Telefonica SA (TEF) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Telefonica's 2008 nine months results conference call. (Operator Instructions).

As a reminder, today's conference is being recorded. I would now like to turn the call over to Maria Garcia-Legaz, Head of Investor Relations. Please go ahead.

Welcome to Telefonica's conference call to discuss 2008 nine-months results. I'm Maria Garcia-Legaz, Head of Investor Relations.

Before proceeding, let me mention that this statement contains financial information that is reported under IFRS. The financial information contained in this document has been prepared under international financial reporting standards. This financial information is validated.

This presentation may contain announcements that constitute forward-looking statements, which are not guarantees of future performance and involve risks and uncertainties, and that certain results may differ materially from those in the forward-looking statements as a result of various factors. We invite you to read the complete disclaimer included in the first page of the presentation which you will find on our website.

We encourage you to review our publicly available disclosure documents filed with the relevant securities market regulators. If you do not have a copy of the relevant press release and the slides, please contact Telefonica Investor Relations team in Madrid by dialing the following telephone number, 34-91-482-8700.

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

Thank you and good afternoon, ladies and gentlemen. Thanks for attending Telefonica's first nine months of '08 results conference call.

During the Q&A session, you will have the opportunity to ask questions directly to our executive committee as I have today here with me, Julio Linares, our Chief Operating Officer; Guillermo Ansaldo, Head of Telefonica Espana; also Jose Maria Alvarez Pallete, Head of Telefonica Latin America; and Matthew Key, Head of Telefonica Europe, who is connected from London.

Telefonica has delivered once again a solid set of results well ahead of our peers. If I had to summarize our performance in the first nine months of the year, I would stress that we continue to offer a unique combination of strong growth, high cash flow generation, sound financial position and a strong focus on shareholder returns. Our growth profile remains unmatched with organic growth rates in every single region of operations beating those of our peers as I will show you later on.

In the third quarter of the year, despite a more complex economic scenario, we have been able to accelerate revenue growth on the back of robust performance recorded in Latin America.

OIBDA and operating cash flow organic growth rates have exceeded revenue growth, showing our ability to preserve our high cash generation, leveraging our integrated management model, scale economies and a strong focus to manage OpEx and CapEx. We have a solid balance sheet that allows us to face the current financial turmoil with flexibility and confidence.

As of today, we are on track to meet our 2008 guidance. We are fully committed to prioritize shareholder returns for the use of our free cash flow. Year-to-date we have devoted 9% of Telefonica's market cap to remunerate our shareholders, and we maintain our commitment to further increase dividends.

As we have publicly stated several times, our M&A ambitions are very limited, and our current priority is to fully exploit our organic growth potential.

Please turn now to slide number four to start with a detailed analysis of our nine-month results. Reporting year-on-year growth rates in nominal terms have been negatively impacted by the capital gains on the sale of Airwave and Endemol registered in the second quarter and the third quarter of '07. Changes in the parameter of consolidation and the Forex effect have also played a part.

Nevertheless, in organic terms and excluding the impact from capital gains, year-over-year growth rates remain robust and show an acceleration from topline to operating income. Organic revenue growth reached 7% in the first nine months of the year, ramping up 0.3 percentage points versus the first half of the year, driven by the very solid topline expansion recorded in Latin America.

Organic OIBDA rose close to 10% year on year up to September, showing a notable margin expansion despite high commercial activity levels. Operating income posted an annual increase of 18% in organic terms, while operating cash flows surpassed EUR11.6 billion for the first nine months of '08, more than 10% above the '07 figure. This growth is purely organic.

Turning now to slide number five, we show that January through September 2008 net income totaled EUR5.6 billion or 23.5% above last year's figure after deducting the impact from asset disposals in both periods, namely Airwave, Endemol and Sogecable. Reported earnings per share reached EUR1.2 and continues to excel, increasing the underlying EPS 26% year on year. Excluding the impact from purchase price allocations, EPS would have reached EUR1.316.

Group diversification, which is key to reliable results, is first outlined on the next slide. Our commercial drive to capture new customers and increase the usage better through new service and bundling offers allowed us to reach 252 million [SMEs] at the end of September, which is more than 15% higher than a year ago.

With very strong net adds across businesses, the 19%, 25% and 54% of growth rates posted by mobile, broadband and pay-TV customer bases have to be highlighted.

I would like to stress that already 41% of our total accesses are voice, broadband and cable bundles, increasing by over 7 percentage points versus September of 2007.

From a regional perspective, Latin America continues to increase its contribution to consolidated results. This growing region already represents 38% of our total revenues, [2.10] percentage points lower than a year ago, and it accounts for 35% of our consolidated OIBDA versus 29% in September of 2007.

The value of our diversification best emerges when reviewing the contribution to organic growth by regions as shown in slide number seven. We are actively pursuing the growth opportunities in each one of our markets, which leads to best-in-class organic growth rates.

Latin America is our key growth engine both in terms of revenue and OIBDA. In the first nine months of the year, our businesses in this region explained around 60% of group sales and OIBDA organic growth.

Spain and Europe are also contributing to expand consolidated revenues and OIBDA recording robust results in regions of lower economic growth and more mature businesses. From a business perspective, high growth services, namely mobile and fixed broadband registered double-digit organic revenue growth rates.

Slide number eight shows our differentiated growth profile in the industry. As I said, we are out performing our peers across every single region of our operations. We are recording superior growth rates both in Europe and in emerging markets. Their performance in Europe is even more remarkable taking into account that other players do not have operations in Spain.

Let's turn now to slide number nine where I would like to stress the sound convergent rate of revenues into cash with operating cash flow organic growth exceeding by more than 3 percentage points the growth rate of sales. This is mainly explained by our active management of OpEx and CapEx, along with higher efficiencies derived from further business integration and scale economies.

Group organic OIBDA margin reached 38.5% or 100 basis points above last year's figure on the back of outstanding margins in Spain and margin expansion in Latin America. Operating cash flow grew across all regions despite significance CapEx to enhance the coverage and capacity of our networks.

