Telefonica SA (TEF) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Telefonica's January to March 2011 results conference call. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator instructions) As a reminder, today's conference is being recorded.

I would now like to pass you over to Ms. Maria Garcia-Legaz, Head of Investor Relations. Please go ahead.

Good afternoon, ladies and gentlemen, and welcome to Telefonica's conference call to discuss January-March 2011 results. I am Maria Garcia-Legaz, Head of Investor Relations.

Before proceeding, let me mention that this document contains financial information that has been prepared under International Financial Reporting Standards. This financial information is unaudited.

This presentation may contain announcements that constitute forward-looking statements, which are not guarantees of future performance and involve risk 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 your 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 don't have a copy of the relevant press releases and the slides, please contact Telefonica's investor relations team in Madrid by dialing the following telephone number, 34-91-482-8700.

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

Good afternoon, ladies and gentlemen, and thank you for attending Telefonica's first quarter results conference call. Today, I have with me Julio Linares, our Chief Operating Officer; Guillermo Ansaldo, Head of Telefonica Espana; Jose Maria Alvarez-Pallete, Head of Telefonica Latinoamerica; Matthew Key, Head of Telefonica Europe, and Miguel Escrig, our Chief Financial Officer. During the Q&A session, you will have the opportunity to ask questions directly to any of them.

Q1 results proved a solid start to 2011, with a performance that is totally in line with our expectations, and therefore, affirms our full year guidance. A high level of sophistication continues to drive our results, both in top line growth and sustain our best in class profitability.

The exposure to Latin America, and especially to Brazil, drives our superior growth profile, over the accounting for 45% of our sales and OIBDA. On the other hand, the right data offer to fully monetize the ramp-up and data adoption have led to a 19% year on year organic growth in mobile data revenue.

As we explained at the beginning of the year, 2011 marks a change in our commercial strategy, with an increased focus on value, instead of chasing volume. In parallel, we continued strengthening our networks and platforms amid customers' demand.

Please turn now to slide number 3, to print a review on the first quarter of 2011 major financial networks.

Reported year on year growth rates are positively impacted by changes in consolidation, mainly the full consolidation of Vivo and Forex. Nevertheless, performance in organic terms remained solid. Revenue grew steadily, by over 10% in nominal terms, and 1.4% year on year in organic terms. OIBDA reached close to EUR5.6 billion, up 9% in reported terms, with a slight organic decrease. As a result, we continued to post a robust OIBDA margin at 36.1%, showing a limited erosion year on year.

Operating cash flow exceeded the EUR4 billion mark during the quarter, with the 4.90% year on year declining organic terms, impacted by a different pace of CapEx execution versus a year ago.

Net income reached EUR1.6 billion, declining 1.9% year on year, despite the strong growth in OIBDA. This is explained by several factors. D&A increased year on year, mainly driven by the full consolidation of Vivo and the recognition of EUR86 million in the equity, due to amortization of Vivo's purchase price allocation. Please notice that total PPA increased 13% year on year. In organic terms, D&A was pretty flat.

Profit from associates also drove net income down, mainly [serviceholder deconsolidation] from the second half of 2010, and the lower contribution from China Unicom year on year. On top of these impacts, profit attributable to minority interests dragged EUR110 million from net profit in this quarter, mainly due to change of consolidation of Vivo and the very strong performance of its earnings.

As a result, earnings per share reached EUR0.36, or 1.5% down year on year. Excluding the impact from the purchase price allocations, PPAs will stand at EUR0.41, 0.2% up versus the first quarter of 2010.

On slide number 5, we present details. We detail our value rated customer base and revenue growth drivers, stressing the benefits of our growth diversification. Growth in the first three months of the year was underpinned by the continued expansion of our mobile base on the back of strong growth in the contract segment, which accounted for close to 60% of net adds in the quarter, and already represents one third of our base.

By regions, Telefonica LATAM continues to be our key growth engine, which, combined with a solid performance posted by Telefonica Europe, outpaced the decline in Telefonica Espana.

By services, we continued to revolve our revenue mix, increasing our exposure to the fastest growth businesses. Growth and services include in fixed and mobile, and services beyond connectivity, already account for 25% of our sales, with a strong growth from these services offsetting the lower contribution from traditional voice services.

I'd also like to highlight the very positive performance of organic revenue growth, excluding MTR cuts, which would stand at 2.4%.

Smartphone demand and data usage continued posting a strong momentum, especially in Europe. Total mobile broadband penetration has reached 12% of our total mobile base. We're up 2 percentage points versus December, with a significantly higher figure for both Telefonica Europe and Telefonica Espana.

The increased customer base and our data tariffs with tiered pricing launched across markets have led to a remarkable 19% year on year organic growth in data revenues, in line with the growth recorded in the previous quarter, driven by the 36% increase in non peer-to-peer SMS revenues.

