth, and margins. These solid operating fundamentals have led to some revenue and profitability metrics. Sales in Latin America increased by 8.5% in the first quarter, a growth rate that exceeded the 12% mark in terms of operate and income before D&A, and OIBDA margin went down by more than one percentage point year-on-year, standing at 36.6% period for the January-to-March period.

Growth in revenues and OIBDA being generated across the region, a slight number of 20%. All countries, with the exception of Ecuador, showed a positive financial performance during this first quarter, and higher efficiencies, built around the deeper original management of operations, upset our commercial push, leading to a notable improvement in profitability.

Broadband and mobile have been the two key accents of revenue growth in the region. Starting with broadband in slide 21, we can see that we continued to be top of the market, adding more than 265,000 new connections in the first three months of 2007, up 19% year-on-year. Our total retail broadband connection topped the four-million mark, a 38% increase on an annual basis. On top of poor (inaudible) activity, Triple Play services are being progressively launched in the region, with the aim to reinforce market shares and drive ARPU.

Pay TV clients went up by more than 43% annually, to achieve 700,000 clients at the end of March, 25% of which were already connected through satellite. As a consequence, broadband revenue growth ranged from the 15% posted in Brazil, to the more than 16% witnessed in Argentina.

Let's comment now on our mobile operations in the region, starting with Brazil in slide number 22. The growth has continued to refocus its commercial strategy towards higher-value segment, in the context of a challenging competitive environment. The shift has born fruit, as the company gained 144,000 contract customers in the first quarter, ahead of post-payment for the whole of 2006.

Pricing plans introduced in the last quarters have promoted usage with the almost 13% annual increase in minutes of use, acting as a driver for the 2% growth in ARPU. From the financial standpoint, both the service revenues and OIBDA have visibly improved their performances. Underlying OIBDA margin widened by more than four percentage points annually, to reach 31.5%.

Moving now to the strong momentum of our Mexican operations in slide number 23, we can see that the first quarter growth additions grew by 57% year-on-year to reach almost 1.6 million, which is in line with our ambition to capture half a million clients per month. But more importantly, net additions have increased four-fold, pushed by the 30% reduction in monthly churn, which stood at 2.9% this last quarter. This strong commercial performance led to a customer growth of more than 40% annually, for both pre-paid and contract.

Turning to key financial metrics, service revenues went up 66% annually. Outgoing services revenues soared by 86%, as the two-times-higher minutes of use was reflected in a 26% overall usage. Income in service revenues grew at the 55% rate, positively impacted by national falling (inaudible). We are gradually achieving critical mass, as shown by the €22+ million up in the first quarter, which is the third positive quarter in a row.

With the next slide, we present the side of the remaining mobile operations. Taken as a whole, mobile performance has remained very healthy, combining a commercial momentum with revenue growth and margins. The majority of countries have achieved customer growth above the 30% threshold as presented in the first section of the table. The growth has been transferred to outgoing service revenues and OIBDA.

The company has launched a new set of refreshed tariffs to turn around its finances. TEF Colombia is gradually improving its performance as the company successfully (inaudible) commercial push and revenue expansion. We achieved around 10% growth in clients and revenues alike, and the proactive migration to GSM, strengthening our competitive position and that is being responsible for the top in OIBDA margin.

And finally Chile, the mature market where retention and efficiency are becoming the keys to our performance, posted high double digit growth in service revenues proven by higher ARPU. This margin improved by close to 4%.

Before turning to financial expenses and debt, please move to slide number 25 for an update on group synergies.

Synergies of more than €180 million have been generated in the first three months of the year. This figure is totally in line with the €1.25 billion that we have committed to generating in '07 as quarterly savings are correlated to CapEx spending and commercial campaigns.

Close to half of our 2007 target will come from conversions and integration, mainly of related technology, operations, and systems. The benefits of our enhanced scale, best practices, and management of resources will be responsible for 30% of synergies while regionalization will account for 23% of the expected economies.

Moving now to the cost of servicing our debts in slide 26, we show that our first quarter of '07 interest expense reached €750 million up 45% versus the first quarter of 2006. This increase has been driven by both higher average debt and higher cost per unit of debt. The effective cost of servicing our debt stood at just about 5.5% at the end of March, up from the 5.1% level posted in 2006, given the changes in debt composition and amount, foreign acquisitions, and divestitures executed in 2006.

Interest rate movements explain 16 basis points of actual costs, as higher interest rates in the Euro and the Sterling have been partially offset by lower interest rates in Latin America, especially in Brazil. At the end of the quarter 33% of our Euros were affected.

The higher weight of the more expensive Latin America debt accounted for 10 basis points of the increase in service costs. 14% of our net debt acquisition is denominated in Latin America currencies. Finally the current market to market results pushed the gap by a further 15 basis points.

Please turn now to the next slide, to slide number 27 to comment on our debt position. We have reduced our net financial debt by €261 million in the first quarter of the year. The full allocation of cash flows has been partially offset by both interest accrual, €348 million below payments, and by the selling depreciation which contributed to reduce the value of our foreign currency debt by €160 million.

Our leverage has been reduced once again, helped by OIBDA growth. Net financial debt reached 2.54 times OIBDA or 2.70 times when adding financial commitments.