In the first nine months, 75% of group CapEx was related with growth projects.

I would also like to highlight that 87% of our operating cash flow comes from investment-grade countries. We have a proven track record of enhancing efficiency to increase further cash flow generation, and we continue working in the same direction. We have recently strengthened our organization to take the most of our scale and diversity and to enhance our competitive position across regions with a strong focus on innovation and transformation. A global approach to both areas will allow us to continue recording differential revenue growth in the medium-term, while we've passed through the operating model transformation to maximize efficiency.

Let me now quickly review guidance execution. The results for the first nine months of the year are hitting our growth targets for all group metrics. After adjustments for guidance calculation, growth in revenues, operating income before D&A and operating income was 7.4%, 7.8% and 14.2% respectively totally in line with our year-end targets. Communicative CapEx through September totaled EUR5.5 billion, and we maintain our full-year target of around EUR8.6 billion in constant currency.

As we anticipated, when we provided our guidance, we were assuming a significant ramp up in the growth rate of OIBDA in the fourth quarter of this year. With the information we have today, this is already happening. Therefore, we expect full-year group OIBDA growth close to the upper limit of our guidance range.

On the next slide, slide number 12, we show that we are also fully on track to fulfill 2008 guidance across regions. Let me remind you that OIBDA growth in Spain will accelerate in the fourth quarter of the year as last year we recorded significant work force organization provisions in the fourth quarter.

Let me now review the performance by regions. Telefonica Espana's performance shows our ability to preserve the cash in a more adverse economic climate. Our businesses in Spain have generated year-to-date EUR6.3 billion of operating cash flow, growing over last year's figures even if you exclude one-offs. This robust performance is driven by first, brand-new expansion, which stood at 2.3% after September on the back of continued double-digit growth in wireline retail and broadband revenues and a solid growth in wireless data connectivity revenues. As anticipated, universal service obligation revenues corresponding to the years 2003 through 2005 were accounted for in the third quarter of this year.

Second, OpEx optimization, next to mobile integration synergies are being captured. We're enhancing our commercial efficiency. A reliable credit scoring program is allowing us to contain increases in bad debt levels, which continue to be below 1% of revenues.

Obviously we are also taking advantage of lower reorganization costs versus last year. And there are many other ongoing initiatives that should bear fruit in the coming quarters like the renegotiation of long-term IT contracts, optimization of the insourcing/outsourcing ratio, etc. All of this has enabled excluding one-offs a 1.5% OIBDA annual growth up to September, posting a very solid OIBDA margin of 49.4%.

Let me highlight the 48% margin of the wireline business. Excluding the universal service obligation, there is also a sequential improvement in wireless margins in the first quarter of '08.

On slide number 14, we show in more detail Telefonica Espana's top-line performance. Wireline revenues grew by 3.9% up to September on a comparable basis, pushed up in the third quarter of the year by universal service obligation revenues of EUR183 million, which are impacting traditional access revenues. Other than that, no major changes in wireline trends.

Internet and broadband grew by 10% year on year, in line with previous quarters. Traffic revenues fell on lower fixed to mobile international traffic. IT revenue growth improved slightly in the quarter as we were anticipating as a main discussion up from first-quarter (inaudible) purchase indecisions.

In wireless both total and service revenues remained flat up through September after a 2% decline in the third quarter on lower customer usage and declining incoming revenues, which were impacted by tariff reductions. For roaming this effect should ease in Q4 of '08 as the sharper price cuts took place in September '07 and the larger weight of this business in the last quarter of the year.

I would like to highlight the value of being an integrated and incumbent player having wireline, wireless diversified businesses and the best quality customer base on the market. All these features are shaping a differentiated profile within the current environment.

Turn please now to slide number 15 for a better insight of the wireline operating metrics.

The Spanish traditional access market continues to grow, albeit at a lower pace, 1.6% up to September. Unbundled activity shifted our approach towards the naked share model. Plus, increased pressure from direct access competitors resulted in a 2.2% year-on-year drop in our retail lines. Although this is not positive, it is a much better performance than those of our peers in Europe.

In broadband we have reinforced our solid leadership with a share of maintenance in the third quarter of 61% above our market share of 57%, and we have been able to sustain healthy broadband ARPUs at close to EUR44, leveraging our best-in-class offering with the very good uptake of our higher speed services.

In the TV market, which has grown less impacted by the ongoing disputes of our football rights, we have increased our market share to over 13%.

Finally, double and triple play adoption are encouraging ARPU growth, up 3.6% year on year to EUR69.

On slide number 16, we review our wireless metrics in Spain. Despite a higher number of competitors, we maintain our strong competitive position, leveraging our focus on higher value segments and (inaudible) containment. An attractive product portfolio and initiatives like the iPhone, which is outperforming our expectations, allowed us to record close to 200,000 contract net adds in the quarter. Up to September, over 93% of our net adds were recorded in a contract segment with a stable churn rate of 1.1%. Contract already accounts were 62% of our total base, growing 9% year-over-year.

ARPU is showing some signs of stabilization versus previous quarters. While from the first to the second quarter of '08, the year-on-year decline accelerated by 2.4 percentage points, it has only decline by 0.7 additional percentage points from Q2 to Q3.

Outgoing voice ARPU reflected lower usage patterns, though outgoing data ARPU remains solid on the back of a very robust performance of connectivity revenues, which in the third quarter recorded the highest year on year growth rate since the fourth quarter of '07, 71%. We have doubled our 3G base in the last 12 months, and one out of four customers already has a 3G handset.

Slide number 17 shows at a glance the very strong performance of our businesses in Latin America. (inaudible) growing region where we have already surpassed 150 million customer mark with an 18% growth in organic terms sustaining the growth levels of June '08.

We're posting solid revenue growth rates that have even accelerated in the third quarter of the year to reach close to 13% in organic terms up to September, driven by the very good performance of mobile outgoing service revenues and Internet and pay-TV revenue.

Let me highlight the increased contribution of our Brazilian businesses growing 2.5 percentage points in the first half to 3.1 percentage points now as a result of the good performance in both wireline and wireless.

