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Telefonos de Mexico, S.A.B. de C.V. (TMX)

Q2 2007 Earnings Call

July 20, 2007 10:00 pm ET

Executives

Rui Echavarra - IR Officer

Hector Slim - CEO

Adolfo Cerezo - CFO

Analysts

Andrew Campbell - Credit Suisse

Miguel Garcia - Deutsche Bank

Patrick Grenham - Citigroup

Henry Cobbe - Nevsky Capital

Martin Lara - Vector Casa de Bolsa SA

Marico Pereira - UBS

Ingrid Castillo - GBM Securities

Presentation

Operator

Good day ladies and gentleman and welcome to the second quarter 2007 Telefonos de Mexico Earnings Call. My name is Alicia and I'll be your operator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions). As a remainder this conference is being recorded for replay purposes. I would now like to introduce your host for today's call, Mr. Hector Slim, Chief Executive Officer; Mr. Adolfo Cerezo, Chief Financial Officer; and Mr. Rui Echavarra, Investor Relations Officer. Mr. Echavarra, you may begin.

Rui Echavarra

Thanks Alicia. Good morning everyone and thank for joining us on this conference call to discuss our second quarter results. As is our practice, our prepared remarks are supported by slides on our website. If you have not logged in, please click on www.telemex.com/investors.

We will begin with our forward-looking statements. During the course of this conference call and its question-and-answer session, we may make statements that constitute projections, expectations, beliefs and similar forward-looking statements. TELMEX's actual results could differ materially from results anticipated or projected in any such forward-looking statements.

Additional detailed information concerning important factors that could affect the Company's performance is readily available in TELMEX's Form 20-F and other filings with the Securities and Exchange Commission. These documents are available on both the SEC's and TELMEX's website.

Now, I will turn the call over to our CEO, Hector Slim.

Hector Slim

Thank you, Rui. Good morning everyone. As you are well aware that TELMEX is a combination of market knowledge and technology leadership that we mix and match to deliver the best possible services at competitive prices for customers where and when they need it.

For example our current rate for the one mega broadband service is MXN260 pesos plus taxes equivalent to 26 pesos per 100 kilobytes per unit. Of the members of the OECD, Mexico is among those with the higher growth rates for broadband services.

Today our income from service has expanded at an annual rate of 73% and now serves 2.4 million users. That represents approximately 60% of the market, excluding broadband services offered by cellular companies. In Mexico penetration for broadband service has risen to approximately 15% of homes compared with 9% a year ago.

In our country just around 20% of households have computers or internet access. Increasing internet service penetration is a priority for TELMEX. Therefore customers lack access to equipment that becomes a bottle neck limiting our progress. Our solution is to make it easy for customer to buy computers on an installment plan. We recently launched programs with monthly payments starting at MXN173 pesos plus taxes for PCs.

The OECD communications outlook 2007 ranked Mexico's residential rates worlds lowest among all the OECD countries, when rates are relative on a comparable dollar basis. Our reliance in the service at the end of the second quarter totaled 18.2 million nationwide that represents 23% of the 80 million fixed and mobile telephone services in Mexico. Out of our lines approximately 8.3 million are in competitive market segments. Those segments are becoming even more competitive now that cable companies are starting global telecommunications services.

The remaining 9.9 million payments lines are in segments without competition and rural communities. In the second quarter, these customers generated revenues of approximately 7 billion pesos, and operating loss of more than 100 million pesos, and EBITDA of 1.7 billion pesos.

We have a long-standing commitment to economic development in Mexico, as you know in many countries convergence is becoming a major contributor to rural developed. In more than 40 countries, signal providers are already operating voice, video and data services. Many of them have been in the market for more than four years. Convergence provides benefits across economic sectors as it multiplies growth of new possibilities and, of course, raises the level of competition.

The new era is just starting in Mexico. TELMEX is ready for it, because we recognize how important convergence is for the development of the nation’s digital culture. Therefore, we favor a competitive environment with the objective of maximizing benefits for our Mexican users. Clearly, TELMEX has the technology to participate in the leading edge developments and our [pursuit]. We also have the recipe to fit them into our customer care approach, high quality products and services and competitive prices in Mexico and Latin America. At the same time Triple-pay already is contributing to our growth in Latin America, as we will see when we discuss results of our operation there.

