Telefónica Earns 3,593 Million Euros Through June, Leaving It on Track to Meet All Its 2008 Targets

The healthy results for the first half of the year underscore the company’s favourable business growth and reflect its strong leadership, the importance of the diversification and integration of its operations, and its proven ability to execute the strategy it has laid out

Stripping out the impact of capital gains, net profit rose 29% year-on-year and EPS by 32.1% to 0.767 euros. The company has allocated 2,993 million euros to shareholder remuneration.
Results for the first half of 2008 were in line with the growth targets for both the Group as a whole and for the different geographic areas (Spain, rest of Europe, and Latin America), leaving it on track to meet the financial targets announced for 2008.
Telefónica (NYSE:TEF) (LSE:TDE) posted strong growth in accesses across all of its business lines and regions and the total now exceeds 245 million (+15.2%). The Company ended June with 47 million accesses in Spain and 148 million in Latin America, while its customer base in Europe stood at 43 million.
Organic growth in revenue remained at a healthy 6.7%, thanks to the value contributed by the Company’s geographic and business diversification. Regionally, operations in Latin America showed strong momentum, with a 12.2% increase, while in Spain and Europe the operator continued to set itself apart, with 2.1% and 6.2% growth, respectively.
Organic growth in OIBDA and operating income (OI) accelerated sharply in the first half of the year, to 12% and 24%, respectively.
Figures highlighted Telefónica’s strong financial position, with the Company reducing debt by 1,311 million euros since December and leaving a net financial debt plus commitments/OIBDA ratio of 2.2x, in line with the Company’s goals.
Cash generation also gathered pace, with operating cash flow (OIBDA-CapEx) rising by 13.1% to 7,673 million euros.
Year-on-year variations are skewed by the extraordinary income obtained in 2007 from divestments, the impact of exchange rates and changes to the consolidation scope. If the effects of these variations are taken into account, revenue grew 1.2%, OIBDA fell 1.3%; operating income advanced 0.7% and net profit dropped 6.2%.

Telefónica’s results for the first half of the year show high growth rates, extending the positive performance seen since early this year. Once again in the second quarter, results benefited from the Group’s high geographical diversification and diversified services mix, as well as from the Company’s unique abilities, allowing it to raise its profitability by streamlining costs and tapping synergies stemming from the integrated management of its businesses and to set itself apart from its peers.

In line with this favourable business performance, the Company says it is on track to meet its financial objectives for this year, both at the Group level and in the different geographic areas. From a corporate standpoint, this means growth in revenue of +6/+8%, in OIBDA of +7,5/+11% and in OI of +13/+19%. These forecasts continue to be predicated on the comparison criteria1 used when the targets were set established in February 2008.

During the first half of the year, the results for the Group and those for Spain, Latin America and Europe have been affected, to varying degrees, by exchange rates, changes in the consolidation scope (Telemig and TVA in Latin America, and Airwave and Endemol in Europe), the capital gains generated on the sales of Airwave and Sogecable, and the change in the model applicable to public use telephony service in Spain.

–245 million accesses–

Total accesses rose 15.2% compared to June 2007 to 245.1 million, due to the high commercial activity recorded across markets. This growth was underpinned by the increase in wireless (+19%), broadband (+25.1%) and pay TV (+57.4%) accesses.

By type of access, Telefónica Group’s mobile accesses stood close to 182.7 million at the end of June, with around 15 million additional customers (+54.3% year-on-year) in the six-month period. The main contributors were Brazil (nearly 7 million customers, around 3 million stripping out the incorporation of Telemig in April 2008), Mexico (1.6 million), Peru (1.3 million) and Germany (1.1 million).

Retail Internet broadband accesses stood at close to 11.5 million, with a year-on-year rise of 25.1%, driven by the growing penetration of voice, ADSL and Pay TV bundles. These bundles are key to expand the broadband market and increase customer loyalty. Accesses in Spain reached over 5 million (+18.3% year-on-year), 5.5 million in Latin America (+26.1% year-on-year), and 917,000 in Europe (+69.7% year-on-year). Net adds in the first half of 2008 totalled 1.1 million accesses, of which 390,923 were in Spain, 489,981 in Latin America and 247,026 in Europe.

Pay TV accesses stood at over 2 million at end of the first half of the year, up 57.4% on the prior year, due to net adds of close to 280,000 accesses in the first half (+25% compared to the same period of 2007). The Company currently offers Pay TV services in Spain, the Czech Republic, Peru, Chile, Colombia and Brazil.

–Solid revenues’growth–

The expansion of the Group’s customer base and the increased usage led to revenues of 28,149 million euros in the first six months of 2008, for a year-on-year increase of 1.2%. Changes in the consolidation perimeter subtract 2.8 percentage points to revenue growth, while the impact of foreign exchange rates reduced the growth by another 2.8 percentage points. Year-on-year revenue growth was 1.2% in the April-June 2008 period.

In organic terms2, revenue growth stood at 6.7% for the six-month period, mainly driven by the significant increase in Telefónica Latinoamérica (4.3 percentage points contribution to growth) and, to a lesser degree, in Telefónica Europe (1.6 percentage points contribution in the half-year period). By concept, wireless service revenues, with a growing contribution of data services, along with wireline broadband and Pay TV, were the main organic revenue growth drivers.

In absolute terms, Telefónica Latinoamérica consolidated its position as the largest contributor to total Group revenue, with a weight of 37.4%. Telefónica España and Telefónica Europe accounted for 36.7% and 24.9% of the Telefónica Group’s total revenue, respectively.

In the first half of 2008 Telefónica Group’s operating expenses totalled 17,846 million euros, 1.5% down year-on-year. Stripping out the effects of foreign exchange rates, operating expenses would be up 1.7%.

Gain on sale of fixed assets totalled 237 million euros in the first half of 2008 and were mainly generated on the sale of the stake in Sogecable (143 million euros) and the Real State programmes of Telefónica España and Telefonica Europe. In the first half of 2007, capital gains of 1,296 million euros were recognised on the sale of Airwave.

Operating income before depreciation and amortisation (OIBDA) stood at 11,123 million euros for the first half of 2008, down 1.3% on the same period of 2007, due to recognition of the aforementioned capital gains on the sale of Airwave in the second quarter of 2007. These capital gains also explain the year-on-year change in OIBDA in the second quarter of 2008 (-6.8%). OIBDA margin for January-June 2008 stood at 39.5%.