Top-line growth fully flows to OIBDA driving margin up in the region by 0.8 percentage points to 37% on the back of our large-scale and enhanced efficiency despite higher commercial activity across all businesses. OIBDA organic year-on-year growth stood at 15.6%, driven by the strong increase in mobile and the better performance in the wireline businesses. As a result, operating cash flow grew 9.6% ex-Forex, exceeding the EUR3.6 billion mark in the first nine months of the year.

On slide number 18, we review our Latin America wireless businesses. Commercial activity was very strong in the quarter with close to 13 million gross adds, 16% more than a year ago, with remarkable growth rates in Brazil and Colombia. Churn performance was positive, posting slight reductions in the quarter.

Our wireless customer base surpassed 118 million with double-digit growth rates in every single market and in context of an average penetration rate of 78%. We posted very strong performances in Brazil, Mexico and Peru, while in Argentina and Chile we continue to record a fast growth rate despite the high penetration levels.

The weight of GSM customers increased to 76% of our total customer base. ARPU was impacted by the strong customer expansion, promotions and lower mobile termination rates. Outgoing minutes of use showed a sharp increase, close to 19% year on year, driven by successful commercial initiatives to trigger usage, while mobile data revenues rose by 39% year on year, driving outgoing ARPU ex-Forex in the first nine months of the year up 1.2%.

Further, expansion in penetration levels, along with minutes of use and data ARPU upside, the (inaudible) leverage in the introduction of 3G services and the development of wireless broadband should continue to drive strong growth rates in mobile.

Turning to the next slide, slide number 19, we are further advancing in the transformation of our wireline businesses with strong focus on bundles and broadband expansion. Broadband net adds have consolidated their positive trend since the beginning of the year, showing increased volumes quarter after quarter.

In Q3 net adds went up 21% versus Q2, capitalizing on our higher speeds, increased coverage and new commercial offers to push bundles. As a result, our retail broadband accesses grew by 25% year on year to almost 6 million with an outstanding increase of over 45% in Argentina.

In pay-TV we continue to gain market share in the region, increasing our customer base by 66% year on year. Bundles and their different types are key in our transformation strategy, and the growth uptake has driven fixed line revenue per access up 5.5% in constant currency, showing a significant acceleration of 200 basis points versus the first half of the year.

Internet and pay-TV revenues continue increasing their weight quarter on quarter to top 18% of total wireline revenues or 3 percentage points higher than a year ago. The sound performance of Internet and TV revenue, along with an improved trend in traditional services, drives the revenue growth acceleration achieved in this quarter.

Now let me quickly review our main four operations in the region. Revenue growth both in Telesp and [TESA] posted a strong acceleration in the first nine months, 270 basis points into [150] basis points respectively from the first half of the year, while OIBDA margins for both operations in Q3 were in line with the previous quarter despite a higher commercial activity.

In Brazil Vivo is consolidating its leadership in the market, expanding its customers by 21% in organic terms year on year. Top-line grew 13% organically, up to September in local currency, driven by the strong performance of outgoing service revenues. OIBDA growth was higher, showing a solid margin expansion.

In the third quarter, the margin reached 31.5%, 5.8 percentage points more than a year ago despite the much higher commercial activity and the consolidation of TEMM, which has a lower margin.

In Mexico where we already have a 19.4% market share, our customers grew over 32%, driven by strong net adds and churn reduction. Outgoing service revenues outpaced revenue growth, advancing 44% year on year in local currency.

OIBDA for the first nine months of 2008 almost tripled that of the same period of 2007, leaving a 23.5% margin, which expanded by 12 percentage points versus September '07, showing the benefits of our larger scale. Operating cash flow was strong, reaching EUR126 million up to September.

In summary, the third quarter has been again a quarter of strong growth in Latin America. In the context of high commercial activity in the wireline business transformation, strong top-line came along with increased efficiency levels recording a solid OIBDA performance. OIBDA margins expanded quarter on quarter in Brazil, Peru and Colombia driven by the mobile operations. Our margin expansion was strong year on year across all our mobile businesses.

Let me remark again the solid results achieved in Brazil where we are recording fast revenue growth and a strong acceleration in OIBDA from 2% up to June to over 7% in the first nine months of the year.

Finally, in Venezuela our results continue to be outstanding.

Moving now to slide 22, we show that Telefonica Europe delivered another quarter of solid results with revenue and OIBDA growing like-for-like by 5.9%, 3.4% respectively in the first nine months of the year. The OIBDA margin kept its upward trend on a quarterly basis, though year on year it was impacted by the strong mobile commercial activity and DSL operations.

In the third quarter, we have recorded a strong commercial activity with more than 800,000 mobile net adds as we're anticipating customer needs around SIM-only, flat rates and broadband, as well as fitting existing customers with the right proposition, especially in Germany.

Customer base growth was driven by strong contract net adds, which accounted for 62% of total net adds in the quarter with record levels in the UK and Ireland.

Turning to slide 23, in the UK we continue to gain revenue share with strong revenue growth and resilient margin despite increased commercial activity. Telefonica '02 UK recorded the best ever quarter of contract net adds, 278,000 on the back of strong commercial performance across segments, especially in the SMEs, driven by no sell structure with churn falling to an industry benchmark of 1.3%.

Total ARPU continued to show a positive year-on-year trend in local currency, reflecting the (inaudible) on quality customer acquisition and a 10% year-on-year data ARPU growth, driven by the mobile broadband proposition launched in April and the iPhone.

In DSL the business reached 267,000 lines on the back of high quality service levels and customer satisfaction. The recently launched comprehensive fixed mobile broadband package offering 12-month DSL connection when contracted mobile broadband at a 20 pound level is now positioned as the best value customer proposition in the market.

In the current economic environment, mobile service revenue posted a robust performance with two-digit growth for the nine months clearly outperforming the market. We have not noticed so far significant increases in bad debt or churn.

Continued increases in efficiency, top margins to stay at the 26% level stable versus the previous quarter despite the above-mentioned increased commercial activity.