Now, I will turn the call over to our CFO, Adolfo Cerezo Perez.

Adolfo Cerezo

Thank you, Hector, and good morning everyone. The news release that we distributed yesterday afternoon to provide details of TELMEX’s performance in the second quarter. We will spend most of our time this morning on discussing services and strategies that are driving those resources. Then we will take your questions.

Our growth and market penetration reflects our broad range of services and the dependability of our network and our success in putting services together in packages that appeal the customers.

Our main broadband Infinitum which continue to produce strong growth, in the second quarter we added 253,000 internet access accounts. That growth brought the total to almost $2.4 million at mid year, 73% ahead of our year ago. For the benefit of Mexican residential users we will continue launching new packages that combine voice and data services to increase its market proposition to our customers, add that into packages to the different consumption provide because broadband drives our business.

Let’s take a closer look of how we are marketing silicon to commercial customers. For small and medium sized businesses, we package a variety of value added services with a higher speed connection. TELMEX’s outstanding network makes it possible for operators of small and medium sized business to access capabilities that used to available only for large corporate accounts. For example, we make it possible for the SME segment to take advantage of virtual private networks, high capacity email platforms and online backup.

These services are an example of how TELMEX grows on our technology and on market knowledge to take those services to particular market segment. The result is state-of-the-art capability for customers for less cost, than if they assemble these business tools on their own. At the same time we benefit from increased use of our network and connectivity. In the corporate market, billed line equivalents increased 16% to 2.5 million. We continue to face strong competition in these market segments in spite of the customer growth, revenues decline 4% from or the last year's level.

Another effect of broadband growths, not so surprisingly is its impact on the number of lines and service. During the second quarter, we deactivated 14,000 trunks that supported dial-up internet. We continue to evaluate line use so that our resources are aligned with market with the highest growth potential. Demand for that service is declining as we expected, because we are encouraging customers to take advantage of broadband services. At June 13 we had 18.2 million lines in service.

There is no doubt about the important role that data business plays in TELMEX performance, especially in Mexico this business represent 16% of our revenues.

In the second quarter we also benefited from growth in Intercollection, Telmexico and Yellow Pages. The adoption of the Mexican international calling party pays in Mexico has generated both higher revenues and extensive footprint. In the second quarter calling party pays expenses along with cost for handsets and other equipment for customers, raised the expenses 2% above last year's second quarter. Without the cost from domestic and international calling party pays cost, then expenses would have decreased 5%.

Operating income in Mexico increased 2% over last years second quarter, the operating margin was 34%. EBITDA decreased 2% with a margin of 48%.

Now lets turn our attention to our business in Latin America, we will start with Brazil. In Brazil was released from the New York stock exchange in April and terminated each reporting obligations in the U.S. in June. When our tender offer for Embratel shares ended June 27, we owned approximately 98% of the company. One of our goals for Embratel is to increase local service by leveraging net infrastructure through build ups. Each network is more than 62% bi-directional, which has width capacity to handle many more subscribers, both networks together, cover 10 states in the country.

Brazil offers tremendous potential for triple play growth, especially in customer segments that are part a large middle market. As an example approximately 11% of Brazilian households have cable TV at present. That level lacks behind cable penetration in other Latin American Countries.

Net services network covers 8.9 million households. It has 2.3 million cable TV users, just only half of them also have broadband access and only 15% have subscribed triple play. As you can see, we have to room to grow in Brazil, which is a big market with outstanding potential.

By integrating our operations there, we have put ourselves in a better position to deliver growth.Net Fone triple play service, which is available through Net Services had 354,000 customers at June 30.

A small but important piece of Embratel's offering as an integrated telecommunications provider is its fixed line business. [Libia] formally best for local service, increased it's customers base to more then 950,000 customers, an increase of 19% compared with last year's second quarter. Revenue from our operations in Brazil increased 3% to $1 billion in the second quarter compared with a year ago. A major contributor was a 35% increase in local services. Domestic long distance revenues fell 5% year-over-year.