In organic terms3, the rise in OIBDA in the first half of 2008 would be 1.5%. However, the organic4 growth in OIBDA excluding capital gains would have reached 12% in the first half of 2008, significantly above revenue growth (+5.3 percentage points), showing an outstanding acceleration with respect to the first quarter of the year (+8.2% to March). Telefónica Latinoamérica (+5.5 percentage points) and Telefónica España (+4.6 percentage points) are the main contributors to this growth.

In absolute terms, Telefónica España accounted for 46.5% of total Group OIBDA, while Telefónica Latinoamérica and Telefónica Europe contributed 34.4% and 18.3% to the total Group OIBDA, respectively.

Depreciation and amortisation in the first half of 2008 totalled 4,521 million euros, down 4.1% year-on-year. Telefónica Europe includes the amortisation of the purchase price allocation made following the O2 Group acquisition (351 million euros) and the Telefónica O2 Czech Republic acquisition (87 million euros).

Operating income totalled 6,602 million euros for the period from January to June 2008, with 0.7% year-on-year growth, due to recognition in 2007 of the aforementioned capital gains on the sale of Airwave. In organic terms4, growth in operating income would be 3.5%. Stripping out also impacts from capital gains (Sogecable and Airwave) year-on-year growth would stand at 24.2%. Therefore, an acceleration in organic4 growth rates (excluding capital gains) is reflected along the different income statement items below revenues (revenues: +6.7%; OIBDA: +12% and operating income: +24%).

Cumulative financial expense totalled 1,388 million euros at June 2008, down 3.4% on the expense recognised in the same period of 2007, mainly due to the 11% decline in average debt, which has generated savings of 171 million euros.

Free cash flow generated by the Telefónica Group in 2008 amounted 3,422 million euros of which 1,124 million euros were assigned to Telefonica’s share buyback program, 1,869 million euros to Telefónica S.A. dividend payment and 372 million euros to commitment cancellations derived mainly from the pre-retirements plans. Due to the fact that financial and real estate net divestments for the period amounted to 493 million euros (basically coming from the disposal of the Company’s stake in Sogecable and for the payment for the acquisition of Telemig), net financial debt decreased in 550 million euros. Also, net debt was reduced by an additional 761 million euros because of foreign exchange impact, changes in the consolidation perimeter and other effects on financial accounts. All this has been translated in a decrease of 1,311 million euros with respect to the net financial debt at the end of the fiscal year 2007 (45,284 million euros), leaving the net financial debt of the Telefónica Group at June 2008 at 43,973 million euros.

Leverage ratio (net debt/OIBDA) continues to fall to 2 times at June 2008, compared to 2.1 times at March 2008, thanks to both the reduction in net financial debt in the period and higher OIBDA. Net financial debt + commitments over OIBDA5 stood at 2.2 times, in line with the Company’s objectives.

In the first half of the year, the Telefónica Group’s financing activity, excluding short term Commercial Paper Programmes activity, stood at approximately 2,400 million euros. Financing activity was less intense than in previous periods due to the instability of the credit markets and the Group’s liquidity position.

The tax provision for the first half of the year totalled 1,520 million euros, implying a tax rate of 29.2%. However, the Telefónica Group’s cash outflow is being lower in 2008 as lower negative tax bases from past periods together with unused fiscal deductions are compensated.

Minority interests fell by 14.3% year-on-year and reduced cumulative net profit in the first half of 2008 by 97 million euros. Minority interests in Telesp and Telefónica O2 Czech Republic account for the bulk of profit attributable to minority interests in absolute terms.

As a result of the above, consolidated net income for the first half of 2008 amounted to 3,593 million euros, down 6.2% on the same period of 2007. This decrease is mainly due to the recognition in 2007 of capital gains on the sale of Airwave. Stripping out the impact of sale of assets (Airwave and Sogecable), net income at June 2008 would be up 29%. Basic earnings per share stood at 0.767 euros for the half-year period.

In the period from January to June 2008, CapEx amounted to 3,450 million euros, with operating cash flow (OIBDA-CapEx) at 7,673 million euros. By region, Telefónica España contributed 4,122 million euros, Telefónica Latinoamérica accounted for 2,332 million euros and Telefónica Europe contributed 1,177 million euros. Operating Cash Flow grew 12.9% year-on-year in organic terms excluding capital gains6.

With respect to shareholder returns, the Company will pay a dividend of 1 euro per share on account of 2008 profits. In addition, from the start of the year to July 17 2008, the Company has executed 67.6% of its programme to buy back 100 million shares in 2008.

RESULTS BY REGIONAL BUSINESS UNITS

TELEFÓNICA ESPAÑA

Telefónica España’s accesses totalled 47 million at the end of the first half of 2008, up 3.9% year-on-year. Underpinning this increase was the growth in wireless telephony (+5.1% year-on-year to over 23.2 million accesses) and in wireline, Internet broadband (+18.3% to over 5 million accesses).

Considering current operating environment, Telefónica España obtained solid first half 2008 results, showing the defensive profile of the Company as well as the differential advantages of being an integrated operator. Thus, the better revenues performance of the wireline business –with a higher percentage of fixed revenues (60% of total revenues)–, offsets the greater impact of current environment in wireless voice usage; moreover, greater businesses integration enables a more efficient cost management and getting synergies.

Revenues grew 1.4% year-on-year in the first six months to 10,331 million euros, with year-on-year growth of 0.8% posted in the second quarter of 2008. In the first half of 2008, like-for-like revenue growth7 stands at 2.1%, after posting a 1.5% like-for-line growth in the second quarter.

Operating income before depreciation and amortisation (OIBDA) rose by 12.8% in the second quarter, to give a year-on-year growth of 9.5% in the first half of 2008 to 5,173 million euros, leaving an OIBDA margin of 50.1%. Excluding one-off effects8 accounted for in the first half of 2007 and 2008, OIBDA growth would stand at 2% in the quarter and at 2.4% in the year to date.

According to the criteria established to set 2008 financial guidance, OIBDA growth at Telefónica España would stand at 6.2% for the six months up to June 2008.