On the hot topic about SMS cannibalization, it is true that there is a growing adoption of messaging applications among our customers, but thanks to the right tariff plans, we are being able to monetize new usage patterns, and therefore, we are strongly growing our total data revenues. And let me stress that our peer-to-peer SMS revenues is growing 5% year on year in organic terms.

What is key for us, and for the industry as a whole, is that we are generating more revenues. Displayed by concepts, well, it depends on the type of bundles, and revenue allocation criteria that each player applies, and therefore, on the different commercial policies of each company.

Turning to slide number 7, Telefonica continued to post a very healthy OIBDA margin in the first quarter, despite increased efforts to boost contract and smartphone penetration, which drove commercial costs up and higher network costs. This performance highlights the benefits of further cost savings initiatives. There are scale and efficiency gains derived from our integrated management model with tangible savings from global projects.

By region, I'd like to mention the good margin at Telefonica Europe, and the pretty flattish year on year performance in Telefonica LATAM, which partially offset the margin erosions suffered in Spain.

Before turning to the regions, let me stress that the first quarter results are in line with our full year outlook, and as we anticipated last February, growth rates will accelerate in coming quarters, as the guidance is back end loaded.

Let's now move to our operations in Spain, where the trading conditions continue to be tough, with a strong price oriented competition and a recovery in voice usage patterns. In this context, our strategy has focused on value, with limited commercial activity in this quarter. However, it is relevant to highlight that negative revenue trends seem to be easing, though we need additional quarters to confirm this trend.

In the first quarter, we posted sequential improvements in revenue across businesses, mainly driven by better data growth. Costs remain virtually frozen, with personnel expenses being the only item rising year on year, due to the impact of 2010 CPI.

As we announced, we are working to have a more flexible labor framework, and we have just had the key cost meeting negotiations with the unions. Now, labor costs continue to decline, despite the negative effects and commercial cost of the increasing weight of smartphones on our sales. Our permanent focus and efficiency does not mean that we give up future growth. We're investing to continue enhancing our quality gap versus peers, expanding mobile broadband capacity and coverage, and progressively rolling out fiber and DDSL.

In the coming quarters, you should expect some slowdown on CapEx growth because of different execution paths versus 2010.

Slide 10 adds more color to the performance by business. In wireless, MSR continue under strong pressure, though there is amount sequential improvement driven by outgoing mobile service revenue on the back of the double digit growth in data revenues.

Regarding ARPUs, there are two different realities. On the one hand, the continued freeze price competition in voice is leading to lower prices but no elasticity, driving voice ARPU down. On the other hand, the data ARPUs is starting to get momentum on strong mobile broadband revenues.

In the wireline business, a similar reading. Voice is not recovering, and broadband continues strongly affected by competition. Nevertheless, we have recorded a good performance in data, in IT revenues, in both areas in which to be competitive, you have to rely on differentiated quality and restructure.

So, all in all, we do not see big changes in competitive dynamics in Spain. But we continue to rely on our differential capabilities to defend our value leadership.

Moving to slide number 11 to review our Latin American operations, you can see that in the first quarter, we grew our customer base by 8% year on year on the back of double digit growth across the different services, with the exception of fixed access, which remained stable. This is a remarkable performance in the region, and show that the strong growth is some of our services is not cannibalizing others. And also strength that that 20% of our mobile customers have a contract, and 44% of them, as recorded in the quarter, were also contract.

Regarding financial metrics, I'd like to highlight the strong acceleration in growth in Brazil, which has become Latin America's main growth engine. On top of that, we continue to deliver a consistent performance in the southern region.

On the other hand, the weakness in Mexico and the lower contribution from regional projects have negatively impacted our results. If we were to exclude these initiatives in both years, organization growth would ramp up from 2010 year-end.

Then we have been able to deliver top line growth, maintaining our solid profitability in contrast with market trends, which in this quarter, an OIBDA margin of 36.2%.

Turning to the next slide, let's look at revenue breakdown by business. Wireless already accounts for almost two thirds of our revenues, and keeps growing at double digit. The fixed business, although at lower pace, also posted an outstanding 3% organic growth year on year. Outgoing mobile service revenue recorded a very good 13% year on year organic increase, driven by the combination of an expanding customer base and ARPUs, with mobile data being clearly the key growth engine. The positive performance in outgoing voice contribution also should be mentioned.

Fixed revenues accelerated their growth pace in the first quarter, thanks to the increased penetration of broadband and pay TV services. This led to ramp-up in these revenue streams to double digit growth rates.

Please turn now to slide 13 to review our outstanding performance in Brazil.

Two quarters after we increased our stake in Vivo, it is evident the improvement in the operating and financial performance of the Company, which has been accompanied by better results from our wireline business. We continue to lead the wireless market, where we are further increasing our contract market share, leveraging a best in class data network.