Cost and expenses totaled $955 million, an increase of 1% due to the expansion of our call centers to improve the local business. Operating income $196 million with a margin of 18%, EBITDA totaled $280 million producing a margin of 26%.

In Columbia, our data business is focusing on the corporate segment and small and medium sized businesses. These efforts generated a 72% increase in line equivalent compared with last years second quarter. The data business is only one of our priorities in Columbia.

We also are busy integrating the operations of recently acquired cable TV company and investing in networks improvements. We expect to complete the integration stage by the end of this year. Our investment in the network is aimed and expanding it as well as increasing it by durational capacity, so that we can offer more double play and triple play services.

At present only about 30% of households served are by directional. Currently our operations in Columbia reached more than 2 million households. The potential for growth is excellent. As a matter of fact, in the second quarter revenues from the operations in Columbia totaled $61 million. The substantial growth reflects not only the acquired cable TV companies, but also our improved ability to serve major corporate customers by integrating our operations. The relating integration and marketing costs are having a near term impact on total costs and expenses. In the second quarter they climbed to $53 million.

Operating income was $8 million with a margin of 12.6%. EBITDA totaled $18 million, generating a margin of 30%. In Argentina, our efforts focus on leveraging there the WiMax platform in 26 cities that account for more than 65% of the country’s economy. Our PreWiMax in Argentina is based on the 3.3 gigahertz frequency. Our current peso growth in this country is multi-service packages that include voice and broadband internet access. Our operations in Argentina increased to second quarter revenues, 8% to $30 million.

Operating income was positive, and EBITDA reached $6 million producing a margin of 19%. In Chile, we have our WiMax platform that is based on the 3.5 gigahertz frequency. The platform in Chile, reaches 20 cities. We are adding customers for multi-service packages at the rate of more than a 100 per day, which accounts for a total of more than 5000 customers.

Second quarter revenues increased 1%, to say, $3 million. Local service revenue turned in a 52% gain. EBITDA totaled $4 million, producing a margin of 12%.

Peru is another market in which we have acquired Cable TV capabilities where we pass 262,000 households in Lima and [Callao] which represents 47% of the country’s GDP. During their next month, we look on making the network only by the (inaudible) that will result in opportunity for growth in both the double-play and triple-play markets.

Revenues from operations in Peru increased 17% to almost $20 million in the second quarter. The major contributors were data revenues, up 30% and local consumption up 9% from a year ago. EBITDA totaled almost $4 million producing a margin of 19%.

On a consolidated base, TELMEX’s second quarter revenues increased 2% to 46 billion pesos. Our data business continues to be a key contributor to revenue growth with internet access revenues up 12% from the same period last year.

Other significant contributors were interconnection, mainly comprising of domestic and international long distance calling party pays which grew 31% and TELMEX Stores and Yellow Pages, which are part of our other income line. They produced a 53% increase in revenues year-over-year, which we have seen in recent quarters, that option of calling party pays has to revenue, but also has an impact on cost. Total cost increased 1.5% for the quarter, pretty much in line because of calling party pays, but also reflecting cost associated with integrating the newly acquired cable TV companies and now Latin American operations.

Operating income increased 3% with a marking of 28%. EBITDA decreased 1.7%. Net income reached more than 8 billion peso, 18% more than in the second quarter of '06.

I would like to end my remarks this morning by emphasizing that TELMEX business continues to reflect strength and is robust. Several years ago we recognized that data would become our number one growth driver. Now we worked our network and service packages accordingly without losing sight of our role as the [all-intended] communications company in Mexico that provide services nationwide to all customer segments. That commitment to customer’s, means that we continue to recognize that they want to access to voice services along with the Internet. Although we are not likely to experience a meaningful resumption in line growth, voice services continue to be a key component of our service offering.

We also know that the industry continues to evolve and the next stage is convergence. Also a single provider like TELMEX is now positioned to offer voice, data and video as a triple play. It was only a few years ago that customers had to rely on three single plays to get all these services. These inter stage comes with intensive competition as has previous stages. We’re used to that. We hold our own in the market, but we are also will carryout our market strategy in the proven TELMEX way of matching resources to market conditions.