CapEx at Telefónica España totalled 1,051 million euros in the first half, with investment focused on growing the broadband businesses and on optical fiber and 3G deployment. Telefónica España generated operating cash flow (OIBDA-CapEx) of 4,122 million euros in the January-June 2008 period, posting a 11.6% year-on-year growth.

–Fixed business–

The Spanish wireline access market grew by an estimated 1.9% year-on-year (June 2008 vs. June 2007).

The Company’s wireline telephony accesses totalled 15.7 million at the end of June 2008 (-1.6% vs. June 2007) after registering a net loss of 172,028 lines in the second quarter of 2008 and 248,725 in the first six months of 2008, mainly related to loop unbundling and to an increase of competitive intensity in the market.

Estimated net adds in the Spanish wireline broadband internet access market in the second quarter amounted to 0.3 million. Accordingly, at the end of June 2008 estimated size of the wireline broadband Internet access market topped 8.7 million accesses, up 17.4% on June 2007.

Telefónica’s retail Internet broadband accesses net adds totalled 169,098 in the second quarter and 390,923 in the first half of 2008, resulting in an 18.3% year-on-year increase in accesses to over 5 million at the end of June 2008. The Company remains market leader with an estimated share of over 57%.

In the pay TV business, Telefónica ‘s estimated market share stood at over 13% at the end of June 2008, with 22,513 new customers added in the second quarter (32,307 in the same period in 2007) and 65,471 in the first half of 2008. Pay TV customers totalled 576,558 (+27.9% year-on-year).

The total number of Duo and Trio bundles surpassed 4.2 million units at the end of June 2008. This means that more than 83% of the Company’s retail broadband accesses were part of a double or triple offer bundle at the end of June 2008.

Revenues totalled 6,213 million euros in the first half of 2008 (+1.1% year-on-year), with a 1.3% year-on-year growth posted in the second quarter. Growth in like-for-like terms9 was 2.2% in January-June 2008 and 2.5% in the second quarter. Operating expenses totalled 3,299 million euros in the first half of 2008 (-4.8% year-on-year), having fallen by 6.1% in the second quarter.

Operating income before depreciation and amortisation (OIBDA) in the second quarter grew by a noteworthy 23.3% year-on-year, partly due to the lower provisions associated with the workforce restructuring programme and other special effects. Stripping out these impacts10, OIBDA growth would stand at 2.7%. OIBDA amounted to 3,045 million euros in the first half, up 15.9% year-on-year (+3.3% excluding one-off effects6). The OIBDA margin stood at 47.5% in the quarter and 49% in the first half of 2008.

CapEx amounted to 702 million euros in the first half of 2008, leaving operating cash flow (OIBDA-CapEx) of 2,343 million euros.

–Mobile business–

The Spanish wireless market surpassed 51.9 million lines at the end of June 2008, with an estimated penetration rate of 113% (+7 percentage points higher vs. June 2007).

In this context, Telefónica España reported net adds of 217,060 lines in the second quarter of 2008 (289,006 in the second quarter of 2007) and continued to target higher value customers, reporting a solid 310,868 net contract gain (389,887 in the same period of 2007). Net adds in the first half of 2008 totalled 398,885 lines, highlighting the 616,101 contract adds achieved (776,860 in the same period of 2007).

At the end of June 2008 the customer base topped 23.2 million, up 5.1% year-on-year, underpinned by a 10.4% rise in contract customers, which now make up 61.4% of the total customer base (+2.9 percentage points vs. June 2007).

Revenues increased slightly (+0.2%) in the second quarter of 2008, held back by the smaller contribution of wholesale revenues (interconnection, roaming…) and lower handset sales, that offset the better evolution of customer revenues. Year-to-date, revenues stood at 4,817 million euros, up 1.4% year-on-year. Meanwhile, operating expenses dropped 0.4% vs. the same quarter a year earlier due to the Company’s improved efficiency, totalling in the first six months of the year 2,714 million euros, a slight year-on-year increase of 1.4%.

Operating income before depreciation and amortisation (OIBDA) grew 1.1% vs the second quarter of 2007 and 1.6% in the first half to 2,147 million euros. The Company has therefore maintained its operating efficiency, with an OIBDA margin in the quarter of 45.4% and of 44.6% in the year to date (+0.1 p.p. vs. the period January-June 2007).

CapEx in the first half stood at 349 million euros, generating operating cash flow (OIBDA-CapEx) of 1,798 million euros.

RESULTS BY REGIONAL BUSINESS UNITS

TELEFÓNICA LATINOAMÉRICA

The second quarter of the year saw further significant expansion of the Latin American telecommunications market in all the countries in the region, both in wireless and in the growth areas of the fixed business: broadband and pay TV. In this context, Telefónica Latinoamérica focus continues on the capture of growth in the region based on two key levers: commercial strength in its mobile business and progress in the transformation of its fixed business activities, with a growing weight of Internet, broadband and pay TV services.

Thanks to these successful policies, Telefónica Latinoamérica’s customer base totalled 147.9 million accesses at the end of June 2008, an increase of 26.1 million over the last 12 months and up 21.4% year-on-year.

After reporting 5.8 million net adds11 in the quarter and 8.9 million in the year to date, Telefónica Latinoamérica reached a total of 113.5 million mobile accesses (+27.1% from June 2007; +22.3% organic12), with solid growth across all its operations. In fixed telephony Telefónica Latinoamérica pressed ahead with the transformation of its operations, with the contribution of growth businesses (broadband, pay TV and data) continuing to improve. Here the company is redoubling its efforts to promote bundled services. As a result, Telefónica Latinoamérica’s fixed business now has a customer base of almost 34.4 million accesses (fixed telephony, broadband and pay TV), year-on-year growth of 5.7%.
Broadband, net adds over the last 12 months totalled 1.1 million (489,981 in the first half of 2008), taking the customer base to 5.5 million.
Telefónica Latinoamérica now has 1.4 million pay TV customers, up from 799,627 in June 2007, with operations in Peru, Chile, Colombia and Brazil.
Fixed telephony accesses stood at 25.8 million at the end of the quarter, 1.9% up from June 2007, with net adds of 376,609 customers in the first half.