And now I'll be saying that first our commercial momentum continues across and businesses with total group accesses increasing by more than 11% year-over-year. Second we are retaining benchmark organic growth from top to bottom, plus a 7.8% increase in sales, and a 22.5% rise in earnings per share. Third we benefit from zero reciprocation and we are successfully developing our distinctive growth levers, mainly mobile and broadband. And fourth we are keeping the focus and efficiency with OIBDA margins standing at 57%.

Thank you very much for your attention, and we are now ready to take your questions.

Question-and-Answer Session

Operator

Thank you. If you do have a question at this time, please press the number One on your telephone keypad. To cancel your question please press the Hash or Pound key. Once again, that's the number One to register a question, and it's the Hash or Pound key to cancel.

There will be a short silence while parties register for questions.

Our first question comes from the line of Luis Prota. Please ask question and present your company name.

Luis Prota - Morgan Stanley

Yes, hello, it's Luis Prota from Morgan Stanley in Madrid. I have two questions. The first one is on domestic broadband. I've seen that the share of net additions in the first quarter is 52% which is 10% each point below the levels of 2006, and so my request is that you would elaborate a bit on whether this is due to increased competition from cable, from modern DSL providers, or whether this has been affected by any seasonal pattern or low advertising on your side.

And the second question is on German mobile. Were you already expecting first quarter revenues to be that weak or did this came as a surprise due to tougher competition. And also what are the initiatives that you are planning to turn around the situation in future quarters? What can we expect here?

Ezequiel Nieto

Peter, you will take first question, Santiago the second question.

Santiago Fernandez Valbuena

Well of course, yes.

On German mobile, let me put the context of the market. I guess I could talk about the fact that there our revenues were hit by a termination rate cut that hit our revenue by 4%, so in other words we'd have flat year-over-year on that. Obviously I could also talk about the fact that Deutsch Telecom and Voda have declined by a lot more. I think it's important to see exactly what the plan is in Germany.

Due to (inaudible) launching about 45 MBMO (inaudible) prices have come down enormously for the whole market by about 20% in the last 12 months. What we did was that we took the sum to evaluate the situation and in the late autumn, the beginning of November we re-launched, which as you probably know is our home zone product, been very successful.

We simply fired it by having three major tariffs, small, medium, and large, and effectively each with a bundle, as you would expect for the small, medium, and large user. Now they've been very successful on the new business front and the last four months we've signed up over 0.75 million of these customers.

The exciting thing, and the big driver, is that also we found that those customers were giving us some two to three times more minutes of use, in other words starting to show some early signs of elasticity in the market. As a result of that success we are now from April pro actively migrating our existing base to those tariffs.

Yes they'll get a lot better value which will stop them eroding some of the lower price operators and also we do get something like 10% better ARPU. So that's sort of Activity One, and that means, I think, that we will start to see an improving position on revenue in the second, third, and fourth quarters. In answer to your question, was Q1 a surprise, I think we always knew that we would be there or thereabouts because rather than rush out their (inaudible) actions, we decided to get it right.

What we've also been doing in Germany, because it's a bit more than just a mobile plane now, we've been moving our German business to the full converged broadband and mobile business. We have managed to sign up the Italian internet companies which trade under the name Alister, it's the AOL base and the HunterNet base.

Point one, they've become broadband customers, which gives our already quite large broadband base, we've got something like 0.75 million broadband wholesale customers, but it gives us obviously an extra kick, a big opportunity, and we will also be launching in the middle of the year, selling our mobile offering to the Italian broadband base.

Now we ran a trial on this in December and it was very successful, many tens of thousands of customers in one month, and that will start in the July-August time frame. So there's quite a lot of activity going on in a considered way that says that point one, (inaudible) new tariff seem to work. They're getting elasticity in extra (inaudible). Two, we're now moving back into proactively migrating our base. And three, we will also be re-launching broadband to our mobile base in the summer. We ran a trial in the December time frame, there were teething problems…we called it a soft launch.

We're now ready from June, July, to start to rebuild that.

So we remain confident in a very tough market, where prices have come down significantly, we can turn the revenue in the upwards direction during the rest of the year.

What we remain very confident in, is our (inaudible) guidance for the market. Frankly, there is a number of cost savings that we've already started.

Last year we saved of the order of €40 million in programs. This year we can stick our way quite comfortably to high double digit millions of Euros, and next year low triple digit millions of Euros savings.

So the (inaudible) is quite confident in the guidance. Obviously, we'll learn more about the revenue growth during the rest of the year, as we can report how all of these planned actions start to kick in, in terms of actual revenues.

Antonio Viana

This is Antonio Viana, regarding domestic broadband.

Our share of net assets has been 56%, not 62%. And we feel quite comfortable with this level of share.

Let me just remind you that we have given the guidance for 2009 including a market share of 53% to 57%, so we feel quite comfortable on that.

Obviously, stimulating the market will also depends on the approval on regulatory sides of a couple of products that we have there and that are ready to launch. And we hope that we can stimulate the market further in the second half of the year.

Luis Prota - Morgan Stanley

OK, thank you.

Ezequiel Nieto

Thank you. Next question, please.

Operator

Our next question comes from the line of Jesus Romero. Please go ahead with your question, announcing your company name.

Jesus Romero - Merrill Lynch

Jesus Romero from Merrill Lynch in London.