In Germany where the mobile market is still seeing revenue declines year on year, our mobile customer base continues to grow, taking advantage of a segmented approach -- using low-cost partner channels to acquire no frills customers and focusing on higher value customers in both contract and prepay with our two branded services.

1.5 million mobile customers were added in the first nine months, almost one-third higher than last year, with contract net adds impacted by the disconnection of nonrevenue generating partner customers. Nevertheless, the business saw good traction in mobile broadband and improved the customer mix on contract to gross adds.

Revenue growth has slowed to a 0.7% year-on-year growth in the third quarter with mobile service revenue impacted by the migration of customers onto new better value types, a process which is today around 90% completed and expected to finish in the fourth quarter and by one-off promotions from the second quarter.

Preliminary data and revenue performance in October shows an improved revenue trend. OIBDA grew quarter-on-quarter, though it showed a 3.5% decline on a like-for-like basis up to September, reflecting the above-mentioned commercial activity around new value tariffs on contract.

Margin expanded on a sequential basis from the first quarter as we saw the benefits of restructuring, scale and a growing positive contribution from the ULL business.

Turning now to our financial profile, I would like to highlight how we continue improving on, number one, we have dedicated EUR3.6 billion to shareholder remuneration, completing our buyback program established at the beginning of the year, which allowed us to announce a new 50 million share buyback program earlier this year.

Second, we have been able to make comparable decent enhanced remuneration with yet another reduction of our leverage ratio by moving net financial debt below the two times mark 1.91 times OIBDA as of September, although this ratio will likely increase in Q4, maybe due to our dividend distribution paid last November 12 and the completion of our Chilean tender offer and our increased stake in China Unicom.

The recent improvement has been the result more than EUR2.4 billion debt reduction in 2008, coupled with OIBDA ongoing increase. When adding our cash commitments to the financial debt, the ratio stands at 2.05 times within the low part of the rates set on our last investment conference.

Third, our liability mix keeps on benefiting from the pound and Latin currency depreciation in the first nine months of the year, more than offsetting the Czech kroner strength and leading to nearly EUR528 million savings in the value of our debt.

Fourth, despite current market conditions, we have been able to maintain the effective interest cost of our debt in line with our 6% target, which is more challenging going forward.

And finally, we show a comfortable majority profile for the coming years. As such, 2008 maturities are lower than existing cash, and 2009 maturities are lower than undrawn committed credit lines expiring in 2010 and beyond.

On top of that, we count on our annual solid cash flow generation.

Also, may I remind you that our average debt life is around six years, which is longer than the time we would need to fully repay it.

To sum up, we continue to deliver benchmark results, reinforcing our differentiated profile in the telecoms industry. We're posting superior organic growth rates well ahead of our peers. We continue to generate high levels of cash flow, which keeps growing across all our markets. We have a sound and comfortable financial position, and we are fully on track to meet our 2008 guidance.

Shareholder's returns are our priority. We have no tolling increased dividends paid in 2008, but we have also expanded by 2.25 times our original share buyback program for this year. Year-to-date we have devoted EUR6.2 billion or roughly 9% of our total market cap to remunerate our shareholders. Dividends will continue to grow, and most of our future free cash flow is going to be used to remunerate our shareholders.

Thanks very much, and now we're ready to take your questions.

(Operator Instructions). Jesus Romero, Merrill Lynch London.

I have three questions. The first one on Spanish mobile. Maybe Guillermo could give us his view for the fourth quarter both in terms of ARPU and service revenue growth?

The second one regarding debt, Santiago, you mentioned that it would be challenging to keep that course at 6%. I don't know if you can give us a bit more detail on maybe what is the mix between fixed and variable out of your total debt?

And then the last one. On working capital, should we expect in the fourth quarter a similar moving positive working capital as we saw in 2006 and 2007 in the same quarter?

Thank you for the question. I will answer the first one. Regarding the fourth quarter on the mobile business, we have won a couple of positive trends that should help us in this quarter.

First, you remember the roaming tariff cards were in September last year, so we're going into a quarter where roaming out will be a positive compared price to overprice.

Second, mobile data and iPhone in general is strong in terms of demand, and this (inaudible) are two key elements of our commercial activity. So these are positive trends.

Obviously the market is harder in terms of slowdown, but we believe that we can counteract this, and overall we are confident we can meet our goals.

On debt, the effective cause of debt has increased slightly this quarter because mainly of volatility. You know that interest rates in Europe and the US are coming down, but interest rates in the Latin region are going up. So the combined effect is a modest increase.

We do not expect final '08 effective cost of debt to deviate significantly from 6%, but I really want to say that volatility is something we know how to play with.

In terms of how much debt we have on fixed and variable, 40% of our debt is fixed. And the rest is split between what we call capped and straight variable or flowing debt, and roughly the numbers are 35% is floating, 35% roughly or 40 is fixed. The rest would be within bounds.

On working capital we have had a special third quarter where working capital consumption has been slightly higher than anticipated because of a number of one-offs. We fully expect Q4 to be in the usual seasonal pattern, whereby we tend to generate more cash than we actually demand. And, therefore, the Q4 pattern should be more similar to the one you saw in 2007 than this time.

Roughly in Q3 we have seen a consumption of working capital of EUR1.6 billion, EUR600 million of which are exceptionals, are linked to one-off events, which will wash out as the year progresses.

Jonathan Dann, JPMorgan London. Mitchell Collett, Cazenove London.

Just sticking with the Spanish mobile business, I noticed that MOU has come down both year on year and quarter on quarter. Is that a symptom of people moving their calls to the fixed network, and can you give us some feel for how the fixed network might be benefiting if that is the case?

And secondly, I think Orange has had the best service revenue performance in Spain this quarter with your performance broadly in line with Vodafone. Can you give us a feel for what Orange is doing that has been successful?

And then thirdly, I know in some of your Latin American businesses you're running both TDMA and GSM networks. I wondered if you had a timeline of when those additional networks might be turned off in terms of how many subscribers would have to be on the GSM network for that to happen and therefore, what sort of cost saving that might create?