Revenues in the first half of 2008 amounted to 10,531 million euros, 9.4% more than in the same period of 2007 in current euros. Organic13 revenue growth in the first six months stood at 12.2%, in line with the figure for the first quarter of the year. The countries contributing most to topline growth include Brazil and Venezuela, each with 2.5 percentage points, followed by Mexico and Argentina, with 2.3 percentage points, each. Operating expenses lagged revenue growth (+7.6% in current euros and +11.5% in constant euros).

Operating income before depreciation and amortisation (OIBDA) grew 13% in constant euros in the first half to 3,831 million euros, and by 15.8% in organic terms4, a sharp rise compared with the first quarter (+11.8%). By country, Venezuela contributed most to organic OIBDA growth (4.2 percentage points), followed by Mexico (4 percentage points).

In this scenario of market expansion and increased commercial activity and business transformation, Telefónica Latinoamérica is continuing to improve its already high efficiency levels. The company achieved an OIBDA margin of 36.4% in the first half, an improvement of 1.2 percentage points on the same period in 2007.

Telefónica Latinoamérica’s CapEx in the first half of 2008 amounted to 1,499 million euros, with investment largely deployed in developing commercial activities for the wireline broadband and TV businesses in addition to enhancing the coverage and capacity of its wireless GSM networks and the first investments in the rollout of 3G (including the 3G licences awarded in Brazil at the end of 2007). Telefónica Latinoamérica generated operating cash flow (OIBDA-CapEx) of 2,332 million euros in the first half of the year, 7.6% up in constant euros vs. the same period in 2007 (+7.7% year-on-year in organic terms14).

BRAZIL

Telefónica ended June 2008 with 56.1 million accesses in Brazil thanks to Vivo’s continued market leadership and a strong performance by Telesp. Vivo now has over 40 million accesses and is the leader of Latin America’s largest wireless market. Its position has been further cemented by the incorporation of the customers of Telemig in the second quarter of 2008. In the broadband market, Telefónica’s number of accesses increased by 26.7% year-on-year to 2.3 million, while pay TV accesses totalled 346,894. Thanks to the transformation of its wireline business, Telefónica keeps 11.9 million fixed telephony accesses in Brazil, where the company is strongly betting for bundled services and the development of segmented offerings for each type of client.

Thanks to a strong commercial performance and the incorporation of Telemig, Telefónica reported revenues of 4,205 million euros in Brazil in the first half of 2008, up 8.8% in local currency on the same period in 2007. Revenue growth has accelerated from the 6.7% year-on-year growth rate reported in the first quarter. Telefónica achieved OIBDA of 1,608 million euros in Brazil to June 2008, up 2% in local currency on the same period of 2007.

CapEx in the first half amounted to 704 million euros, with the consolidation of GSM networks and investment in UMTS accounting for the lion’s share, along with the fastest-growing services in the wireline businesses (broadband, pay TV and data). CapEx includes the 3G licences awarded to Vivo at the end of 2007. Meanwhile, Telefónica’s operating cash flow (OIBDA-CapEx) in Brazil amounted to 903 million euros in the first six months of 2008.

–Vivo–

The Brazilian wireless telephony market bolstered its position as Latin America’s fastest growing market, adding more than 26 million accesses over the last 12 months. It had a penetration rate of 69.5% in June 2008, an increase of 13.1 percentage points year-on-year. In this context, Vivo remains as nmarket leader with over 40.4 million accesses (+33.7% vs. June 2007, +19.7% in organic terms15) and has a market share of 30.4%.

Vivo’s strong performance fuelled a 23.5% year-on year revenue increase in local currency in the second quarter (+11.6% organic8), with service revenues up 24.9% in the quarter (12.1% organic8). Revenues rose 19.6% in the first half in local currency to 1,379 million euros (+13.3% organic8), underpinned by service revenues (+20.9% year-on-year, +14.2% organic8). Operating income before depreciation and amortisation (OIBDA) increased by 29.6% in the second quarter in local currency (+9.2% organic8), contributing to a 22.1% year-on-year increase in OIBDA in the first half to 356 million euros (+12.9% organic8).

–Telesp–

New telecommunications technologies/services grew sharply in the Sao Paolo market, which is becoming the most dynamic and innovative in Latin America. Against this backdrop, Telesp managed 15.7 million accesses at the end of June 2008, up 3.7% from June 2007. At the end of June Telesp managed 11.9 million fixed telephony accesses (-1.1% year-on-year), with significant growth in broadband and consolidating a more competitive pay TV offering.

Telesp continued to enhance its broadband service, increasing ADSL speeds. Having registered net adds of 129,390 accesses in the quarter (+5.9% year-on-year) and 227,462 in the first half of 2008 (+11.1% year-on-year), Telesp managed a total of 2.3 million accesses (a year-on-year increase of 26.7%). The company estimates that it accounted for approximately 64% of total market growth in the quarter, attaining a market share of 66% at the end of June. In pay TV, Telesp has built a competitive offering on TVA’s assets. A total of 346,894 Telefónica customers in Brazil are enjoying the service, after having recorded a net adds figure of 64,558 accesses in the second quarter of 2008 (+25.5% from the previous quarter) and 115,987 accesses in the first half.

Consequently, Telesp’s revenue grew 5.4% year-on-year in the second quarter (+4.6% organic16) and to 3,022 million euros in the half year, up 4.7% year-on-year in local currency (+3.9% organic17). Despite the higher costs, the pick-up in revenue growth and the lower impact of non-recurrent factors are behind a substantial improvement in operating income before depreciation and amortisation (OIBDA). This grew 0.5% year-on-year in local currency in the second quarter and totalled 1,232 million euros in the first half, down 4.1% year-on-year in local currency (vs. the –8.6% drop reported in the first quarter).

CapEx in the first half amounted to 345 million euros, with increasing investment in broadband projects and corporate networks, while operating cash flow (OIBDA-CapEx) totalled 887 million euros.

ARGENTINA

Growth in the telecommunications market in Argentina remained strong in the first half of 2008, with the wireless and broadband businesses both registering significant expansion. Telefónica remains market leader with over 20 million accesses at the end of June 2008, 10.4% more than a year earlier. Underpinning this growth was the capture of 1.8 million new wireless customers and 307,451 broadband accesses over the last 12 months for respective totals of 14.1 million lines (+14.9% year-on-year) and 966,404 accesses (+46.7% year-on-year).