I have a question on Spain. You had a very good quarter in the first few months of the year. If I look at the numbers you've reported from a revenue point of view, compared with your guidance for the full year in Spain.

I was wondering if Antonio, you could give us a bit more detail on what effects or potential negatives could take place in the next three quarters that might lower the gross rate to near one or whether there is room for potential adjustments, perhaps in the next quarter.

And then a question on Mexico. We've seen a big improvement in growth reduction in churn . I don't know if somebody could give us a bit more detail on what do you think the sustainable churn if what kind of market share numbers do you think you could achieve in two years, if you could keep with the formats of Q1?

Thank you.

Antonio Viana

This is Antonio Viana.

As a matter of fact, you stated that our performance in revenues has been quite good. We're very happy with the results.

I'd like to remind you that when we announced the guidance, there were three issues that we had to take into consideration.

The first one was the emergence of new competitors, and I have to say that for the time being they've had so significant impact on the market, but maybe it is too soon to come to a final conclusion, so we'll have to wait and see what will happen in the coming quarters.

But until now, new competitors have had very, very limited impact in the market.

The second one is, as you know, termination rates, where this year we will be facing two decrees in termination. The first one occurs now in April, -7.5% and the second one is due to occur in October.

So, obviously the coming quarters in that sense will suffer from that effect.

And the third one is the decrees in roaming Paris, that we have already incorporated in our forecast for the year, and obviously that will effect the second half of the year more and especially with the roaming traffic occurring more in the summer months, so that this obviously is going to impact more on that front.

Having said that, we feel comfortable and we are happy with the results that we have achieved in this quarter, and we will see, and probably the timing for re-discussing those issues will be after the second quarter.

For the time being, we feel comfortable where we are.

Santiago Fernandez Valbuena

And the revenue question about Mexico, first of all, let me tell you, that we feel confident that the current evolution is sustainable. The quality of (inaudible) has proven to be very good and therefore, we feel comfortable with the current levels of churn.

We even, in fact, have improved them in the future.

We need to make an additional effort on the prospect segment of time, and we will be focusing on that, and we have been very effective in managing the new distribution channels and the new products that we have been able to launch, especially the own product.

After (inaudible), we think that we should focus on keep going into the same direction of working well without running, and working on the quality of (inaudible).

We think that the target that we fix a little bit sooner. Last year was in the neighborhood of 20% market share in the next two years, and we feel comfortable that we will be able to achieve that.

Ezequiel Nieto

Thank you. Next question please.

Operator

Our next question comes from the line of David Wright. Please go ahead with your question, announcing your company name.

David Wright - JP Morgan

Hello, it's David Wright, from JP Morgan. I might ask a question a little more on the while on side, if that's OK.

I think when you gave full year guidance it was 9-12% and we worked out that the employed provisions in real estate, if you'd strip those, you were already at 9.2%. So it was kind of an implicit zero to three percent keep it dark guidance and you had just come in at 4.7%.

So again, on the while on side, it certainly looks like you're ruling well ahead, especially given the rental revenue increase were on all year, and you should also get a boost from the tariff increase that only came in, in March. That's question one.

And then just on Latin American mobile, Columbia went backwards fairly substantially. I'm just wondering whether we have a max kin scenario here, where you have perhaps outgrown yourself from we have two to three quarters to really clean the base.

And also on Argentina, I think that for the first time, your net additions have been taken over by TEO. I was wondering if you could just comment on why perhaps you have slowed down your share above that?

Thank you.

Antonio Viana

OK, this is Antonio again.

On the wire liner in Spain, I will restate what we have said also on the wireless side.

We are happy with the result. I think we are doing a great performance in commercial terms. You have to bear in mind that the head count production that we experienced during the first quarter, we had already taken it into account on the provision that we created in the first quarter of last year.

Right time, just to keep you posted on that, we are running something like 1,700 head count production for the time being, and the consequence of that, it is probable that you will see that the costs that we have announced in the results of the first quarter, the costs of around €620 million, the costs for adding to take place in the coming quarters, and that obviously is going to affect the overall result.

It is also true that there is some seasonality on this part of the business. So now probably the second quarter is a less strong quarter in terms of gross broadband from a (inaudible) perspective and that is obviously going to impact the growth that we will have.

Having said that, you have to notice, we are in a good commercial momentum. We are in a very strong momentum in Spain post-wireless and wireless.

I believe that the results of integrating the two biggest lines and managing them together has given a boost to the theme and that things are moving fast ahead, so probably at the time for re-discussing the issues on how we see year end will be closer to the end of the second quarter.

OK, taking your question on the Columbia and the mobile unit. First of all they are like three different effects that are occurring this first quarter.

First of all, we have basically cleaned the time base (inaudible) campaign customer position in the beginning of last year, and therefore we have been under client base in order (inaudible) to profitable client.

On top of that, we are finishing the deployment of the new GSM network, and that's also facilitating the migration of clients TDMA to GSM.

We have an aggressive year, intent on promoting this migration, in order to have a payback in within this year, this is a profitable action that is affecting OIBDA margins in this third part of the year, but we think this is the right thing to do in order to improve the situation sooner.

And finally, in times of the commercial distribution network, we are doing exactly the same process that we did in Mexico a year ago. We are improving the distribution network, and we are adding up new points, and at the same time closing up some orders, in order to have a much more, I would say, sound and recurring profitable distribution network.