In Telesp, despite weather factors affecting its commercial activity in the first quarter, has continued to accelerate its transformation, and therefore, fixed broadband revenues. Nevertheless, it is worth to highlight our intense commercial TV offer with positive net adds for the second consecutive quarter.

Q1 total revenue growth in organic terms almost doubled the growth rate posted in 2010, while for the first time in the last five quarters, we are expanding our margins in Brazil on a year on year basis, although this is despite the fact that synergies generation year to date has been limited. As a consequence, first quarter organic OIBDA growth reached 12%, and consolidated OIBDA margins stood at 36%. Clearly, our Brazilian operations are outperforming market peers, as mobile service revenue is showing.

To finish with the Latin American operations in slide 14, let me just make two comments. In Mexico, operating trends remained similar to the previous quarter. We continue recording a strong performance in the contract segment, while the weak results in prepaid drove down revenues in OIBDA.

There are some initial sense of improvement in commercial activity. Gross adds grew 17% year on year, and traffic is growing sequentially for the second quarter in a row. But we need more time to see a recovery of the business here.

In the southern region, our operations posted solid top line growth, showing an acceleration in the first quarter with some OIBDA margin extension on the back of higher margins in Chile and Peru.

In summary, very good in Latin America, benefiting again from our diversification, and where Brazil continues to post a stellar performance.

Let's now turn to slide number 15, where we show that Telefonica Europe delivered strong financial performance in the first quarter of 2011, as it continued to implement its value over volume strategy, especially focusing on mobile broadband while also driving growth from new business areas.

Mobile broadband penetration continued to accelerate, reaching 27% of the total mobile base at the end of March of 2011. This, coupled with improving quality mix, led to a total organic revenue up 4%, excluding MTR cuts, with non peer-to-peer SMS revenue contributing close to 3 percentage points.

OIBDA was 6% year on year in organic terms due to profitable data growth, and continued efficiencies across the business. As a result, OIBDA margin increased 1 percentage point on March 2010 in organic terms, achieving 26%.

From a network deployment perspective, we are progressing well on our investment program, thus helping solid cash flow generation.

Telefonica UK, as slide 16 shows, cautiously took the decision not to chase volumes this quarter, but to continue generating value from the best quality customer base in a competitive market, particularly at the lower value end. Despite lower upgrades, contract churn remains stable at market leading 1.1%, further proving that Telefonica has the right focus in the UK market.

Contract smartphone handset sales were 82% of sales in upgrades in the quarter, increasing their penetration of the total addressable base to 33%. This, together with encouraging trends in the adoption of two data types from new and existing customers, led to a solid 10% year on year data revenue growth, which fully offset voice revenue performance, driving total revenue growth of 5%.

OIBDA margin increased 2 percentage points to 27%, mainly as a result of the lower (inaudible) activity we found this quarter, but also due to our consistent approach to maximize customer lifetime value.

Although CapEx evolution in the first quarter does not signal a trend, let me highlight here the tangible benefits we are having from the spectrum refarming in the 900 megahertz band with limited additional investments.

Let's now turn to slide number 17 to review our operations in Germany. During the first quarter of the year, the Company posted solid commercial activity. Contract net adds were strong, and accounted for 67% of total net adds in the quarter, backed by the successful adoption of mobile broadband, and further improvements in churn. Mobile broadband penetration continued to rise to 22%.

These results show the benefits from the investment in spectrum and the Company's focus in value. In parallel, the prepay segment recorded solid growth from the (inaudible). We have finalized the integration of HanseNet, resulting in further cross selling opportunities ahead of us.

The good commercial performance is reflected in the financials. Total mobile revenues and MTRs ramped up to 12%, driven by the robust, stable evolution of data revenues, which already represent 39% of mobile service revenue. The strength in non peer-to-peer SMS revenues continued, with growth accelerating to 32% year on year.

Also note that handset sales rose strongly, due to My Handy model, which actually decouples handset subsidies from service revenues.

OIBDA margin remained stable year on year despite the commercial [pushes] on contract, thanks to the Company's efforts in efficiency with the restructuring program commenced in 2010 expected to generate further benefits from the second quarter.

Turning to slide 18, I would like to highlight that we have reduced net financial debt at EUR1.4 billion from December 2010, which has allowed an improvement of the leverage ratio of 0.08 points to 2.42 times OIBDA, including commitments as of the end of March. The decrease in financial debt is explained mainly by retained free cash flow, bigger interest payments versus accrual interest, the FX translation of non-euro debt, and positive mark to market on cash flow hedges with no impact on the P&L.

Financial expenses add up to EUR579 million with a marginal FX P&L. Taking into account the total average debt in the period of EUR55.6 billion, the effective cost has been 4.23%.

In the coming quarters, we expect an increase on the effective cost, driven mainly by outstanding forward starting swaps for fixing rates in the long term, and our expected increase of short-term rates.