The strong operating momentum fuelled a 19.9% year-on-year increase in local currency in revenues in the first half of 2008. Operating income before depreciation and amortisation (OIBDA) improved significantly in the second quarter (+28.2% in local currency) and totalled 386 million euros in the first half (+12.2% in local currency vs. January-June 2007).

First-half CapEx amounted to 125 million euros, leaving operating cash flow (OIBDA-CapEx) of 261 million euros.

–Telefónica Móviles Argentina–

By the end of June 2008, estimated penetration of the wireless market in Argentina reached 103%, up 14 percentage points from June 2007. Telefónica reached over 14.1 million wireless customers in Argentina at the end of June 2008, an increase of 14.9% year-on-year. GSM customers accounted for 89.2% of the total customer base (up 7.7 percentage points from June 2007).

Revenue growth in the second quarter of 2008 accelerated by over 10 percentage points vs. the first quarter, with first-half revenues growing by 25.5% in local currency to 711 million euros. Operating income before depreciation and amortisation (OIBDA) rose 51.4% in local currency in the second quarter and totalled 198 million euros in the half year, up 31.5% vs. January-June 2007 in local currency, with operating expense growth lagging behind revenue growth.

First-half CapEx amounted to 36 million euros, leaving operating cash flow (OIBDA-CapEx) of 162 million euros.

–Telefónica de Argentina–

The wireline business activity of Telefónica in Argentina picked up in the second quarter of 2008, achieving a total of 5.9 million accesses at the end of June 2008. This represents an increase of 1.1% vs. June 2007 compared with growth of 0.8% in March 2008, driven by a surge in broadband accesses. Telefónica Argentina now manages a total of 966,404 broadband accesses, 46.7% more than in June 2007. An acceleration was noted in the second quarter, with net adds of 81,119 new accesses, up 23% on the first quarter of 2008 and 14.5% higher than in the second quarter of 2007, with 147,085 new accesses reported in the half year. This improvement is largely due to Telefónica’s focus on bundled services. A total of 439,843 customers had Duo bundles at the end of June, representing 46% of total broadband accesses compared with 22% in June 2007. Meanwhile, wireline telephony accesses remained at 4.7 million.

Revenue growth in the second quarter accelerated to 12.3% in local currency, driving an 11.3% rise in first-half revenues in local currency to 472 million euros. Telefónica de Argentina’s operating income before depreciation and amortisation (OIBDA) rose 10.4% in the second quarter, totalling 189 million euros in the first half.

CapEx during the first half was primarily earmarked for enhancing existing products and developing new broadband products, reaching 89 million euros in all. First half operating cash flow (OIBDA-CapEx) amounted to 100 million euros.

CHILE

At the end of June 2008 Telefónica Latinoamérica managed a total of 9.7 million accesses in Chile, year-on-year growth of 8.9%. This rise was underpinned by the growth in mobile (+11.5% year-on-year to 6.6 million), broadband (+18.4% to 679,774 customers) and pay TV (+40.5% to 240,801) accesses. The company further cemented its leadership position in the Chilean telecommunications market.

Telefónica Latinoamérica’s first half revenues in Chile totalled 989 million euros, a year-on-year increase of 15.2% in local currency (+13.5% in local currency in the second quarter of 2008). Operating income before depreciation and amortisation (OIBDA) rose 12.6% in local currency in the first half to 368 million euros (+12% year-on-year in the second quarter), underpinned by the growth of the wireless business.

Telefónica Latinoamérica continued to invest heavily in the country. First-half CapEx amounted to 188 million euros, which was largely devoted to the fastest growing business areas (mobile telephony, ADSL and pay TV). Operating cash flow (OIBDA-CapEx) to June amounted to 180 million euros.

–Telefónica Móviles Chile–

In the first six months of 2008, the Chilean wireless market maintained the strong growth seen in 2007, achieving an estimated penetration in June 2008 of 93% (+7 percentage points from June 2007). Telefónica Móviles Chile remained market leader with 6.6 million customers at the end of June 2008, up 11.5% on June 2007, having reported net adds of 179,320 lines in the second quarter (+11.6% year-on-year) and 328,593 accesses in the half year (+32.9% compared with the same period in 2007).

Revenues grew 20.7% year-on-year in local currency in the quarter, with first-half revenues totalling 532 million euros (+24.3% year-on-year in local currency). Operating income before depreciation and amortisation (OIBDA) rose 28.9% year-on-year in the second quarter, taking half-year OIBDA to 196 million euros (+32.7% year-on-year) thanks to efficiency gains and despite increased commercial initiatives.

First half CapEx amounted to 107 million euros, leaving operating cash flow (OIBDA-CapEx) of 89 million euros.

–Telefónica Chile–

Telefónica Chile managed 3.1 million accesses at the end of June 2008, up 3.7% year-on-year. Fixed telephony accesses totalled 2.1 million, and broadband accesses at the end of June 2008 stood at 679,774, a 18.4% more than a year earlier. The company had 240,801 pay TV customers at the end of June, up 40.5% year-on-year, and added 20,885 accesses from December 2007.

Revenues grew 6% year-on-year in the second quarter in local currency and totalled 502 million euros in the first half (+6.4% in local currency). The performance of the operating income before depreciation and amortisation in the second quarter (-3.7% year-on-year in local currency) eased the fall over the first six months of 2008 to 4.2% (-4.6% in March 2008), totalling 173 million euros.

CapEx in the half year amounted to 81 million euros. The sharp growth in satellite TV services (DTH) and broadband along with initiatives designed to enhance network quality remain the main drivers of this increased investment activity. Telefónica Chile’s operating cash flow (OIBDA-CapEx) in the period stood at 92 million euros.

PERÚ

Total accesses managed by Telefónica in Peru at the end of the first half of 2008 were 33.4% higher year-on-year at 13.5 million. The strong pace of access growth over the last six months was driven by wireless customer net adds with total accesses increasing by close to 1.3 million to 9.3 million (+48.1 year-on-year), the increase in wireline accesses (+8.1% year-on-year) and the growth in the broadband customer base (+18.8% year-on-year) to 626,805 accesses.