So we think that those three effects should cover positive impact all along this year, and we will keep you posted on that evolution.

And if I understood correctly your second question, it was on the wide line in Argentina?

David Wright - JP Morgan

No, it's still on mobile. It just seems like your share is flipping a little.

Antonio Viana

Ah, no, according to the figures that we have in this first quarter of the year, the situation is more or less the same as it was at the end of last year. We are not facing any special situation in Argentina. But we will keep you posted on that.

David Wright - JP Morgan

I'll just chase quickly, then, on Colombia. Should we expect positive ambitions for the full year if this is a similar recovery to Mexico? Are we expecting back to positive territory in Q2 or should we should expect sort-of net zero for full year '07?

Antonio Viana

It's not the same. It will depend on several things, (inaudible) on Mothers' Day, the mothers campaign that we are trying out right now. So I rather prefer to wait for the second quarter to update you on Colombia.

OK, thanks.

Ezequiel Nieto

Thank you. Next question please.

Operator

Our next question comes from the line of Terence Sinclair. Please go ahead with your question, announcing your company name.

Terence Sinclair – Citigroup

Good afternoon, Teri Sinclair from Citigroup. A point that I missed at the beginning of this call, and I hope you haven't already covered this, but since we last spoke in public, you have obviously bought or announced acquisition of a stake in Olympia. And I wonder if you could say what options you believe that brings you in Brazil and other countries where you'll have to upsend your stuff from (inaudible) in the TI board. And secondly, what benefits you believe that brings you, beyond those of a financial investment?

Santiago Fernandez Valbuena

Yes, Teri, thanks for the question. This is Santiago. Let me answer briefly, saying that we have decided to take the opportunity presented to us for maybe two reasons. One is because this brings us closer to the action in Italy. As you know, we have decided to buy 42.5% of a company which is going to be invested both in Olympia and in some other telecom issues contributed by our partners. We are the only industrial, and we are the only non-Italian partner in this market. This gives us a complementary angle to those of our Italian partners. We think we can provide a lot to the table, in terms of helping shape and helping understand what is going on in our sector.

So far, so good, until the deal gets actually completed, which as you know, is pending some regulatory approvals yet. It will be too soon to say anything else. But for the time being, let me say that this gives us certainly the benefit of looking at the Italian situation and looking the international experience of Telecom Italia from a closer angle. You know that Telefonica will obtain (inaudible) at the Telecom Italia level, together with our partners in Italy, and that means that together we will help shape significantly the strategy at TI. So far, that's as far as we can say.

In terms of Brazil, which is one thing you mentioned, there we have no special angle at this point. We understand that both the team in Brazil and other operations at the TI level are absolutely independent of what we say or do, and we certainly intend to keep it that way.

Terence Sinclair – Citigroup

Thanks. Is there anything in the comments that Anatel made during the process of negotiations with Olympia that gives you any concern? I'm talking about regulatory separation, keeping assets listed. Lobo made a number of public comments. Do you have any reaction to those?

Santiago Fernandez Valbuena

No, we do not have any special reaction to that. It is too early a date in the regulatory approval phase, and we will certainly keep the market updated on the different reactions. But we do not expect any impossible-to-overcome constraint.

Terence Sinclair – Citigroup

Thank you very much, indeed.

Ezequiel Nieto

Thank you. Next question, please.

Operator

Our next question comes from the line of Christian Kern. Please go ahead with your question, announcing your company name.

Christian Kern – Lehman Brothers

Christian Kern, here, of Lehman Brothers. Santiago, can I just follow up Teri's question with regards to Brazil? Any comments on the ongoing negotiations? That's the first question. And the second one, I was interested in an update on your domestic competitive situation around mobile there. We've seen Eureka now in the market for a couple of months. We've seen Vodafone Spain doing rather aggressive there. Any update? That would be much appreciated.

And finally, on the strategy side, OTE, E-Plus, we've seen the German business weakening. Any thoughts on this? Thank you.

Santiago Fernandez Valbuena

Yeah, thanks, Chris. Let me answer the first question, and maybe a little bit of the strategy bit. Let me just reiterate what we have said a number of times. We would very much like to gain the access to 100%. We think we could manage that in a faster way than it is currently doable, but as our chairman has always remarked, it has to be at the right time, and certainly at the right price. There's no change in that, and if there is any change, of course, we will alert the markets about that.

And in terms of other interests, as we're of course always associated with interests of anything that moves, at this stage it is very uncertain for us, and what potential privatization or other state processes of (inaudible) might be like, and in any case, any position we might adopt would be within investment criteria that everybody now very well knows. The limits both, and cap on acquisitions, and certainly the rate limits that we have set for ourselves, and that are serving us very well.

Antonio Viana

On the domestic competition in wireless, there's not much to add, Christian. Honestly, it's not relevant, to put it mildly. And I think that Vodafone are still doing a very good performance. We'll have to see for their results, which I believe they will present on May 29, but they are still the strong competitor here. The results of Orange, you have already seen them, and would make no comments on them. So I think that, again, our challenge is more and more to retain our valued customers, to continue offering them better services, and that putting value on the network effect that we have due to the almost 22 million customers that we have.

Christian Kern – Lehman Brothers

Thank you very much.