We will continue adding value for our shareholders, through managing our resources well. We are a company that focuses on customers and that drives our investment decisions. Latin Americas is a market where we can leverage our service experience, to take advantage of opportunities that each of these countries offer us.

And last but not least, we have a long-term vision, which means that we do not exploit the company, but focus on growth, by increasing the profit, because we have confidence in the future of our company. We appreciate your interest. And now we would turn the call over to your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Andrew Campbell with Credit Suisse. Please proceed, Sir

Andrew Campbell - Credit Suisse

Hi, good morning, I was wondering if you could bring us up to date on, where the company stands in terms of complying with the requirements for the convergence agreement, I'm referring to base [scrip] portability and the Interconnection requirements and when you'll think you'll be fully compliant with that and there is a related question. When do you expect to be launching video services?

Adolfo Cerezo

Okay. Andy. Let's say that in a nutshell, we are ready. So as you know in Mexico, in our case we have to comply with three present conditions, Interconnection, who is a telecommunication provider. That has already happened in the case of each cable providers. So we've already signed eight Interconnection contracts, interoperability were of the market a [Participate] network, which has a technical issue on each sort.

Number portability, the regulator has released the technical specifications for portability, and we are waiting for the business rules that define the administration process. This resolution will be finally [test] of the process on how every player will recover the investment. So you probably remembered, we say invested more than $60 million of portability that's I see it. In TELMEX, we are ready to provide triple play services through the state of the art networking that we have.

Andrew Campbell - Credit Suisse

Okay, and well do you have an estimate approximately of when you think these issues on portability will be resolved. I mean do you work with an assumption in terms of what month it will be or what quarter it will be going forward?

Adolfo Cerezo

Based on the rates that realtors have announced, that will that will take us to the end of this year or probably early next year, in first quarter next year.

Andrew Campbell - Credit Suisse

Okay. Thanks Adolfo.

Adolfo Cerezo

You’re welcome Andy.

Operator

The next question comes from the line of Miguel Garcia with Deutsche Bank. Please proceed.

Miguel Garcia - Deutsche Bank

Yeah. The first question is regarding your lines in service. They decreased about 1% from in the last 12 months. Do you think this trend is going to continue or you expect or you see any opportunity to grow lines in service going forward? And the other question is regarding (inaudible) indication that you could determine that TELMEX is a dominant operator and I wanted to know what could be the legal sources of the (inaudible) in case TELMEX decided to contest that decision?

Adolfo Cerezo

Okay Miguel. As we announced probably a year ago, we continue our (exciting) in growth with profitability and we sustain our commitment for the development of telecommunications in every market, in every market segment where we are. So in the mean time, I mean what we have seen is that for example, we have to deactivate some trunks that we had for support in dial-up users. Thus we probably know we are migrating these dial-up users to the broadband services kind of different. Shortly, I mean we had these 40,000 lines out of service that we had to cancel. I should expect to see may be something between 25,000-20,000 additional trunk and lines to be deactivated in next quarter, because this migration continues and we're promoting that.

On the other, it doesn't mean that we have decided to stop growing on lines. It only means that we have decided to focus on growth with profitability. We are taking advantage of the technological platform that TELMEX currently has and we can provide services without accelerating growth. It's only to be very rational on CapEx and to take advantage of the opportunities that we are seeing in the near future.

Regarding the (inaudible) point I think it's important and that because we just decided to point out that first; what is the current size of the Mexican telecom market? Its 80 million lines, fixed or wireless market, as we speak. We have 23% of that market, but more important, probably you remember that we’ve announced that while we were commenting four quarter resource in this most important segment, I mean, the high income residential, the A and B.

TELMEX has 49% in the A segment and 72% in the B segment. That is, of course, 66% participation in both segments and that were not only the cable operators, but our competitors. They are focused only on those segments. So, of course, if something happens that TELMEX has a lot of lines and our presence is a nation wide presence, and we are the only telecom provider in other market segments, that reason is very simple. That’s not a profitable segment, no one but TELMEX wants to be there. We are committed, I mean, we have said that several times, we continue assessing our commitment for providing telecom services in Mexico. And we hope that all these issues will be taken in account when, and therefore it is decided to analyze to issue some regulations from TELMEX.

I cannot say anything now, how to react. It will depend on the new regulations that get ready to start expecting to launch.