Thank you for the questions. Well, regarding the MOU, we do have a decrease in terms of minutes in this quarter. This is due to the fact that we have a summer campaign, which was 22 days shorter than the one we had last year. This has another positive impact in ARPU but a negative impact in the MOU metrics.

The second effect obviously is the data-only SIM is something that quarter by quarter we have an increasing impact in this ratio. We tried to estimate these two impacts in our numbers, and it explains like two-thirds of the variation quarter-over-quarter, third quarter to second quarter. The rest of the variation, of course, we allocated to the slowdown and change of pattern behaviors.

What are we seeing in the fixed network? Well, two different scenarios. One, in the expensive traffics like international and fixed mobile, there is some stress, meaning due to the slowdown during the summer. But in the cheaper traffics meaning metropolitan, provincial and national traffic, where there is a significant and growing portion of flat rates, our traffic is going very well and even above our own estimation. So there is some change of traffic between mobile originated to fixed originated, but that, to be honest, does not explain the whole slowdown in the part of the MOU. So partly the summer campaign, part is going to the fixed, and part is the slowdown.

Regarding the comparison with other competitors, as you mentioned, the behavior in the quarter compared with Vodafone is pretty similar. Regarding Orange, we do not have the fall information about Orange. When we look that ARPU, for example, as you remember, this competitor did a restatement of a number of lines in the second quarter of '07. So when you compare annual ARPU against annual ARPU, you have to take that into account. And that reduces the gap.

Also, in terms of ARPU again, this competitor has a different prepaid mix as us. Remember Telefonica has the highest postpaid mix in the market, so that explains a little bit. But again, on a quarterly basis, it is pretty hard to extrapolate what is going on. Compared with Vodafone, as mentioned before, the trends are pretty similar in this quarter at this level.

Taking your question about the Latin American business on the CDMA and the GSM network cost of running both networks at the same time, well, I would tell you that the only place where we still have significant or more significant activity for CDMA are Brazil and Venezuela. And out of those, you have two different kind of impacts.

One is in OpEx, and the second one is in CapEx or in maintenance.

In terms of OpEx, as most of our new adds are coming in GSM, more roughly 90% in the case of Brazil, the level of subsidies in terms of CDMA handsets has insignificantly reduced. So the impact on the margin is already there mostly. And it is mostly the same case in Venezuela.

And in terms of my international networks and, therefore, in terms of CapEx, there are no significant additional efforts to be held because most of those sites have shared, and the maintenance costs are similar.

So I will tell you that probably by the year 2010, if things keep going in the same direction in terms of commercial activity in GSM, we will be starting switching out the CDMA network.

In order to give you an idea in Brazil, right now the level of CDMA plan base has been reducing approximately 6 million subscribers year on year from roughly 21 million last year in December last year to roughly 50 at the end of the third quarter. So the effort is progressively being done on most of impact in terms of the OpEx has been already absorbed or taken advantage of because of less need of additional subsidies in the CDMA handsets.

Great. Thanks. That was very clear.

Terry Sinclair, Citigroup.

Two questions for me. First of all, is there any part of your business where you see the prospect of a sharp CapEx fall next year?

Secondly, can you just help me a little bit to understand why costs in Chile remain so strong relative to revenue growth?

And in a similar vein, is there anything we can say about Telefonica Peru where we might see a turnaround there?

Well, I will take the second and the third one in terms of Chile. Two effects. First of all, take into consideration the fact that inflation has been picking up roughly like 8% in Chile. And, therefore, at the same time, we're running a significant business transformation on the wirelines side, accelerating the development and the deployment of broadband and television and with the level of penetration of the mobile market, which is significant, and as a result, we are seeing a transformation of businesses towards I would say lower volume business in the case of the broadband and the TV business.

At the same time, we keep boosting the efficiency levels, and we keep increasing the quality parameters. And, therefore, you will see that the decreasing margins in Chile has been slowing down in the next -- in the recent quarters, and we aim to have stable margins in the short run.

There is also a pickup in a, slight pickup in Chile on the wireline side that has been also affecting us because of our aggressive commercial campaigns on the TV side in the first quarter of this year. So, as you net all these effects that we are working on, we are aiming to have stable margins in Chile in the short run.

In the case of Peru, it is different. Because in the case of Peru, what we're fighting is against a CTI minus 7% price cap, and therefore, if you take that into consideration, you will see that the effort in margins is still significant.

So in the case of Peru, we fighting against our revenue restrictions to say that we do not have in the case of Chile. So in the case of Peru, it is probably going to take us longer to moderate the situation than in the case of Chile.

Regarding your question on CapEx, first of all, I think it is important to take into account that in 2008 we have a big CapEx. So next year we expect better level on CapEx. In addition to that, based on the information we had for the first nine months of this year, 75% of our CapEx was invested in what we call transformational growth periods. Because of that, yes, 25% of our CapEx was to maintain our existing business. And then we believe that we have a huge flexibility to control all our CapEx.

Sorry, did you say 25% or 75%?

75?

75.

75% is for transformation and growth opportunities and 25% to maintain our current businesses.

Very clear, gentlemen. Thank you all very much.

[Sandeep Singh], Morgan Stanley London.

I would like to ask two quick questions, please. First of all, American Mobile's CEO recently gave an interview (inaudible) suggesting they may have to lower their guidance due to the current economic situation. Can you explain why that may not apply to you?

And my second question is on Vivo and Portugal Telecom. If Portugal Telecom is more willing, would you entertain a deal where you could merge telephony with Vivo, and they could remain a partner with another shareholder agreement?

Well, thanks for your question. And taking the first one on the macro situation of the region and just commenting on our case because I cannot comment on other's case.

The situation that we're seeing is that there is still very strong commercial activity, mostly in every market, probably with the exception of Central America, which is slowing down a little bit. But globally speaking in terms of minutes of use, ARPUs or gross adds in terms of relatively speaking commercial activity, as of beginning with the figures of October, it stills sound growth ahead of us and sound growth to be captured.

So, and if you just hop the levels of gross adds that we have been having, mostly (inaudible) around, we have not seen any sign of deceleration so far.