Ezequiel Nieto

Thank you. Next question, please.

Operator

Our next question comes from the line of Robert Grindle. Please go ahead with your question, announcing your company name.

Robert Grindle - Dresdner Kleinwort

Yeah, hi there. It's Robert Grindle from Dresdner Kleinwort. I'm still struggling to reconcile your Spain mobile ARPUs on subscribers, with the strong acceleration of services revenue growth you've seen in Q1. Did you change anything on the promotional discounts during the quarter, or indeed on the last quarter, which helped the growth trend, which isn't seen in the ARPUs?

And separately, was the big working capital requirement in Q1 due to the half a billion extra that accrued in Q4, and is that all unwound now, at this stage in 2007? Thanks so much.

Santiago Fernandez Valbuena

Thanks, Robert. This is Santiago. Let me answer quickly the working capital. You're certainly very well oriented. The change in working capital recorded in Q1 has a lot to do with the spike in cap expenditure that was recorded in the last two quarters, especially the Q4 of '06. And will gradually be reversed and normalized, assuming or, of course, taking into account that this year we have many more in the family than we were in Q1, as O2 begins having a full impact, or a 12-month impact, on the full account. So you are very well oriented on that particular.

Antonio Viana

On the criteria for accounting promotional discounts or whatever, we've changed no criteria, whatsoever, in Spain. So the criteria are exactly the same. I think the figures speak for themselves in terms of the gross, in terms of ARPU that we can see on chart 13, that they have explained a good performance in terms of voice, and a great performance in terms of data. And also the fact that the migration from pre-paid to contract, (inaudible) chart 12 have been more densely spread than 90,000 on a contract, obviously that is what explains the growth in terms of revenues, nothing else. There is no change whatsoever in criteria.

Robert Grindle - Dresdner Kleinwort

That's great. Thanks so much.

Ezequiel Nieto

Thank you. Next question, please.

Operator

Our next question comes from the line of (inaudible). Please go ahead with your question, announcing your company name.

Unidentified Analyst

Hi good afternoon. I have a quick question on taxes. I wanted to ask if Q1 is a good reference for the cash tax payment we're going to see going forward into the next few quarters. And also if you could let us know how the airway divestment have performed in terms of taxes, whether you've been able to use your tax shield, how is your tax shield looking like after divestment?

Thank you.

Antonio Viana

Thanks for the question. On taxes, Q1 is going to be slightly abnormal in terms of the cash consumption of taxes as a consequence of two factors coming together. First the disbursement of corporate income taxes in many markets in Latin America, and a special VAT related effect that is a spill over from Q4 of last year.

So you should see the difference between accrued become more normal as the year progresses. And I will remind you, although this is highly volatile always, that Q1 is probably going to see the spike or the peak in the seasonality factor of 2007.

On the cash, the first airwave is completed and it is not taxed at the local level, so that's that. And (inaudible) has not been completed yet, it will be, I hope, completed in the next four to five weeks, as a small reminder regulatory approvals need happenings so the signing has been communicated on Monday, but the closing will likely not take place until I'm not sure, something late June or so. And by that time we will see what we can say.

What we have said is that we expect capital gains as a consequence of the purchase price or the selling price in our case being significantly higher, by €1.4 billion full value of the asset and that's a capital gain that will be recorded in all likelihood Q2 or if for whatever reason the regulatory approvals are drawn out, then it will be a Q3 event. But more likely than not, it will be this second quarter.

Unidentified Analyst

Thank you.

Ezequiel Nieto

Thank you Next question please.

Operator

Our next question comes from the line of Brian Rusling, please go ahead with your question, announcing your company name.

Brian Rusling – Cazenove

Yes, it's Brian Rusling from Cazenove. Just to finish off on cash flow, the cash interest payment in the first quarter implies about 7.5% rate of interest. Is there something abnormal there or some large bond coupons that get paid in the first quarter? And what's the expectation full year?

Second question is related to your guidance, and specifically the telephone occurred to group commentary, where you talk about not changing the guidance at the division level, and yet the results of O2 Germany, for example the Q1, suggest that the guidance you gave us on March 1 for Germany is not really going to be achieved. Peter, your commentary suggests you might be able to get OIBDA level. Can you just walk us through slide 40 from the March 1 presentation, what's changing to the O2 UK and O2 Germany guidance, what the flexibilities are with that?

Peter Erskine

Yes, certainly. I think the UK guidance hasn't changed at all. In fact the revenues in the first quarter in the UK are at the very top of end our guidance. And it's generally a quieter market in the UK that was six, nine months ago. That is because we've all started to launch 18 month contracts. In fact 70% of our UK business on post-pay is now 18 month contracts.

So our revenue looks good, our margin is slightly lower in the first quarter than it will be the rest of the year because we've spent lots of money quite deliberately on retention. So I think the UK guidance is very robust at this juncture which is effectively after you knock off the fact that we're doing 12 months compared to 11 last year, a UK of 69% revenue growth and AA margin that's a little off last year's, but certainly better than the 24% we got in first quarter.

In Germany, obviously with a minor streak dissent first quarter to deliver the 5-8% in the rest of the year is challenge. We have a number of initiatives out there and I can report a lot more usefully at the end of the second quarter, when those initiatives I ran through at the beginning, I knew (inaudible) in Paris which has started to buy, putting them into the base, launching DSL into our customer base in the summer, et cetera, has started to show what they can deliver.