Having reported 4.9% year-on-year growth in local currency in the second quarter, Telefónica’s revenues in Peru amounted to 757 million euros to June, an increase of 5.1% in local currency. Operating income before depreciation and amortisation (OIBDA) in the half year stood at 277 million euros, virtually unchanged from the same period in 2007 in local currency.

First half CapEx amounted to 66 million euros, mostly devoted to the development of the wireless network and the broadband services, leaving operating cash flow (OIBDA-CapEx) of 210 million euros.

–Telefónica Móviles Perú–

The penetration rate of wireless telephony in Peru maintains an exceptional pace of growth in the first months of 2008 jumping 17 percentage points year-on-year to 55% at the end of June 2008. Total wireless accesses at the end of June 2008 topped the 9.3 million mark, up 48.1% year-on-year.

Revenues grew 26% year-on-year in local currency in the second quarter and by 27.5% in local currency in the half year to 342 million euros. OIBDA grew 93.1% year-on-year in local currency in the second quarter and totalled 105 million euros at the end of June representing an increase of 58.2% from June 2007.

First half CapEx amounted to 32 million euros, leaving operating cash flow (OIBDA-CapEx) of 74 million euros to June.

–Telefónica del Perú–

Telefónica del Perú managed a total of 4.2 million accesses at the end of June, up 9.4% year-on-year. This growth was underpinned by the increase in wireline telephony accesses, which rose 8.1% vs. June 2007 pushed up by the expansion of fixed-wireless accesses, totalling 217,352 net adds over the last twelve months.

Also noteworthy is the growth in broadband accesses, with net adds in the quarter of 32,577 accesses and 54,717 in the first half. As a result, the customer base grew by 18.8% year-on-year to 626.805 accesses. In addition, Pay TV base stood at 653,249 accesses up 8.9% from June 2007 thanks to the sharp growth in satellite and cable subscribers.

In this context, first half revenues stood at 471 million euros. Operating income before depreciation and amortisation (OIBDA) for the first half totalled 171 million euros.

First half CapEx amounted to 34 million euros, leaving operating cash flow (OIBDA-CapEx) of 136 million euros.

COLOMBIA

Total accesses managed by Telefónica in Colombia exceeded 12.1 million at the end of June 2008, up a solid 20% year-on-year, underpinned by the increase in broadband (+135.2% year-on-year) and pay TV accesses (almost a four-fold increase from June 2007) and the sharp growth in wireless customers (+22.9% year-on-year).

Telefónica’s revenues in Colombia grew 0.2% year-on-year in the second quarter in local currency, leading the first half year revenues to 759 million euros with a growth of 1.5% in local currency from June 2007. Operating income before depreciation and amortisation (OIBDA) grew 3.1% year-on-year in the second quarter and 8.1% in the first half in local currency to 238 million euros.

First half CapEx mainly devoted to expansive services (mobile, broadband, pay TV) amounted to 147 million euros leaving operating cash flow (OIBDA-CapEx) of 91 million euros.

–Telefónica Móviles Colombia–

The Colombian wireless market hit the 35-million-line mark in June 2008, with an estimated penetration rate of 81% (+14 percentage points vs. June 2007). In light of this backdrop, Telefónica’s total accesses in Colombia grew 22.9% from June 2007 to 9.4 million, with growth accelerating compared to the first quarter (+16% in March).

As a result, revenues slightly fell 0.5% in the second quarter in local currency, resulting in first half revenues of 423 million euros (+1% vs. the first half of 2007 in local currency). OIBDA totalled 92 million euros in the first half of 2008, with 38.3% year-on-year growth in local currency in the second quarter and 59.1% growth in the first half.

First half CapEx amounted to 66 million euros, leaving operating cash flow (OIBDA-CapEx) of 26 million euros.

–Telefónica Telecom–

Telefónica Telecom total accesses base stood at 2.8 million accesses at the end of June 2008 (+11% year-on-year), underpinned by a strong growth in broadband accesses (+135.2% vs. June 2007), the focus throughout the region of Telefonica to advance in the transformation process of its wireline business as it evidences the significant investment made since the second half of 2007. It should be highlighted the positive evolution recorded by broadband net adds. Telefónica Telecom reported 55,626 broadband net adds in the second quarter (+81.1% vs. the second quarter of 2007, +46.1% vs. first quarter of 2008), bringing net adds in the first half to 93,693 accesses (+64.4% vs. first half of 2007). The company now manages a total of 293,964 broadband accesses. Year-on-year pay TV accesses growth remained strong (almost four times as many customers as in June 2007), with 112,615 accesses at the end of June 2008 after 39,685 new customers were added in the first half.

Revenues to June 2008 stood at 353 million euros, showing a quarterly and cumulative increase of 1.2% year-on-year in local currency. Consequently operating income before depreciation and amortisation (OIBDA) fell in local currency 12.3% in the second quarter of 2008 and 10.1% in the first six months to 146 million euros.

Fist-half CapEx amounted to 81 million euros, leaving operating cash flow (OIBDA-CapEx) of 65 million euros.

MÉXICO

The penetration rate of the Mexican market reached an estimated 68% at the end of June 2008 (+10 percentage points vs. June 2007), with growth increasing slightly from the first quarter. Telefónica Móviles México’s customer base stood at 14.1 million at the end of June 2008 (of which 825,370 were contract customers), an increase of 38% from June 2007. This growth was underpinned by a competitive and flexible commercial offering in the prepay segment.

Revenues in the second quarter rose 29.7% year-on-year in local currency and by 34.1% in the first six months to 784 million euros. OIBDA totalled 175 million euros to June 2008, over three times the amount for the same period a year earlier.

CapEx amounted to 137 million euros to June 2008, resulting in operating cash flow (OIBDA-CapEx) of 38 million euros, a significant improvement on the same period in 2007 (-3 million euros).

VENEZUELA

Penetration of the Venezuelan wireless market stood at an estimated 93% in the first half of 2008, up 15 percentage points from June 2007. Telefónica Móviles Venezuela had a total of 11.1 million accesses at the end of June 2008 (+13.7% vs. June 2007), underpinned by its wireless customer base (+11.6%) and the sharp growth in fixed wireless (+34.1%).