So what we can tell you that we are comfortably in the levels of guidance that we have been sharing with you and that we have no reason to review that as we speak.

So what we can tell you that we are committed to the figures and, in fact, as part of this year, we are significantly in the upper part of the guidance that we shared with you at the beginning of the year, and we are dealing with the normal operational issues that we have been dealing so far. So we will keep you posted, but for the time being, we have been seeing a very strong region.

Thank you. And the second question, please?

Sorry. On the Vivo and PT, we have been stressed recurrently that we would like to -- that we are a buyer of the 50% stake of Vivo/PT and that we are open to any kind of alternative that PT would consider convenient. But again, I am stressing that there's nothing we can do to urge their position and that they are (inaudible) to take that decision. But we will be delighted to comment with them or to discuss with them any alternative.

David Wright, Deutsche Bank London.

A couple of questions, please. First of all, at the O2 Conference October last year, we had your dividend announcement. If you to give us an idea of when we should expect the 2009 dividend to be announced, please?

And another couple of questions on guidance. You just indicated that you should be hedging the upper end of the EBITDA range, yet you have chosen not to formalize that in this morning's statement. Is that to give you a little more flexibility in Q4, perhaps iPhone subsidies, etc. that you have clearly been successful in the UK and maybe mapping more into Spain and even Latin regions?

Just very finally, a little more detail on Colombia. It seems like there's been a huge margin turnaround in Q3 margins plus 9% or so versus the first half, a negative 5% year on year. I was wondering if you could just give us a bit more detail on that, to what extent that is sustainable, and then Colombia is looking more like a 45% margin business?

Thanks for your questions. On dividends you know we pay twice a year when it is an inherent dividend, which we just paid ahead of 2008 results and the final dividend which will likely be paid in the spring. So the 2009 dividend will be announced in all likelihood in the first half of 2009.

But we wanted to stress that we continue to be fully confident in the cash flow generation ability of the Company and that the dividend path is going to be one of increasing numbers. And we wanted to leave it deliberately open so that we will have full visibility about the full-year results. In the short-term model, we are more -- we have more information available to actually hit that number. But it will be a growing path of dividends going forward.

On guidance you may have been overinterpreting a little bit our statement. We just wanted to reconfirm that we feel comfortable in hitting those numbers, and my comment that OIBDA is likely to be in the upper part is more to signal our confidence than intended to have any second or third meaning. So no, we are not leaving anything behind. Ranges are there to be used, and we feel comfortable that, especially at the OIBDA level, we are more than likely to hit the upper part of it.

David, taking your question about our Colombian operations, we have improvement in margins in both of the units and on the wireline and on the wireless. And in both cases, we think it is there to stay.

On the wireline side, do you have a better comparison year on year because of the improvement in systems that we have been installing in the last quarter of next year and in terms of the regional efficiencies that we are starting during the year 2008 to put in place in the region? And on top of that, we're accelerating also the deployment on the bundling of products, and we're having a successful experience there in terms of deployment of growth.

In the case of the wireless business, there are I would say two major effects. First of all, I mean we're having a decrease in the cost of terminals and the subsidies because of the CDMA migration towards GSM. And on top of that, you have less interconnection costs because of the interconnection growth that we have been having this year, and both effects we think are there to stay.

Okay. Thanks. Could I just chase one comment, Santiago, just on the dividend. I mean I mentioned it was announced this time last year, but I think in previous years it has typically been announced at the very beginning of the year after you write the budgets. It sounds to me like that could be a little more delayed now. Should we be thinking a dividend announced after the final for 2008 or sometime after the full-year results? Could you just give us a little more visibility on that?

David, the board has not seen yet the budget, which is being finalized. You are right in pointing out that in the past we have acted the way we have acted. This year we wanted to give full visibility and full comfort when we have both visibility and comfort. We're not there yet. We're not in a position to say it is going to be February when we publish the results or it is going to be later in the year. I'm simply not in a position to say that, not because we're holding any information, but because we don't think it is absolutely necessary to commit to things which will start to be paid at the earliest in November of 2009. There is plenty of time.

James Ratzer, New Street Research.

I have got two questions please, both on Latin America. The first one was, I was wondering if you could tell us of the EUR5.7 billion of cash on your balance sheet, how much of that is in Venezuela bolivares at the moment? Could you give us an outlook on your ability to repatriate cash from that business on an ongoing basis?

And the second question was just regarding your performance in Mexico where the rate of growth does seem to be slowing at the top line. It looks like you have lost revenue market share to AMX over the last couple of quarters. Can you give us an outlook on your strategy there? I mean it looks like price has actually gone up this quarter. Do you expect to cut them more aggressively to try to regain market share? Thank you.

Yes, well, in terms of our cash position, we would rather not give the full disclosure of every single detail. The one thing I can say is that we have repatriated with no difficulty from the region on the Latin American region north of EUR1 billion this year. That, in particular, from Venezuela we have got in about about $5 million I think it is, and we have no reason to not expect that trend to continue in the future. Certainly Venezuela has, as you sure are aware of, currency controls, but currency controls are not currency prohibitions. And yes, there's a very long and bureaucratic process to apply, but we have so far been able to extract and to repatriate the better part of that.

Considering your question about Mexico, there are several aspects to comment there. First, in the third quarter of this year, we have had the portability issue in Mexico, which has not been very relevant in terms of numbers, but has forced us to a system change, and that is why at the beginning of the quarter we have been slowing down commercial campaigns in order to be focused on this community systems migration. And that is why we have been constantly slowing down our commercial campaign.

On top of that, there has been a willingness to really see what is the underlying level of our customer base in terms of rechargers without significant or aggressive commercial promotions. And that is why we right now have a clear picture or we think we have a clear picture of what is the real underlying MOU and underlying ARPUs of the customer base.

We have been retaking commercial activity in this last quarter, and the figures that we have for October shows a pickup in ARPU and in MOU. So we think that we are now -- as far as we are in this quarter, trends are picking up slightly.