What I am very confidence of is the OIBDA guidance in Germany. There's a number of cost saving programs which were planned. I mentioned earlier last year they saved about €40 million in cost savings. This year they have a number of programs that come in the high double digit millions of Euros savings, and next year low triple digit.

So we remain robust on our guidance but obviously we'll know more about the new German revenue in the summer when we report next time. But the OIBDA is solid and the UK numbers are totally solid after a check of course.

Santiago Fernandez Valbuena

(Inaudible) cash flow ability to interest expense question. The Q1 is somewhat of an abnormality as a consequence of annual coupons being paid in Q1. You may remember that last year we held a fair amount of bonds, €6 million worth of them, and their first coupon payment has become due in this first quarter.

So the strong increase in cash relative to accrued, which is not going to be repeated throughout the year, at least not to that extent. If anything, you should expect two things. One is the cash interest expense to become very much in line with the accrued interest expense, (inaudible) cash will be slightly lower as a concept of our small business approval loans accrued but not actually getting anything to pay.

And second you should expect our internet expense accrued to drift slightly or gently higher as a consequence of higher interest rates and a higher Latin American, and therefore more expensive debts in family of companies.

Ezequiel Nieto

Thank you. Next question please.

Operator

Our next question comes from the line of Javier Borrachero. Please go ahead with your question, announcing your company name.

Javier Borrachero – ING

Yes, good afternoon, Javier Borrachero from ING. I have two questions. One is on your very high OIBDA margin in Q1. Just wondering if this is a sustainable run rate or if there's anything extraordinary in Q1?

And another question. I saw in your press release that you mentioned some capital gains without disclosing the amount. I guess probably because the amount is negligible, but to have a clear assessment of the the situation maybe you can disclose these capital gains.

Thank you.

Jose Maria Alvarez-Pallete

Yes, Javier, thanks for your question, Jose Maria speaking. On Venezuela there is nothing extraordinary so I think that the OIBDA margin is nothing special that we can comment on apart from the normal running rate of operations and regarding Brazil, the capital gain is gain is due to the sale of (inaudible) and it's accounted below the line of our objective OIBDA and the amount is 134 million BRL and that's the only yearly capital gain that is counted, and again is below the line of adjusted OIBDA.

Javier Borrachero – ING

Thank you.

Ezequiel Nieto

Next question, please

Operator

Our next question comes from the line of (inaudible). Please go ahead with your question, announcing your company name.

Unidentified Analyst

That's very kind, thank you. It's (inaudible) Securities. I just wanted to ask a question about O2 UK if I may. In the statement you actually highlighted extra focus on retention during the quarter. And would it be possible to enlarge on the ways that the recently renewed contract with Carphone that will help you deliver the lower commercial cost that you're forecasting for the rest of the year.

I appreciate a lot of things are confidential, but maybe you could talk generally about the various way that you envisage that helping you.

Peter Erskine

Yes well we have spent a lot of retention. I mean first of all we focused our 18 month contracts because obviously the longer the customer stays, the less we have to pay at the end to upgrade them. And a number of other initiatives, predominantly around pricing, let's say now we've launched loyalty programs that include things like Fair Deal that make sure our existing customers get at least as good deals as the new customers.

However, talking specifically to distribution, your question about Carphone, we obviously felt that we led the way with the fact that we support the link and broke it up, which took us down to two independent retailers, and we are quite open that we've cut a deal with Carphone and perhaps reduced our clout with Phones2U and as you would expect in that situation where both were quite eager for the volume, we've got from Carphone deal which gives them a lot of income but for a lot greater volume. In other words, we're getting a lower cost per acquisition.

Now you made the point the car phone deal is more second half loaded, so we will get more of the financial benefits in the second half. As you imagine, these things take quite a while to, the agreements have to unwind on old deals and therefore we start the increasing share volume through the year.

Effectively, what you would expect, well, is to independent being squeezed increased, as operators led by ourselves take more and more of their business direct.

We've now got over 60% of our UK connections done by ourselves. We've gone volume, but in return lower costs per connection, and that's effectively what we've got with car phone.

Unidentified Analyst

May I ask, is there a sort of serious move away from upfront freeze, towards a share of ongoing revenue in the UK?

Peter Erskine

Well, there's no change there, in all honesty. We started all of 18 months to two years ago, doing exactly that with car phone. It works very well, you get a lower churn and we do the same with Phones4u.

So, a serious move in words would imply a change, no, but we find it a very useful way to do business, because rather than they just make their money upfront and then concern themselves, they get a piece of the ongoing revenue.

But it's not that significant anymore, because as I say, over 60% of our business is now funded by ourselves and that's now growing, with the success of our retail channel and their online channel.

Unidentified Analyst

Very fine, thank you Peter,

Ezequiel Nieto

Thank you. Next question please.

Operator

Our next question comes from the line of Jonathan. Please go ahead with your question, announcing your company name.

Unidentified Analyst

Two questions. The first one is, most of the good questions have been asked. Can you just kind of run us through why you are delaying broadband launch in UK. Does that imply anything about the sort of how clear it is your converged trust you in Britain?