It's also to highlight that the fact that we have restored Telefonica's average net debt life over six years, after a temporary deviation, in line with our commitment. This was achieved thanks to our balance financing activity year to date in the bond and the bank market, with the latest refinancing of EUR4 billion on the Vivo's acquisition facility initially maturing in 2013.

Now to recap, Telefonica has effected to 2011, delivering a solid performance as we capitalize on our execution skills and diversification, outpacing the continued weakness of our operations in Spain. We have a clear commercial strategy focused on value, rather than on pure volume, with a special bias towards mobile broadband. Top line continues to grow at healthy rates in organic terms, underpinned by Telefonica Latin and mobile data revenues, while we have fostered a very good level of profitability. At the same time, our strong cash flow generation is combined with a balance sheet strength.

Finally, let me reiterate again our 2011 targets, as we are fully on track to meet them.

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

(Operator instructions) The first question comes from Tim Boddy from Goldman Sachs. Please go ahead with your question.

Yes, thanks for the question. I wanted to ask a couple of questions on LATAM. First of all, in Mexico, I was wondering if you could add more color (technical difficulty) challenges you're facing in Mexico, and to the turnaround plan you have in place. That would be very helpful, I guess particularly in the prepay market that the pressure is felt.

And then secondly, in the UK, just a question around, obviously, with your slowdown in growth this quarter as the optimized value and the margin obviously is very strong, how do you see your strategy going forward? Is it sustainable to continue on a steady path? Thank you.

Thanks for your question. On Mexico, during the first quarter, we still have poor performance, basically because we are still facing the same issues that we have at the end of the previous quarter.

You know that in second quarter of 2010 and third quarter of 2010, we have eliminated some promotions, free days of traffic and (inaudible) charges, betting on a more rational behavior from the market. In fact, it didn't happen, and therefore, we have been reinstalling all those promotions, (inaudible) charges, and in back on the market.

We went back, we (inaudible) traffic promotions, and we made a significant and consistent move, and this has created tension in commercial expenses that are partly explaining the poor performance of [RDA] in this first quarter, as we are not seeing yet revenues flowing through the P&L.

It started to happen at the end of March, and now we have some good signs in April, but it is still too soon to say.

We have as well developed a significant effort in deploying our 3G network in Mexico, while we have the spectrum that we needed. And we aim to have a similar cover of our main competitor in 3G by the end of this year, most of the -- the most significant part of the Mexican market, and that has been creating some tension as well in expenses during the first quarter of 2011. But we think that this will mitigate one of the most significant disadvantages that we have in the Mexican market, which is coverage.

We have slowed down our migration effort from prepay to postpaid. We will have a more clear picture of the soundness of our database. We have restarted that migration process at the end of March, and in April, when we are starting to have some result.

And as summary, the turnaround is taking longer than estimated. We have some initial positive signs, like a good lever of commercial activity. Gross adds were at 60% year on year. Outgoing MOU is down 90% year on year in the quarter, but in the month of March, it was 31% higher than in the month of February.

We have been able to sustain our market share in spite of all those difficulties, and the contract customers are already reaching 8% of the total customer base.

So in summary, we acknowledge that we have a weak performance in this [third] quarter. We have been accelerating some decisions for both commercial and in (inaudible) deployment. We expect those decisions to have a significant hit in the coming quarters that should help us accelerate the turnaround.

Hi, Tim, it's Matthew here. Let me pick up the question. From a strategy perspective, we believe we've got the right strategy in the UK, and we would never chase value when we don't think it's there. The reality is, the market in the UK, the High Street has been very quiet over the first quarter -- no real change in that trend coming into the second quarter, and we do see a very high level of competition, where some tariffs that are being sold by some of our competitors, we certainly wouldn't want to do, because we think may be value-destroying.

From an OIBDA growth perspective, what you certainly shouldn't be doing is building in sort of the 14% year on year growth through -- into the second quarter. Let me give you just a bit of color on that. The two key drivers in the first quarter are, firstly, upgrades, as Santiago said, the 24% lower year on year, which clearly gives us a benefit in the quarter from an OIBDA perspective.

Three things driving that. It's the benefit of the 24 month contracts that we started doing about 18 months ago, which we said we would get the benefit with prolonged customer life. It's a little bit about the economic environment, people not wanting to commit to a new, 2-year contract. And thirdly, I think there's been a lack of clear differentiation from a handset driver perspective in the market.

The last thing that I should mention is termination rates. In the UK, in quarter 1, we got a one-off benefit of about EUR12 million. The way the termination rates work in the UK is, you have a blended rate over the termination rate period. Our competitors in the market actually over indexed on their revenue last year, so effectively, had to reduce their rates in quarter 1, which gave us a cost of sales upside.

In addition, in quarter 2, we clearly had to make an MTR cut on the first of April, which will hit us by a similar amount in quarter 2.

Thank you very much.

Okay, thanks, Tim.

