Telefónica Latin America Increases Revenues by 30.6% Y/Y

Results for Telefónica Latin America were positively affected by the appreciation of the Brazilian real, the Chilean peso and the Peruvian nuevo sol against the U.S. dollar. The most significant changes in Telefónica's Latin American financial results for the first quarter of 2006, released on 12 May, were:

• The customer base grew by 3.7% year-on-year (y/y) to 28.3 million customers, with ADSL showing the biggest contribution of 50.2% to reach 2.9 million subscribers in March 2006. On the other hand, dial-up subscribers decreased by 11.1% y/y to 3 million subscribers, which is still 4% higher than broadband subscribers. Pay-TV subscribers grew by 16.9% y/y to 474,700, while fixed-line grew by 1.7% y/y to 21.7 million lines in service (see Latin America: 2 March 2006: Telefónica Latin America Posts 22.5% Y/Y Revenue Growth in 2005).
• In the first quarter of 2006, Latin American total revenues grew by 30.6% y/y to 2.3 billion euro, mostly influenced by Telesp's revenue growth of 38.6% y/y. Latin American revenue represented 19.3% of Telefónica's total revenue, a decrease of 2.3 percentage points y/y, while Latin American mobile revenue represented 50.1% of Telefónica Móviles' total revenue in the first quarter of 2006 (see World: 11 May 2006: Latin American Net Additions Push Telefónica Móviles’ Customer-Base Growth in Q1 and 12 May 2006: Telefónica's Acquisitions, Expanding Mobile Business, Broadband Growth Drive Q1 Revenue Up 45% Y/Y). Revenue growth was driven by the higher number of ADSL customers in general.
• Operating expenses reached 1.323 billion euro, an increase of 44.8% y/y, mainly influenced by a greater commercial effort, sales commission, and workforce restructuring costs in Brazil and Chile.
• Operating income before depreciation and amortisation (OIBDA) increased by 15.5% y/y to 994.2 million euro, leading to an OIBDA margin of 42.9%, a sharp decrease of 5.6 percentage points y/y.
• Net income decreased by 1.7% y/y to 242.3 million euro.
• Investments increased by 13.1% y/y to 173.9 million euro in the first quarter of 2006, mostly allocated to ADSL investments and new businesses.

The biggest Latin American subsidiaries are:

• Brazil (Telesp): Customer base of 15.6 million accesses, representing 55% of Telefónica Latin America's total accesses; fixed-line customer base of 12.370 million; fixed-line customer base growth of 4% y/y; ADSL customer base of 1.3 million ADSL subscribers; revenue of 1.4 billion euro; revenue growth of 42% y/y; and OIBDA of 630 million euro.
• Peru (TdP): OIBDA margin of 45.1%.
• Chile (Telefónica CTC Chile): ADSL customer base growth of 68.4% y/y.