And in terms of the share of our revenues, we think we have not been losing significantly with American Mobile. We probably more with Nextel because it has been most on the postpaid part of the market where Nextel has been aggressive and successful, and we still need to be more focused on our postpaid offer because so far we have not been able to find a right balance there.

So you are right. We need to do an additional effort there. But in terms of the Mexican situation, we are still seeing growth, double-digit growth, and we are right now back on the commercial campaign intensity path, and we will keep you posted on the progress.

Graeme Pearson, Nomura London.

A couple of questions on Europe, please. In the UK what was the total EBITDA investment for the iPhone in the quarter, and what trend do you expect in acquisition costs going forward?

And second, when do you think you can turn around the negative EBITDA trends -- sorry, the negative ARPU trends in Germany?

So as far as the iPhone is concerned, frankly, it is just partly of our product mix. We will always manage our business as a product mix. It was an important part, but also we really (inaudible) this is the product which is a SIM-only product in the UK and also recognized that our churn levels in the UK were the lowest that we have ever reported, and I think the lowest any mobile operator in the UK has reported. So those are the three key flows of our

growth. So yes, the iPhone had an impact, but we're still very, very comfortable that the quality of customers we're getting will drive long-term value for us.

As far as German ARPU is concerned, I guess it is good to say, as I have said, there are a few big moving parts in Germany. We're now 90% of the way through migrating customers that were run older tariffs onto newer best of value tariffs, which is clearly an ARPU depressor in the short-term. Recognize also that we're getting an element of our volume from partner business as well, which (inaudible) come in at lower ARPU levels.

And I guess finally, I would say in Germany that the market as a whole across the four operators in total are still showing a decline. So it is a market question as well as an ask question.

James McKenzie, Fidentiis Madrid.

Could you -- since we almost in London the situation in Spain has changed quite radically. I wonder could you give us an idea quantified if possible of what sort of levers you could pull in both of your Spanish businesses to ensure that the cash flow targets could be met, and then would it be possible to give me an idea of where the bad debts stand in Spain in the third quarter?

Let me start with the last one this year, we stayed below the 1% over revenues. Bad debt positions over revenues has not changed much since the last two quarters, although there is stress as you can imagine of people not paying and so on. So far it is controlled, but it is a concern.

Regarding cash flow targets, one thing that is important is that in these scenarios, as you understand very well, right now while our focus is on cash flow generation in Spain, and that is the key metrics. I know it is always important, but in these times this is our test to provide the operating cash flow to the operation.

So in that sense, we have two generic priorities. The first is to protect our revenue base, and that means several things. First to continue sustaining our leadership in broadband both in fixed broadband but also to capture the growth opportunity on mobile data and mobile broadband, which we believe there is a growing demand and is a trend that despite the overall environment provides growth for the whole sector and for us. The first is to continue leaving the broadband both wireline and wireless broadband arena.

The second one is churn. Churn and retention are our key priorities, whereas now as you can imagine if the market is not growing as fast as we all expect it to retain our best customer is a key priority. So there we will continue pushing bundles and investing in loyalty programs in the mobile business, for example, and through our loyalty points program. I will also renew in terminals whenever we see opportunity to foster or to lengthen our contracts or commitment with clients.

Third is three key (inaudible), kind of difficult, but there are some ARPU voice opportunities in mobile through a segmented approach. We do not believe in generic actions that start the migration of people without nonsense, but there are opportunities to specific actions in different segments.

And a fourth priority on the revenue side is to maintain our quality premium. We have done so so far, and we can continue -- and we wish to continue doing so. So that is on the revenue side.

If you go to the OpEx and CapEx, that is where we are also approaching a lot of effort as you can imagine. Generically we believe that about 45% of our top OpEx is manageable or variable in the short-term, and also of CapEx is something that we know how to manage in the short-term.

Regarding OpEx, there are several measures. One is your question, is that bad debt or nonperforming, that is the key priority.

The second one is commercial efficiency. We are continue pushing synergies between in the retail channels and direct force channels between the mobile and the fixed business, so we can capture any opportunity to get the same sales with the minimal resources. We will continue investing in all line channels and reducing product portfolio.

Regarding operating costs, well, you know we continue with our redundancy programs that we announced. We have renegotiated IT contracts both on operating the system and business systems. Again, capturing fixed to mobile synergies since we looked at processes across the whole company, and we keep on working on finding the right balance between insourcing and outsourcing and also in offshoring.

There is a lot of projects going on. Some of them are easy to implement; some of them take more time. But there is a lot of savings coming in.

So regarding free cash flow, that is our key metrics. As you know, we grew 8.4% in the three quarters of this year. Even taking away all their one-offs, we're still growing an operating cash flow, so that is our priority, and we will keep our focus on that in any scenario.

Andrew Hogley, Execution London.

Three questions if I may. First of all, contract (inaudible) in Spain were the weakest since the start of '05. Does that market change in strategy, or is it just an indication of the deterioration in market conditions?

Second, are you able to give us any indication of the number of mobile broadband SIMs you have got in each of the big three European markets? And finally, we have seen a number of your global peers take exposure to India over the last few months. Do you have any desire to do the same?

(inaudible) the question?

The final question was we have seen a number of your global peers take exposure to India over the last few months. Do you have any desire to do the same?

Let me start with the third one. The short answer is no. It is not a market that we consider approaching any closer than we have already done in the past, which is very little.

Let me try to answer the first question. If I understood correctly, you are asking about if the mix of postpaid and prepaid is not advancing as fast as before? Is that the first question?

That is correct, yes.

Okay. What is it one quarter, but of course, in this type of environment, there is a little bit more -- there is a preference in the customer base for controlled tariffs and prepaid and prepaid tariffs. So we keep on working on maintaining the contracts, but we are a little bit cautious on migration from prepaid to postpaid. Whenever we see an opportunity, we will do it. But if we don't see that our (inaudible) positive credit scoring criteria are not met, we're going to be a little bit cautious. So we're little bit more conservative because at the end of the day, you are providing some credit to these customers. But it is very normal in these type of situations.