The next question comes from Georgios Ierodiaconou from Citigroup. Please go ahead with your question.

Yes, good afternoon. I have two questions, please. The first one is regarding the full year guidance you gave in Madrid for 2% to 4% OIBDA growth. Looking at the first two years you did less than 1%. This year, best case scenario is around 2%, probably lower. So that means you will need 5% to 6% next year, in order to get to the bottom end of that guidance.

Does it -- is it still valid, and if that's the case, can you give us some color onto what's going to drive the [EBITDA] acceleration next year?

And my second question is on the domestic mobile strategy. When First Telecom report their results, they reported higher commercial expenses, and they say now that's something that will continue. I believe during the Investor Day, you've taken out the potential to reduce subscriber acquisition costs. Do you think that would be possible if Orange and maybe some of the other competitors remain aggressive on subsidies? Thank you.

This is Julio Linares. Regarding the -- your first question, I have to refer to the updated guidance that we provided in London in our last Investors Conference. As you know, there, we referred to OIBDA margin. We talked about upper 30s. We (inaudible), and that's the reference for our OIBDA margin guidance today.

And Georgios, this is Guillermo Ansaldo, taking up the second question, regarding the domestic mobile market. Yes, in London, I mentioned that our strategy is to, along the next three years, to gradually move from the commercial expenditure in mobile from pure acquisition, more to retention, and that's a gradual movement. Depends, obviously, on the different moments of the market. And it's also segmented across different type of client, customers, classes, sorry.

So we have started to do so. Obviously, we had to give (inaudible) in the market, and be very pragmatic, and we are already doing that, trying to protect the customers that have the largest customer life value, and in order to produce the better value for the Company.

Next question, please.

The next question comes from Paul Marsch from Berenberg. Please go ahead with your question.

Yes, hi, I've got two questions. Firstly, on SMS trends, in Spain, SMS ARPU seems to have fallen significantly from last year's level of about EUR1.80 per calendar month to EUR1.60 in the first quarter. Now, looking back at last year's first quarter, there was a similar fall in the first quarter from the EUR2.00 level, and I'm just wondering what the reason is for that reduction that seems to happen each first quarter. Last year, it was then stable through the rest of the year.

And just following on from that, there's a clear reversal of SMS ARPU in the UK and also in Germany, with SMS reversing from year-over-year growth in Q4 to year-over-year declines in Q1. And I'm just wondering if you can maybe cast some light on that, given some of the concerns that have been raised by other operators, that smartphones and instant messaging are cannibalizing SMS traffic and revenues.

This is Guillermo, taking up -- let me see if I understand the question regarding SMS. Obviously, SMS overall revenues are up as following, because of the overall macroeconomic conditions and some trends based on the different activity in different [subsidies].

However, when you take into account SMS, the premier SMS which makes -- puts some noise in the serious quarter on quarter, was affected by the level of activity of contest that we have in the market, and also, in changes in regulation last year. So that's placing some noise.

So the trend is similar this quarter to the other one, as you mentioned before, and there's no particular thing that happens one quarter. Very strong quarter to quarter, depending on changes in regulation, which happened more than one year ago, so that's made some noise in the comparison, some trends in the market. But it's basically the same path, there's no news there.

Hi, Paul, it's Matthew. Let me pick up your SMS point. Let me talk about the UK, because I know there was some questions around certainly the level of activity. And your underlying question, in terms of are we seeing a shift to IP messaging, absolutely not. We're not including in the UK market things like Blackberry Messenger, and what's happened, Facebook, etc., have been around for a while. Our SMS per customer year on year is actually up 16%.

I think what you might be looking at is the ARPUs on SMS, recognizing quarter 1 we had a voluntary reduction in termination rates on SMSs, plus all the networks, we took the termination rate down to 3 pence to 2 pence. No (inaudible) are impacted. That's the offset in cost of sales, because you would get the benefit on the other side, so that may be what you're looking at, but we're certainly seeing no shift to -- in customer behavior to IP type messaging.

That's great. Thank you.

This is Julio Linares. Just to give you some more information at the Group level, our SMS revenues are growing year on year, comparison basis, 5%. Our mobile data ARPU is increasing year on year versus 9.3%. And then, because total -- our mobile data revenues are growing at almost 19%. So that's the result that we show today, as you see, quite positive regarding the future. We believe that we will be able to keep a good growth based on our current strategy, basically through our fair pricing and [balancing] strategy.

Thank you.

Next question, please.

The next question comes from David Wright from Deutsche Bank. Please go ahead with your question.

Yes, hello, guys, it's David. A couple of questions. First of all, you saw very strong growth in the data and IT revenues in Spain, and I think that offset a lot of the pressure in traditional. I'm just wondering to what extent we should expect that to continue, certainly this quarter, but at that kind of run rate throughout the year. Is that valid?