Second-quarter revenues grew 18.1% year-on-year in local currency, with first-half revenues advancing 21.5% to 1,186 million euros. Operating income before depreciation and amortisation (OIBDA) grew 31.9% in the second quarter in local currency, with first-half OIBDA totalling 533 million euros (+30.7% in local currency vs. the first half of 2007).

Fist-half CapEx amounted to 60 million euros, leaving operating cash flow (OIBDA-CapEx) of 473 million euros.

CENTROAMÉRICA

Penetration levels grew sharply in the Central American market and stood at 75% in June 2008 (+20 percentage points vs. June 2007). Telefónica had almost 6 million customers in Central America at the end of June 2008, posting year-on-year growth of 29.7% after adding 273,567 new wireless customers in the quarter and 520,377 in the first half of the year.

Second-quarter revenues advanced 3.9% in constant terms vs. the same period in 2007 and by 6.1% in the first half of 2008 to 272 million euros. Despite the increase in commercial activity in the region, operating income before depreciation and amortisation (OIBDA) in the April-June 2008 period grew 4.4% vs. the same period in 2007 in constant terms and 11.4% in the year to date to top 95 million euros.

First half Capex amounted to 25 million euros, leaving operating cash flow (OIBDA-CapEx) of 70 million euros.

ECUADOR

The wireless market in Ecuador continued to grow at a strong pace, with penetration estimated at 76% at the end of June 2008 (+9 percentage points vs. March 2007). Telefónica Móviles Ecuador reported net wireless adds of 186,357 accesses in the second quarter of 2008 and 281,106 net adds in the first half. It managed a total of 2.9 million wireless customers in June 2008, year-on-year growth of 8.3%.

Revenues advanced 25% year-on-year in local currency in the second quarter, significantly outpacing the growth in the customer base, and by 21.8% in the first half in local currency to 146 million euros. Operating income before depreciation and amortisation (OIBDA) grew by 32.4% year-on-year in local currency in the second quarter, with first-half revenues up 23.5% at 36 million euros.

First half CapEx amounted to 16 million euros, leaving operating cash flow (OIBDA-CapEx) of 20 million euros.

TELEFÓNICA INTERNATIONAL WHOLESALE SERVICES

TIWS maintained strong growth across all its business lines in the first half of 2008. Revenues in the period totalled 154 million euros, up 23.5% year-on-year in constant euros, in line with the growth reported in the first quarter. Revenue growth underpinned an improvement in operating income before depreciation and amortisation (OIBDA), which stood at 48 million euros (+13.2% in constant euros), leaving an OIBDA margin of 31%.

RESULTS BY REGIONAL BUSINESS UNITS

TELEFÓNICA EUROPE

Telefonica Europe maintained its momentum in the second quarter of 2008, adding 0.8 million mobile customers (+44% year-on-year) and 1.3 million in the first half (+13.5% year-on-year). As a result, Telefonica Europe grew its total mobile customer base (+8.8% year-on-year) by over 3 million compared to June 2007, driven by the solid performance in the contract segment (+14.9% year-on-year). At the end of June 2008, Telefonica Europe’s total customer base reached 43.8 million (+9.8% year-on-year).

Revenues for the second quarter were flat year-on-year, while for the first half they showed a year-on-year decline of 0.9% to reach 7,006 million euros. Excluding the impact of foreign exchange rates and the exit of Airwave in April 2007, the strong operational performance in the quarter led to continued solid revenue growth, with a year-on-year increase of 6.1% in the second quarter (stable over the previous quarter) and a 6.2% for the first half.

Operating income before depreciation and amortization (OIBDA) in the first half of 2008 was 2,033 million euros, a year-on-year decline of 34.4%. On a like for like basis18, OIBDA would have grown by 4% year-on-year for the first half, mainly as a result of the higher commercial activity in wireless and DSL as compared with last year.

CapEx for the first half was 856 million euros. Operating cash flow (OIBDA-CapEx) for the first half totalled 1,177 million euros, an increase of 11.5% year-on-year on like for like1 basis.

–Telefónica O2 Reino Unido–

With a continued focus on capturing profitable growth, Telefonica O2 UK achieved very strong net mobile customer additions of 274,571 in the second quarter (over 8 times the second quarter of 2007 figure), taking the total mobile base to 18.7 million (excluding Tesco Mobile) representing growth of 5% year-on-year. Net mobile adds in the first half reached 295,723 (+95.2% year-on-year). Telefonica O2 UK’s DSL broadband service registered 62,800 net additions in the quarter, and 123,510 in the first half, leaving the total broadband customer base at 194,220 at the end of June.

Revenues in the second quarter grew by 11.1% year-on-year in local currency, a strong performance relative to the market. Operating income before depreciation and amortization (OIBDA) for the quarter rose 14.1% year-on-year in local currency, impacted by restructuring charges taken in the second quarter 2007. Excluding these charges, growth was 10.6% in local currency, with lower mobile acquisition costs offset by increased retention spend, along with additional DSL and mobile broadband launching-related costs. For the first half, OIBDA totalled 881 million euros, a growth of 13.7% year-on-year in local currency (+11.8% excluding restructuring charges).

CapEx for the first half amounted to 362 million euros, with operating cash flow (OIBDA-CapEx) amounting to 519 million euros.

–Telefónica O2 Alemania–

The business traded strongly in the quarter, with mobile net additions of 568,374 customers, a 52% increase on the same quarter last year and a 6% rise over the previous quarter. In the first half, the mobile customer base grew by 1.1 million (2.1 times vs. the same period last year), taking the total mobile customer base to 13.6 million (+17.5% vs. June 2007). The Tchibo Mobile brand added 35,456 customers in the second quarter, while the Fonic brand added 96,097 customers to end June with a base of 416,436. O2 DSL acquired 40,658 customers during the second quarter to add 90,689 customers in the first half of the year, reaching a total customer base of 165,389. Telefonica Deutschland reported 1.1 million ULL lines in total at the end of June (338,801 lines in June 2007).

Despite the ongoing pricing pressure in the German telco market, revenue growth accelerated in the second quarter vs. the first quarter to 3.8% year-on-year. For the first half, revenues totalled 1,749 million euros, growth of 2.7% year-on-year. OIBDA for the first half totalled 341 million euros, growth of 31.6% year-on-year; while on a like for like basis3 OIBDA declined by 4.1%.

CapEx amounted to 357 million euros for the first half.