Outlook and Implications

Results Per Country

• Brazil: Telesp increased its customer base by 1.7% y/y to 15.6 million accesses, mostly influenced by its change of focus to client orientation, offering products adapted to each segment of the population. Its fixed-line telephony customer base increased slightly by 0.1% y/y to 12.37 million and ADSL broadband increased by 47.5% to 1.3 million ADSL subscribers, while dial-up internet users decreased by 8.3% y/y to 1.87 million subscribers. Telesp's total revenues increased by 42% y/y to 1.427 billion euro, mainly influenced by the increase in the customer base, the increase in voice traffic of 1.1% y/y, and a higher tariff approved on 4 July 2005, leading to an increase of 7.27% in local telephony, 2.94% in DLD and 7.37% in public phone calls, as well as the introduction of new services such as VoIP (see Brazil: 1 July 2005: Anatel Approves 7.27% Fixed-Line Price Hike in Brazil; 2 July 2004: Brazilian Court Rules in Favour of IGP-DI Index-Linked Tariff Increases; and 3 February 2006: Terra Launches VoIP Services in Brazil). Meanwhile, OIBDA stood at 630.1 million euro, an increase of 38.6% y/y, leading to an OIBDA margin of 44.1%, a slight decrease of 1.1 percentage points y/y. Telesp invested 89.5 million euro in the first quarter of 2006, an increase of 3.8% y/y, mainly focused on developing new products and broadband.
• Argentina: Telefónica de Argentina (TASA) increased its customer base by 4.8% y/y to 5.465 million accesses due to a better economic environment and greater consumer spending in Argentina. Its fixed-line telephony customer base increased by 4.3% y/y to 4.553 million and ADSL broadband increased by 64.1% to 346,500 ADSL subscribers, while dial-up internet users decreased by 11.3% to 548,900 subscribers. Therefore, the operator has reached 34.7% of its 2008 broadband target (see Argentina: 5 April 2006: Telefónica de Argentina Aims to Reach 1 mil. ADSL Users by End-2008). TASA's total revenues increased by 12.5% y/y to 236.4 million euro, mainly influenced by the increase in the customer base and the 1.1% increase in voice traffic. Meanwhile, OIBDA stood at 122.2 million euro, an increase of 6.4% y/y, leading to an OIBDA margin of 43.1%, a decrease of 3.8 percentage points y/y. TASA invested 31.2 million euro in the first quarter of 2006 - up 9% y/y in local currency, of which 50% was in ADSL for developing new products and broadband. TASA will launch VoIP services for residential customers in 2006 in order to compensate for the reduction in long-distance revenues (see Argentina: 29 August 2005: Telefónica de Argentina to Launch VoIP for Residential Customers in 2006).
• Chile: Telefónica CTC Chile decreased its customer base by 0.2% y/y to 2.873 million accesses. Its fixed-line telephony customer base decreased by 0.7% y/y to 2.407 million and dial-up internet users decreased by 51.8% to 110,700 subscribers, while ADSL broadband increased by 68.4% to 345,400 ADSL subscribers due to special broadband packages (see Chile: 8 November 2005: Telefónica CTC Chile to Introduce New Broadband Plans). Despite the decrease in the customer base as a whole, total traffic decreased by 7.6% y/y. Telefónica CTC Chile's total revenues increased by 23.5% y/y to 261.9 million euro due to the increase in the broadband customer base and positive fluctuations in local currency. Meanwhile, OIBDA stood at 261.9 million euro, leading to an OIBDA margin of 34.9%, a sharp decrease of 10.1 percentage points. Telefónica CTC Chile invested 29.5 million euro in the first quarter of 2006 - an increase of 83.4% in local currency - focusing on developing new products such as Pay-TV services and broadband (see Chile: 4 April 2006: Telefónica CTC Chile to Invest US$200 mil. in 2006 and 21 April 2006: Telefónica CTC Chile to Enter Pay-TV Market in April 2006).
• Peru: TdP increased its customer base by 12.2% y/y to 3.277 million accesses, mostly influenced by strong commercial activity and new package offers. Its fixed-line telephony customer base increased by 8.5% y/y to 2.388 million; ADSL broadband increased by 53% to 359,800 ADSL subscribers; pay-TV increased by 16.9% y/y to 474,700 users; while dial-up internet users decreased by 33.7% to 47,600 subscribers. Its total revenues increased by 9.3% y/y to 279.3 million euro, mainly influenced by the increase in the customer base and offset by the 2.1% y/y decrease in total traffic (see Peru: 19 August 2005: Telefónica del Perú to Introduce New Tariff Plans in 2006). Meanwhile, OIBDA stood at 126.1 million euro, an increase of 30.9% y/y, leading to an OIBDA margin of 45.1%, a sharp increase of 7.4 percentage point y/y. Investments totalled 17.7 million euro - an increase of 19.5% y/y in Peruvian nuevo soles - mainly focused on developing new products and broadband.