And then secondly, I guess a question for Matthew. You chose to step away from the High Street in the UK because of the perception of lower activity and a little more competition. Can you just give us an update on -- sort of what you're seeing so far in Q2? Is the consumer still standing back, or are you guys still standing back? Thanks.

Hi, David, this is Guillermo. Yes, fixed data, I understand you're talking about fixed data. It has some very healthy growth during the first quarter. You have to take into account that this is the fixed business, so part of that activity is linked to sales to mobile operators, and our own mobile operators, so the net is positive, but it's not as impressive, this number, and that is a good trend, but is affected by that intercompany activity.

And in IT, it's an activity that has a positive growth, but has, as it is, booked projects, and there's a lot of volatility quarter over quarter. So we see a positive pipeline, a very healthy pipeline in IT, but you have to take into account that some quarters are higher than others because of the way projects are finished and accepted, then booked.

Hi, David. As far as the UK High Street is concerned, nothing significantly different, I don't think, in our experience in terms of Q2 versus Q1 to date. I don't think we stepped away completely from the High Street. We stepped away from where we didn't see there was value. Where we think we can drive value, we are still there.

Just to reiterate my point on upgrades, significantly lower upgrades. I'd be worried if I saw our churn increasing, but our postpaid churn is still market leading, as you can see, at 1.1%. Upgrades probably will kick up a little bit at the end of quarter 2, as we start to unwind from the first 24 month contracts that we wrote two years ago.

So the short answer is, no significant change in Q2 trends.

Okay, very good. Thanks, guys.

Next question, please.

The next question comes from Justin Funnell from Credit Suisse. Please go ahead with your question.

Thank you. I hope you can hear me. Two questions, please. In the UK business again, (multiple speakers) --

Justin, we cannot hear you well. Can you repeat your question, please?

Yes, I'll turn it up a bit. In the UK business, there was quite weak core volumes. Volumes fell about 10% sequentially. Just wondered if Matthew could talk about that. Is that all the economy, or is that some kind of a migration of voice by data?

Secondly, can you discuss a bit more smartphone uptake in LATAM, outside your Brazil business? Are you starting to enjoy some mass market adoption of smartphones in the wider LATAM region? Thank you.

Hi, Justin, let me pick up your first one. I think the question was around core volumes, and I guess particularly, minutes of use. The first thing is, just be careful not just to look at prepaid. Look at the consolidated number, because there is still a trend in the market of high end prepaid customers moving to postpaid.

Having said that, when you look at the combined number, yes, our minutes of use quarter 1 on quarter 1 per customer down about 9%. But I think, as I said to Paul's question, the flip side of that is our SMS per customer Q1 on Q1, is up 16%.

The other thing I would say is, we are seeing some postpaid optimization of bundle usage and the level of minutes outside bundle, and in fact, the level of text outside bundle reducing a little bit in quarter 1.

If you strip out the minutes of use and strip out the MTRs, and look at customer spend, no significant different variance in the trend, certainly even from Q4 to Q1. Both sort of minus 2.5, minus 2.8, so very little movement on that.

So summary, minutes of use per customer, yes, it's down, SMS more than offsetting it at the moment. There is optimization, but customer spend trends not significantly changing.

Taking your question on the smartphones in Latin America, yes, we are seeing an acceleration, a take-up in the number, and the activity in the market, in terms of the smartphone growth, we have roughly more than 120% increase year on year. We have basically reached a level of -- in the neighborhood of 5% smartphone over total -- for volume of total customer. And in fact, we are seeing a significant activity and a significant increase in activity as the prices of the smartphones are heading down. We're already approaching a level close to USD100, which is where we think the market is going to be accelerating even more.

If you judge upon the impact of all these efforts jointly with (inaudible) in the region, we have been increasing our total broadband access in the region by more than 83% year on year, and that is (inaudible) up on data revenue. Data revenue is posting up very solid 32% year on year growth, and we think this is a very sound trend. And as the prices of the smartphones should be heading down, these trends should accelerate.

And on top of that, trying to link this question with the previous one on non-SMS, revenues are 52% of our -- of revenues, of data revenues, are coming from non-SMS related. So very solid trend accelerating, and volumes should be very important, very relevant in the next quarters.

Thank you.

Next question, please.

The next question comes from Guy Peddy from Macquarie. Please go ahead with your question.

Yes, good afternoon, team. Just a quick question on Spain. In the presentation, Santiago, you mentioned that Spanish trends seem to be stabilizing, but you'd like to see a few more quarters before you've got any confirmation of trend. What are you actually looking for to see a more positive environment going forward, and what are the sort of key things you're going to be measuring? Thank you.

Hi, Guy, this is Guillermo. I will take -- yes, as Santiago mentioned, we see a better performance in the top line in this quarter, compared to the last one in several business lines, and the overall numbers. But looking at consumer trends and the overall dynamics of the market, where we live, we need to confirm these trends in following quarters.