Miguel Garcia - Deutsche Bank

Okay. Regarding future line growth, the plan is to use mostly fixed wireless technologies, PreWiMax and WiMax to continue growing as profitably as you said?

Adolfo Cerezo

In Mexico not necessarily, I mean we can -- the ability to use some PreWiMax until fixed in Mexico, but no, we would continue using our fixed line platform taking advantage of all these lines that are available.

Miguel Garcia - Deutsche Bank

Okay. Thank you.

Adolfo Cerezo

Thanks.

Operator

The next question comes from the line of Patrick Grenham with Citigroup. Please proceed.

Patrick Grenham - Citigroup

Hi. Good morning. Just two questions, first one on demand. It looks as if -- if I look at just your gross connections that the rate of disconnections has dropped quite a bit over the last 12 months or so. Is that a reflection of demand generally, or is that because you are being much more careful about the credit of the lines that you are putting on.

And the rate of disconnections seems to be about the same rate which is so, looks as if there might be some clean up in the base going on, but it really seems to that you are starting right down on the rate of growth, and how do you see that going forward into 2008?

The second question is, a lot of you prepared comments today and then on the Press Release, really it seems to be a political data and political statements. Could you come through what is the political environment you are in, and what’s changing, and why do you -- why are you so worried about the politics?

Adolfo Cerezo

Okay, Patrick. Let's start with the first one, rate of growth for newer lines. Yes. It has declined income compared with the past quarters, but basically I think that’s because we have decided to be focused on profitability and in fact that was a condition. But that’s the only reason, because we were seeing this decline in our rate. And disconnection mean taking into account of re-connectivity, I mean new TELMEX connectivity's by disconnection because they might raise our end abusers.

But also, and there is another important point. As long as we are promoting the broadband services, as long as our customers can take advantage of all the features in that the Infinicum service provides, basically there is no need for a second line in some cases. So, we have some deactivation that in some way, they are a consequence of our market in networks. That’s a fact. We recognized that, we have decided that the growth driver in the years ahead would be broadband services. So we should expect to see growth in fixed lines. Yes, I think so, but in the low single digits.

Patrick Grenham - Citigroup

Okay.

Adolfo Cerezo

Now on the other question. No, it's not a political approach. I mean, it's not my job. My job is, it has a financial bias. I will not share it. So, the only point is that, we want to be very clear the fact that defines how the Mexican market is. And the fact that defines how the TELMEX presence is in different market segments.

And instead of participating in long-based discussion, we provide facts. It's a fact for example that if we want to evolve the Digital Culture in Mexico, we have to support computers growth. That’s a fact, and that's because for example we've decided to sell computers and in this case without asking the people to take the Infinicum service and that’s important because, probably you have read it, in Mexico there is a lack of computers, only one in five households, they have computers.

So we’ve really want to take this country into the digital culture. We promote that. It’s a fact. We've recognized that. And once they have the computer, of course I mean, that opens the door for triple play. I mean, I've been emphasizing that throughout my speech. We want to go to triple play each year. If you go first through double play, and to solve that you have to solve the computer issue.

Patrick Grenham - Citigroup

Right. What proposals are out there to change your strength in the market? Are there other government proposals to change the markets structure?

Adolfo Cerezo

No not at this point, I don't know anything about it.

Patrick Grenham - Citigroup

Are you worried what that could be?

Adolfo Cerezo

No, I don’t think so. Finally, I think all of us, I mean authorities and players all of us we have a common goal in mind and the goal is how to accelerate development in our country that's one thing that we have in common and what I am foreseeing is some ideas, some directions that will take all us into the same goal.

Patrick Grenham - Citigroup

All right. Okay, thank you

Adolfo Cerezo

You’re welcome, Patrick.

Operator

The next question comes from the line of Henry Cobbe with Nevsky. Please proceed.

Henry Cobbe - Nevsky Capital

Hi, thanks for the call. Perhaps, could you just give us an update on the CapEx budget for this year and next year and by region and also just comment on the ongoing growth in CPP volumes and what expectations you have for growth rates there?