And secondly, when you look at German mobile, do you, is some of the things that EPlus doing good. Do you think that you'll kind of try go down that sort of no handset cheaper tariff type of model, or we stick to the try trusted cheaper tools free handset?

Peter Erskine

Well to take both your questions bought down in the UK. I mean, I believe the truthful answer why we're taking our time to launch is we want to get it right.

We said when we bought the last autumn. At that stage it was only the 15% population coverage. We needed to roll out to more like 40% population coverage.

I think also, I'm on record on saying that although O2 price being required by telephone said it wanted to get into broadband. Thank heavens we didn't, on our own, because it is really complicated witness the frank reason without sounding smart, that several of our competitors in the UK have perhaps not done a brilliant job.

We were aiming originally for July launch, but working telephonically taught us a lot, but a lot about it, we're now focused on a September launch, because I really don't want to go out there and frankly put something into the marketplace that causes difficulties.

We are confident that we can get things right because we're learning from people who get it right in a number of countries i.e. in the rest of Telefonica

I think in German mobile, we already there do a number of sim only connections and one of the things of the Indian launch in November 1st, was that the small package was sim only, so we're already in that space.

I think we already have an MV&O with (inaudible) so in a way the MV&O strategy that Eplus has launched, you could argue that we were the first up there, because (inaudible) now has over 800,000 customers. But what we aren't following is the model where you go and get some 45 MV&O's. Because I think we do gain in year one without everybody out there selling new (inaudible) and of course that grows the revenues in the short term.

But already one thing, the vast majority of those aren't succeeding and therefore, listening to the (inaudible).

Having said that, what we are doing, is getting much more single minded in our offerings. Undoubtedly, the Genion launch November 1, had in mind the offerings from EPlus, but obviously also from our competition. And that's working so far really quite well.

And the idea of proactively migrating our base, rather than just sitting back has been sparred by the competitor said. We do have an out base as I know the competitors do.

Many customers who will have two sims, and my goal is obviously that they get back through the Genion tariff to just having one and that's ours.

So of course any competition, such as you, but no, we're certainly not going to poppy the strategy, because I think we're very confident finding our profit structure, adding more value to broadband plus mobile and putting the new been tariffs into the base.

We've got the same winning formula that O2 and (inaudible) had for the last four or five years.

Unidentified Analyst

Thanks.

Ezequiel Nieto

Thank you. Next question please.

Our next question comes from the line of James McKenzie. Please go ahead with your question, announcing your company name.

James McKenzie - Fidentiis

Hi, it's James McKenzie calling from Fidentiis.

One question on Spain. I wonder if in the first quarter you could give me the underlying revenue growth that would've occurred if you hadn't changed the accounting for telephone cards, either in absolute Euro terms or in a percentage term.

And then just (inaudible) on the UK, looking at the broadband launch in September. Is that going to be a broadband launch as we've seen in Germany, a very soft beginning, or should we expect a significant expenditure in the first quarter.

Antonio Viana

This is Antonio.

Gross revenues that we spent 3.6%, we now identify the fact that you mentioned on the wireless side, the underlying would have been 4%.

Peter Erskine

I think so far as the UK launch of broadband, it's going to be focused on the system customers, with control costs.

We don't see any big investment rather like our competitors have needed to do those who've gone a new business. So I think the existing base.

So then, to put that into context, we've got the biggest existing base. We've got 17.75 million of our own customers, without the one and a half in Tesco.

It'll be a powerful launch, but it's not going to be a big bang in terms of the big hole in the bottom line, if that's what's concerning you.

James McKenzie - Fidentiis

What do you, I mean about the quarterly performance, would it be right to expect that the second and third quarter margins would be considerably above what we've seen in the first quarter, but then the fourth quarter, we could see a decline again?

Peter Erskine

Well, we don't specifically go into quarters, but what I am confident in saying is that the first quarter margin in the UK was planned at the kind of level that it is, and that is below the guidance of the year, and obviously through the year we will get our margins back to what the sort of level that we guided the market, as we spend a little less on the tension etcetera.

But I don't see any big coals caused by broadband. Obviously though, the (inaudible) quarter is always highly competitive and therefore the margins can be under challenged.

But no, I see an even growth through the rest of the year.

James McKenzie - Fidentiis

Thank you.

Ezequiel Nieto

Thank you. Next question please.

Operator

Our next question comes from the line of Lawrence. Please go ahead with your question, announcing your company name.

Unidentified Analyst

Hi, Lawrence here from London. A couple of questions.

You said that you are re-iterating your licensing regarding O2. I believe we shouldn't expect any write off of the book value of O2.

And my second question was on Spain. Due to your above 50% market share in the fixed broadband, Could we expect new measures from the regulator going forward?

Thank you.

Antonio Viana

So let me answer first on the price (inaudible) that you ask about. We do not expect. We have not budgeted nor have we any reason to believe a write off of any, even a small part of our O2 investment is in danger.

If that were the case, we would of course have shared that with you. But that is not in our cards.

Peter Erskine

Regarding the broadband situation in Spain, I think that we already have a quite severe regulatory requirement, and as you know, in order for us to launch any product, the reguator, first of all has to approve it and has to be sure, has to be certified that that offer can be replicated by other operators through (inaudible).

So I think that the regulatory scenario in that sense is already tough enough.