Remember, for example, the third quarter last year was better than the fourth one. The fourth one was weaker. This is better, so it looks like we are in a situation where quarter by quarter, and also month by month, we have some volatility. There is a moving consumer trends, depending on the month, on the news that they have, where there are some changes in consumption.

But those -- and as you know, there's a very intense competitive dynamic in the market. So we need to wait, in our opinion, another quarter to have a clear trends going forward.

Next question, please.

The next question comes from Ivon Leal Macia from BBVA. Please ask your question.

Hello. Good afternoon, everybody. A couple of questions on Latin America. The first thing, Jose Maria, I don't know if you could explain us what is happening to MTRs in Mexico. I think there has been a recent ruling which actually will drive the implementation of (inaudible) decision to decrease MTRs by 60% between American Mobile and smaller operators in the market.

I don't know how this is going to affect your MTRs and how it's eventually going to affect, in the long term, American Mobile competitive position in the market.

That's the first one. And the second one, I don't know if you could update us on the Telesp/Vivo integration synergies?

Okay, thanks, Ivon. On the new interconnection rules in Mexico, the Mexican Supreme Court decided on May 3 that whether the new interconnection rules are clear through the legal process between the different players, the new rules, the new pressure should be applied, which is, in fact, quite surprising.

These new charges represent a radical change on the rules of the game in Mexico in terms of interconnection. Current interconnection prices, in order to give you an idea, in the range of MXN 0.85, which is a similar level to most European countries, in spite of a very different penetration level.

The Mexican regulator decided a nominal decrease to MXN 0.39, which is 60% decrease, but on top of that, they decided to change the [tariffication] from a rounding basis to a minute to a per second basis, which in fact, represent a farther decrease because of the length of the calls.

This Supreme Court decision forces all players to apply this change. If, in spite of the different legal processes initiated by both (inaudible) and ourselves.

As you know, our main -- we are a net interconnection revenue company. We have more interconnection revenues than expenses. And our main counterparty is Telmex. We have an agreement in place with Telmex, and the initial prices of MXN0.95 to MXN0.85], and therefore, everything is going to be depending on what is going to be the reaction of Telmex to this new ruling.

In the short run, such a price decrease will have a significant impact on everybody, I would guess, in the country we serve, and then to see the interconnection revenues. But it is tough to quantify right now what is going to be the impact because of the pre-existing agreements, and because of the different interests of the different parties involved.

In the long run, I think that even though this decrease is too drastic and too fast, it would set up a new competitive environment, where our net prices are going to be more affordable for the new entrants, for the ones that have a lower market share, including ourselves. So in the long run, we think this is going to be positive, from a competitive standpoint. In the short run, it's going to be tough to identify, because again, the drop is too drastic and too fast.

And taking the Telesp and Vivo question, as we were trying to advance to you in London, after two quarters in a row of being very involved in both units together, we are very positive on the synergies that we are able to achieve. Once the legal process has been completed, and the new organization chart has been announced and communicate, we are really accelerating our plans.

During the first quarter of 2011, we have already accomplished significant insight, and that's why we affirm that the EUR2.3 billion, EUR2.7 billion synergies net present value range that we share with you that we announced at the time of the transaction, we are within this minimum range. There -- the synergies identify around three main pillars, intents of the offer, joint offer. The first one is a very intensive joint offer in the corporate segment. We are already ready to go, and that we are already sharing with our customers.

We are already analyzing our fixed wire effort inside and outside Sao Paulo. That should help us to accelerate growth in revenues and to be more efficient in terms of deployment of the more traditional products, such as voice.

In terms of [platform] on efficiency, the intercompany -- you know that we have these long distance code, the 15 that were shared among Vivo and Telesp. We see the margin for Telesp. Now we can be much more efficient, because we are, as well, eliminating intercompany indirect taxation.

In network, joint network planning and transmission, again, we are taking advantage of all units inside and outside Sao Paulo. Data center, we are advancing, and we are working very intensively in doing the planned convergence towards Vivo, generating more synergies in terms of commercial expenses and distribution.

We are extending the contracts that we have with (inaudible) Telefonica in the remainder part of Latin America to Vivo, and that's why we have been dating some significant success in terms of ringback tones, co-branded cards, and financial services.

I'm trying to quantify a little bit all those efforts, so in order to give you an idea, we have had 27,000 more contracts with small and medium companies. We have been able to generate more than BRL100 million in the first quarter of this year from savings in network and transmission, BRL10 million in terms of hardware maintenance and IT suppliers, more than BRL17 million in new products and services, and just expanding the ringback tones in three weeks in Vivo, we have been able to reach 1.2 million new customers, new services.

So all in all, very optimistic, and that's why we have been accelerating the reorganization effort in Brazil.

Next question, please.

The next question comes from Will Milner from Arete Research. Please go ahead with your question.