Adolfo Cerezo

Okay, Henry, on the CapEx issue. We continue keeping the same figure that we announced since the beginning for the whole region its $2.2 billion, and in the case of Mexico, Mexico we'll take $1.1 billion. Mostly of this investment goes for modernizing and expanding the telecom plant, when I am saying expansion that means expansion to support the new services that we are planning to offer double play, triple play services.

And for the rent of the regions in Brazil takes the most. Basically is $700 million that’s what Brazil takes and the balance goes for the rest of the countries. In '08, I would say advice to take the same fees. We'll continue investing something on the break down will be similar. Brazil needs to call it a second satellite in’08. I mean, I’m not for seeing capital in Brazil declining before '08.

Growth on CPP, CPP we have been growing at on pace between above 6%-9% this quarter against, previous quarter. So my advice is think about the single digit area, in the middle, its something which is doable, thinking about 5% or 6% on the rate on the relative period. That’s something that you should see. Next year, my advice is to think in the low single digit period ’08 around 3%-4% that's consumer driven, it's hard to estimate how ’08 will perform on CPP this time.

Henry Cobbe - Nevsky Capital

Yes and but just looking at the actual volumes, I mean in the last three quarters the CPP volumes have increased by about 200 million minutes per quarter, and what has always been, just to extrapolate, if you look through that quarterly progression through 2008, that would imply something more like a 20% to 25% growth rate over ’07. So, low single digit seems quite conservative or is there a seasonality or my understanding of the mobile customer base gets bigger and bigger, and calls to mobiles get cheaper there the reason is well justified that people are scared to make calls to mobile?

Adolfo Cerezo

It’s a good point Henry. Let’s say first that there is no solid statistical experience to support any forecast on how this product will perform in the year ahead. I think we have launched it in November. This theory says that elasticity should be there; we have seen it, I think some, I mean, growing at a pace between 5% on a quarterly base, that’s a huge rate of growth for the whole year. But again, I mean, the idea is that these calls are calls that because, they were generated because calling point base are clear. I know that what goes on marginal calls, how sustainable this rate of growth is for the year ahead, I don’t know, that’s because I am suggesting to think about and going down in terms of the rate of growth.

Henry Cobbe - Nevsky Capital

Okay. And last question, just on the share buyback policy, previously you've returned more than 100% of free cash flow through a combination of dividends and buybacks, and looking at the buyback pattern for the first half of this year, the buy rates are going to drop from about 7 million shares a day to 1 million shares a day. And is there -- what's on the -- thinking that apart from some of the price have fallen (inaudible) more expensive, and is that also initiated with the possibility that the Regulator becomes more aggressive on either market dominance or more likely on interconnection rates, and the company is keen to retain more free cash flow for overseas acquisition, which is your Regulatory risk.

Adolfo Cerezo

Currently we are buying shares on a base of 1 million -- does that in a 50,000 per day, I mean, TELMEX’s shares, and not TELMEX ADRs. We have seen a decline in appraisal. Last year it was between 6 and some days it peaked, it averaged to 7 million shares per day. And this is a combination in which we are taking into account the cash dividend loss, the share buyback, and then what’s on the other side. On the other side of the balance is those investment alternatives that we are finalizing, as we speak.

There are some alternatives that would be because, they are into [buy bond], we still have not made a decision and then I cannot comment, but if you can imagine that, as long as we have another quarter alternatives, so with capital resources, and we will designate these resources to them. But when you see our own resources it’s a good alternative.

So finally, what we have in mind is to deliver value to our shareholders, and we are convinced that we deliver value from one side through the cash dividend and the share buyback, but on the other side adding more value through new additions on expanding our network. So it's a combination of all of it.

Henry Cobbe - Nevsky Capital

I understand, but in the absence of any further acquisitions this year. Hypothetically would you still be committed to returning a 100% free cash flow to shareholders, one way or the other given your gearing is about one-time effected EBITDA?

Adolfo Cerezo

No, it's quite to twice of that equation, say in years. No, I mean but I continue as TELMEX is a long-term company, so we don’t react on a quarterly basis. So we prefer to have a long-term view on. So it will depend upon our performance not for the past quarter but our performance for the past couple of years. And our view for the next two or three years based on that we could change our current position or we will make a different decision, but don’t expect to see TELMEX reacting on a quarterly basis.