–Telefonica O2 Irlanda–

Telefonica O2 Ireland recorded net additions of 24,620 in the second quarter (-1,082 in the second quarter 2007 and +16,805 in the first quarter of 2008). With 41,425 net additions throughout the first half of the year, the total customer base was 1.7 million customers at the end of June, 3.4% higher than a year ago with the number of mobile broadband customers at 47,814.

Revenues for the first half declined 2.9% year-on-year to reach 448 million euros. For the first half OIBDA was 150 million euros, 8.6% lower than the same period last year.

CapEx for the first half totalled 30 million euros. operating cash flow (OIBDA-CapEx) for the first half it amounted to 120 million euros.

–Telefónica O2 República Checa–

At the end of June, the total fixed and mobile accesses of Telefonica O2 Czech Republic, including Slovakia, stood at 8.5 million, an increase of 0.5% year-on-year. The total number of customers currently subscribing to a bundled product in the Czech Republic amounted to 142,565 at the end of June 2008. Fixed telephony accesses amounted to 1.9 million at the end of June and The total number of retail Internet broadband accesses reached 540,372 (+16.6% year-on-year) with 12,928 net customers added in the quarter and 30,983 in the first half. The total number of TV customers increased by 10,745 in the second quarter and by 24,753 in the first half to reach 97,918.

Revenues for Telefonica O2 Czech Republic in the second quarter were 0.6% higher year-on-year than in the same period of 2007 in local currency, leading to a 1.1% year-on-year increase in the first half to reach 1,236 million euros. For the first half OIBDA totalled 580 million euros, an increase of 3.2% in local currency year-on-year.

Capex amounted to 96 million euros in the first half resulting in an operating cash flow (OIBDA-CapEx) for the first half of 484 million euros.

RESULTS BY BUSINESS UNITS

OTHERS COMPANIES

ATENTO GROUP

Revenues totalled 629 million euros at the end of the first half of 2008, an increase of 11.4% on the same period a year earlier, after growing by 10.9% year-on-year in the second quarter. Operating income before depreciation and amortisation (OIBDA) grew 16.4% year-on-year in the second quarter and 8.1% in the first half to 79 million euros.

First-half CapEx totalled 17 million euros and was mainly earmarked for the construction of new platforms (Chile, Morocco and Peru), centre refurbishment and equipment purchasing (Brazil and Mexico). The Atento Group’s operating cash flow (OIBDA-CapEx) in the first six months of 2008 period stood at 62 million euros.

1 The 2007 base figures exclude Airwave and Endemol and include three months of consolidation of TVA in 2007. T. España’s revenue are adjusted for the new services model for the public use telephony service. Hence, the Group’s revenue has been adjusted in accordance with this new model. . The 2008 figures include TVA, Deltax, and Telemig (from April 2008). . Telefónica’s CapEx excludes the Real Estate Efficiency Plan. The growth rates announced for the 2008 targets were based on constant 2007 exchange rates. . For the calculation of targets, OIBDA and OI do not include exceptional income and expenses that could not have been foreseen in 2007.

2 Assuming constant exchange rates and including the consolidation of TVA in January-June 2007 and Telemig in April-June 2007. Excluding the consolidation of Airwave in January-March 2007 and Endemol in January-June 2007. In revenues, the impact in Telefónica España of the new model for the public use telephone service (-67.9 million euros) is included. In OIBDA and OI, the impact of sales of assets (Airwave and Sogecable) in both periods is excluded.

3 Assuming constant exchange rates and including the consolidation of TVA in January-June 2007 and Telemig in April-June 2007. Excluding the consolidation of Airwave in January-March 2007 and Endemol in January-June 2007.

4 Assuming constant exchange rates and including the consolidation of TVA in January-June 2007 and Telemig in April-June 2007. Excluding the consolidation of Airwave in January-March 2007 and Endemol in January-June 2007. In revenues, the impact in Telefónica España of the new model for the public use telephone service (-67.9 million euros) is included. In OIBDA and OI, the impact of sales of assets (Airwave and Sogecable) in both periods is excluded.

5 Calculated based on June 2008 OIBDA, excluding results on the sale of fixed assets and annualized.

6 Assuming constant exchange rates and including the consolidation of TVA in January-June 2007 and Telemig in April-June 2007. Excluding the consolidation of Airwave in January-March 2007 and Endemol in January-June 2007. In revenues, the impact in Telefónica España of the new model for the public use telephone service (-67.9 million euros) is included. In OIBDA and OI, the impact of sales of assets (Airwave and Sogecable) in both periods is excluded.

7 Including the impact at T. España due to the new model for the public use telephony service (-67.9 million euros in January-June 2007).

8 Bad debt recovery amounting to 25 million euros accounted for in the first quarter of 2008, the 152 million euros fine imposed by the European Union during second quarter 2007, the January-June 2007 provision of 94 million euros associated with the redundancy programme, and Real Estate capital gains amounting to 68 million euros in January-June 2008 (8 million euros in same period 2007).

9 Including the impact at T. España due to the new model for the public use telephony service (-67.9 million euros in January-June 2007 in revenues and -89.7 million euros in voice service revenues).

10 94 million euros provision accounted for in the second quarter 2007 related to the Redundancy programme (zero in same period 2008), the 152 million euros European Union fine booked in the second quarter of 2007, and Real Estate capital gains of 1.3 million euros in the second quarter 2008 and 5.2 million euros in the second quarter 2007.

11 The Telemig customers incorporated to the Group in April (3,986,439 customers) are not considered as net adds.

12 Including Telemig accesses in June 2007.

13 Assuming constant Exchange rates and the consolidation of TVA in January-June 2007 and Telemig in April-June 2007.

14 Assuming constant Exchange rates and the consolidation of TVA in January-June 2007 and Telemig in April-June 2007.

15 Including Telemig in June 2007.

16 Including TVA in April-June 2007.

17 Including TVA in January-June 2007.

18 Assuming constant exchange rates and excluding the consolidation of Airwave in the first quarter of 2007. Capital gain from the sale of Airwave is also excluded, as well as gains related to the real estate sale in the Czech Republic, restructuring and similar charges and the result of the application of provisions made in respect of potential contingencies deriving from the past disposal of shareholdings, once these risks had dissipated or had not materialized.
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