Regarding the broadband, I think you are asking about the three major markets. Regarding Spain, just to give a flavor, you know in mobile broadband you can measure the market in different ways. One cut is to look at tariffs data tariffs, and right now in Spain we have 800,000 data tariffs. This is basically high in terms of tariffs for basically the type of bundled tariffs in mobile.

Second, tariffs for small phones like the one we have in iPhone and also daily tariffs. This is 800,000 that is basically double the size we had one year ago.

Andrew and I will (technical difficulty)-- Germany. Two different stories for us. Both markets are continuing to accelerate. In the UK we actually came to the market relatively late because we wanted make sure the customer experience was right, and certainly the UK operators have gone early, have experienced significant returns from customers when they go there. Mobile broadband products (inaudible) to get right coverage and speed.

So (technical difficulty) we've gone late and now we have launched between (inaudible) difficulty) products (inaudible) in terms of markets.

Germany, a different story. We're trading above our weight in Germany, largely because we recognize that E-Plus does not have a strong data network. So it is more a three player market in Germany than a four player on mobile broadband.

Luigi Minerva, HSBC London.

Three questions on my side. The first one is on regulation in Spain. The European Commission this morning issued a statement raising doubts about the Spanish broadband regulation. If in January they reverse the CMT current framework, how is that going to affect you, your strategy in fiber? Will you, for example, be available to offer wholesale fiber products?

The second question is really on Brazil. If Vivo pays a dividend to Brazil sales, would you agree for Brazil sales to then distribute that dividend to Telefonica and PT?

And finally, the last question is on your 2010 target. If you can reiterate your EPS and the free cash flow per share target in 2010? Thank you.

Regarding the first question, fiber relation in Spain, what happened yesterday and it was a press release this morning, is that the local regulatory is doing what we call a market analysis for a couple of possible markets. And that procedure implies that this market analysis when there is a dominant player in both has to be approved or seen by the European regulators. The European regulators can take three stances. They can approve it. They can veto all they can enter in what they call a Phase II, which is a two-month period of gathering more information and trying to agree upon the proposal of the national regulator. That is what in this case, that is what has happened with one of the markets, which is the market five. And this is particularly which is where the wholesale offer for copper and fiber is involved.

So what happened is that they have not vetoed the proposal of the local regulator. They just have decided to get into this Phase II scenario. This means that the CMT, the local Spanish regulator, has to provide more information and further discussion with the European authorities so as to come to a conclusion after this two-month period.

So we're confident and we hope that these discussions and these exchange of views will be positive, and we will have to in this case to wait for the discussions. So it is a little bit early to discuss outcomes and what happens if different outcomes are happening.

Regarding wholesale offers, our will heads east and has only been to offer wholesale offers to third parties. The discussion here is not the wholesale. Now wholesale is a regulated offer or a commercial offer. But again, we have to wait until this two-month period or less because this is cap, and this is now on the turf of the national regulator and the European Commission.

Taking your second question about if Vivo was to pay any dividend and if we would be approving that dividend to be transferred to shareholders of Brazil Tel, the answer is yes. There is no value in preserving cash at the level of Brazil Tel. So as far as PT agrees, for us it is yes.

And on the 2010 EPS and free cash flow per share guidance, it is my pleasure to reiterate for the umpteenth time that we will get those numbers by 2010. Thanks for asking.

Luis Prota, Morgan Stanley Madrid.

I have two questions, the first one from the UK. You have been mentioning growth in contract Brazilians of ARPU. These are clearly the facts. But I would like to get some light on the key differentiating factors against O2 and the rest of the competitors. What is your view on that?

And the second question is on digit ARPUs. What are your plans here? What is the maximum price you would be willing to pay, and what is the stance regarding the football rights within digital ARPUs? Thank you.

I will pick up the UK question. Fundamentally it is about giving customers products that they want to buy and doing it consistently, which we have now done for many years and anticipating their needs in the current economic environment, and we recognize they want flexibility, certainty and value. And once you put bright propositions and market them properly and execute (inaudible), so we just believe in the UK market. We continue to do that. And consistency of management is also very important as far as maintaining the business.

Regarding Digital+, you know that we still have cooperation with them. We continue having that cooperation because it is very important assets to complement our own offer, and because of that, we will follow everything that is our own.

Digital+, who has been participating in the different open processes, that is too early to try to buy various specifics on the type of kind of questions that you are asking for.

Jonathan Dann.

Just to circle back on two questions. One is, I understand that the announcement of a 2009 dividend is delayed. Does that have any bearing with any ongoing union negotiations, perhaps?

And secondly, it is a sort of geekier question. Does '02 pay a sort of franchise fee back to Telefonica, and do any of the Latin American assets still pay management fees?

Let me answer maybe both questions. First, there is no dividend delay. I'm just pointing out the fact that 2008 is still running and that the dividend for 2008 has been fully committed to be one full Euro. It is the kind of thing that we revisit every once in a while and certainly when the cash becomes available, which has become more of a priority now than it may have been a couple of quarters ago.

So, as analysts, should we sort of look at our quarterly cash flow models in '09 to sort of kind of understand where you're coming from? Is that what we should do?

What we're going to do is let '08 expire, get more visibility about what the outlook and the budget for 2009 are, and in all likelihood we will speak on those two numbers and the degree of confidence that we have on those are said along with guidance. But I would rather not make any formal commitment about when that is likely to happen.

On brand fees, it is a highly technical issue because when we purchase some of the Latin American assets, a management fee was included. We would be willing to go at length. It is fully public information. Because of the change to IFRS and of things we have had to change on the O2 sort of reorganize the (inaudible) schedule. But anything we provide on the businesses is net of those brand fees. Meaning you should not assume that any change of any intercourse of fees has any direct bearing on the businesses. Because it is, at the end of the day, something that we try to do most for tax reasons to please and naturally manage the tax authorities in different jurisdictions, which sometimes are quite picky and finicky about what gets paid where. Because obviously it has a tax impact that they are concerned about.

Thank you very much, everyone, for participating in this conference call, and we will join you at the end of January when we release our full-year results. Thank you.

Thanks, everyone, and thanks for attending the call.