Henry Cobbe - Nevsky Capital

I understand. Thank you very much.

Adolfo Cerezo

You're welcome Henry.

Operator

The next question comes from the line of Martin Lara with Vector. Please proceed.

Martin Lara - Vector Casa de Bolsa SA

Hi, Adolfo. Good morning, I have two questions, the first one is, what's the EBITDA margin we should expect going forward both on the consolidated basis on the TELMEX Mexico and the other question through regarding your investments in Portugal Telecom. Do you still hold it?

Adolfo Cerezo

Okay, Martin. EBITDA margin, it's had an impact in this quarter because the calling party pays business is a business in which, yes of course, we have profits but the margin is lower than the current margin that TELMEX has. So as long as we have these revenues take a more important role in our revenue that is affecting our margin. That's for Mexico.

On a consolidated basis we are in the process of integrating the cable companies. This cable companies at this stage, that means that probably, we don’t have there size of users needed to create enough margins to generate that profitable business for us. But that’s the stage which we currently are, which means we know that at this point we have to grow the market on using revenues coming from the cable companies, but the margins coming from the cable business won't be as good as the margin for the telecom business. That will happen these year or next year with the good return probably at the end of next year. And on the side of Portugal Telecom, yes the Portugal Telecom shows we have basically most of them. Our current position has declined in comparison with last year not substantially. There is not a substantial change in this case.

Martin Lara - Vector Casa de Bolsa SA

And what percentage of Portugal Telecom do you have?

Adolfo Cerezo

It's less than 1.5% of the company and totally 1.3% of the company not more than that.

Martin Lara - Vector Casa de Bolsa SA

Okay, thank you very much.

Adolfo Cerezo

You’re welcome, Martin

Operator

(Operator Instructions). The next question comes from the line of [Marico Pereira] with UBS. Please proceed.

Marico Pereira - UBS

Hi, good morning. Question that I have on the buyback [Joe], specifically on the buyback not on the cash returns as a whole. Are you decreasing the buybacks because of the restrictions that you have in the byelaws of the company? And could you explain what type of restrictions you have there in the buybacks, how many shares that you can buyback? Thank you.

Adolfo Cerezo

Yes, in the TELMEX byelaws, it's specified that the common shares, that those are the double AA and A+ shares they cannot be more than 51% of the total capital. So in other words that was implied that the A shares, they cannot be less than 49% of the current capital. But at this stage A shares represent 56.7% of the equity, the TELMEX equity. So that gives us enough room to continue buying shares back. Then, there is a no problem. There is no restriction for buying shares back. And once exit the point we'll have to decide if it is justified to amend the TELMEX minors, but at this point, I repeat, there is no problem, there is no restriction ensures your 56.7% of the company and that translates into plenty of room for continuing buying shares back.

Marico Pereira - UBS

Okay. And just to be sure at this pace that you've been this last quarter, let’s say, where more or less, you think, you would have to just stock buy-back because of these restrictions by 2009, 2008, just to have an idea?

Adolfo Cerezo

At the current place, it would take us the end of '09 or probably in 2010 -- at the current place.

Marico Pereira - UBS

Okay. Thank you.

Adolfo Cerezo

You are welcome. Operator, I think we have time for one final question we can take it or not.

Operator

Okay, that final question is coming from the line of Ingrid Castillo with GBM Securities. Please proceed.

Ingrid Castillo - GBM Securities

I was wondering if you could give us some inside in --

Operator

Ingrid your line is very bad, is it possible, are you using a headset or a handset?

Ingrid Castillo - GBM Securities

Handset.

Operator

Because the line is very-- it's not clear at all.

Ingrid Castillo - GBM Securities

Okay, I'll call later.

Adolfo Cerezo

Okay. Is there another question.

Operator

No additional questions at this time.

Adolfo Cerezo

Great, okay, so let me take the opportunity just to say thank you very much to everyone. It was a pleasure to share this moment with all of you. Thank you.

Operator

Ladies and gentlemen, thank you for joining today’s conference. This concludes the presentation and you may now disconnect. Good day.

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Source: Telefonos Q2 2007 Earnings Call Transcript
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