Unidentified Analyst

Could you give us, if there is any of that take on video sales plans in Spain?

Peter Erskine

For the time being, what we are waiting for is a public consultation that the regulator wants to launch regarding the fiber networks. So we have to wait for that in order to understand how that will play in the market. We have announced in Valencia that we have for 06’-09’ that we have a Cap X of around 800 million EUR in fiber that we intend to do. The base and the amount on where we will increase that will depend on the regulatory scenario in the Spanish market related to fiber.

Operator

Our next question comes from the line of James Radster. Please go ahead.

James Radster – New Street Research

Yes, good afternoon. It’s James Radster calling from New Street Research. Two questions, the first one is regarding your debt structure. You’ve got roughly 14% of your debt denominated in Latin currency and you’re making about 36% of your profits in Latin America. Do you see that as sustainable in the long term, and if not what mechanism do you see yourself trying to put in place to address that balance?

The second question, I was wondering if I could explore the performance to less in Brazil in a little more detail. Firstly, just on a point of clarity, you mentioned that the real estate sales were below EBDA, but your wording on page 25 seems to suggest that they were included in EBDA. So I was wondering if you could just clarify that.

Secondly, your line loss into less seems to be accelerated to about minus 2.7% year on year in the first quarter, how do you see that developing going forward?

And the last question, you mentioned that you wanted a DTH license. I was wondering how you saw the roll out of DTH services affecting margins going forward?

Santiago Fernandez Valbuena

Let me answer the question on debt. First, we have said on a number of occasions, that we do not intend to catch the (inaudible) of net assets but rather the Euro value of future cash flows over the next two years.

This is where you may find an explanation for the apparent miss match between where we derive our income from and where we place our debt. Also in some markets in Latin America it is not feasible to get into debt in local currency and therefore we have to resort to a more widely marketed proxies like the US dollar.

If it was the US dollar to our exposure you will find the bigger number. Our US dollar exposure is now somewhere between 4-5%. So the answer is two fold, number one it is cash flow hedging that we do, not net assets. And cash flow is a lower number than the revenue assets for all guys. And second, you have to use the dollar sometimes for a proxy when the local currency is not feasible or not available.

Jose Maria Alvarez-Pallete

Taking your question on Brazil. Two things, first in terms of the Capital Gain, the 154 million BRZ is the gross sale price. The impact on the account, you have to deduct the 50 million BRZ of the gross value of the (inaudible) and that will give you the exact amount of the impact.

What I was trying to say before is that is of course included in the ADA. But in terms of calculating the real return margin you should subtract that in order to see what is the real ongoing margin that we are obtaining.

In terms of the recent evolution, there are like two different effects. From a revenue standpoint, the situation is improving in regards to the last from the previous quarter.

We are suffering less erosion in numbers and lines in the months of March and April. And the bungling strategy that we are pursuing is giving good results. Approximately 20% of the lines are already bundle lines, with one or two products, including the figures in terms of decline and structure.

It is true we are suffering with one thing we said which is the bad evolution, which is a result of last year process. Last year debt situation was (inaudible) in Brazil and as a result of that we lowered the (inaudible) of entry. We have re-concealed that strategy at the end of last year and that’s why during the first part of this year we will be suffering an increase in the bad debt accounts in this quarter and in the next one.

If you witnessed that effect and the fact that we have a negative pattern adjustment last year, you will see that year on year, revenue evolution and margin EDA in Brazil will have a positive turn.

James Radster – New Street Research

Will you comment on that DTA license impact as well please?

Jose Maria Alvarez-Pallete

There is still no impact on that because we have not launched our own DTA license. We have been working on that very recently. What we have been doing is bundling with other third parties and that has an impact?

James Radster – New Street Research

Do you have any Guidance on what impact that might have on the rest of the year as you launch your end services?

Jose Maria Alvarez-Pallete

Not yet, but we don’t think it’s going to be significant.

James Radster – New Street Research

Thanks.

Ezequiel Nieto

Thanks, please. We have time for the very last question.

Operator

The next question comes from the line of Luigi Minerva. Please go ahead with your question announcing your company name.

Luigi Minerva - HSBC

Yes, it’s Liugi Minerva from HSBC. I wanted to ask you if you assessing in Spain the opportunity of a next generation access program, especially the related opportunities or windfall from property disposals given that most local exchanges would become redundant if you were to upgrade the access network.

Antonio Viana

As I mentioned before, the sort of program could have that sort of affect that you’re mentioning could have that sort of effect, but before we engage in that type of program, we need to be clear what is the regulator environment surrounding that type of new network. So that is where we are discussing and waiting for the regulator to launch this public debate.

We have our own position, in terms of saying that in areas where there are competitive infrastructures and this should be left to commercial agreements between players. And in areas where there are no competitive infrastructures, we will accept a different sort of regulation.

We have stated that as a regulator, we have to wait and until then I think its’ premature to think about what kind of savings one can get or what kind of real estate one can get from that sort of operate.

Ezequiel Nieto

Ladies and Gentlemen with this we thank you for taking the time to share part of your evening with us and until the next call in Q2, we wish you all a successful couple of months.

Operator

Ladies and Gentlemen, thank you for your participation today. This concludes today conference. You may now disconnect your lines. Thank you.

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Source: Telefonica Q1 2007 Earnings Call Transcript
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