Thanks very much. I've just got one question on Spain, firstly. The retail broadband revenue trend, obviously, pretty disappointing, going back 10%. Clearly, I guess you're still suffering from competitors offering discounts on DSL to their mobile customers. I guess the question is, if those offers don't change, if they continue to be in place in the market, what will you change in your commercial approach to address the [back book] issue? I think you did put us in an offering place during the quarter. I'm just wondering if there's any positive signs from that, that would arrest the decline in that trend.

And then a second question, just picking up on Matthew's earlier point that he made, what is the percentage of revenues in the UK that come from out of bundle minute usage, and out of bundle SMS usage? And perhaps also, if you have those figures for Spain as well, that would be quite useful. Thanks.

Yes, Will, this is Guillermo. Regarding your question in regular broadband, yes, of course, there is, as in previous quarters, very aggressive competition in the (inaudible) market with aggressive promotion offers.

However, on the other side, the last April 7, the increase in the bundle of [local] (inaudible) price has been in force, so we have start seeing some moves in the competition that are either increasing some charges, or slowing down some promotions. It's too early to see a trend, but we are starting to see some logical [reagent] adjust their P&L. So this is not a change in trend, but it's something that is new in the market, and we need to keep an eye on that.

We are more selective on promotions. We have done less promotions in the first quarter than in previous quarters, because we want to understand in a better way, a more deeper way, are we creating value or we are not? So we have been more selective on the other side. We need to see if this increase in the wholesale prices change the shape of the dynamics.

Hi, Will, it's Matthew. On your out of bundle question, I think, yes, as I said, customers are certainly optimizing and managing very carefully around their out of bundle percentage, and you will have seen recently we just increased our per minute and per text rate out of bundle. The actual number out of bundle is single digit on both numbers, so both are less than 10% on both out of bundle voice, and out of bundle SMS.

Matthew, just -- sorry, SMS usage, I guess, on (inaudible), what's the percentage?

I don't -- Will, I don't know. Let us take it offline and come back to you.

Okay, thanks a lot.

The next question comes from Luis Prota from Morgan Stanley. Please go ahead with your question.

Yes, hello, I have two questions. The first one is on Spain. And sorry to come back to the issue of the out of bundle and these things, but in your mobile data tariffs, your structure looks very similar to that of KPN. This is based on the add-ons, rather than data-centric bundles.

So the question is whether you are seeing in Spain any similar trends to those that KPN have mentioned? They claim out of bundle traffic in Spain, voice (inaudible) utilization of data, you've mentioned that you are not seeing this in the UK. But any light on what's happening in Spain, and whether you are planning to move to more data-centric bundles, would be useful, as your peers are already that kind of tariff.

And the second question is regarding your debt position, and I'm hearing some comments from credit rating agencies, kind of suggesting that your rating might be at risk if you don't cut debt substantially. So I would appreciate your thoughts on this, and whether you have any other assets on top of Atento that could be for sale. Thank you.

Hi, Luis, this is Guillermo. Obviously, we are tracking cannibalization impacts, as in the past we were tracking fixed mobile and broadband cannibalization, and we have positive news. We are -- decided to track more closer cannibalization of services like SMS and data.

So far, our data indicates that revenues, there is a positive net impact, meaning that what we estimated could be a decrease in SMS is more than compensated by the revenues that we are generating data. For example, this quarter, we have 7.6% increase year on year in data April, so it's something that we know we have to keep track, an eye on that, and I have to track that very frequently. But as in fixed to mobile, so far, we see no -- a positive net impact on our numbers.

Okay, Luis, this is Miguel, taking your question about the -- on our rating. I think that we have made good progress in this quarter, just by reducing substantially our deleverage ratio just in our quarter. It is true that we have been helped by FX, but also, we have been paying down both principal and accrued interest with the cash that we have been generating.

So we think that we are in line towards the requirements made especially by the S&P, but this will take some time until we achieve our targets at year-end.

Next question, please.

The next question comes from Torsten Achtmann from JPMorgan. Please go ahead with your question.

Good afternoon. Could you update on your progress on cost cutting in Spain? You already indicated at the presentation that your negotiation of CPI. Can you say how far you are, and also, on the headcount reduction, have you started negotiations there?

And secondly, on Argentina, the service revenue growth seemed to have slowed down from 25% last quarter to 14% this quarter. So any specific reason for that, or could you give some more clarity around it? Thank you.

Hi, Torsten, this is Guillermo. Regarding question in Spain and cost cutting measures in numerous sources, for the non-union program that we started last -- in the last quarter of last year, that program is going on smoothly, and is hitting the targets. Regarding the union, the unionized efforts, after the Company unit elections in Telefonica Espana last March, the new (inaudible) committee was created, April 27, I believe. The first meeting of this committee was hold on the 11th, two days ago, and in which it was discussed about different issues previously mentioned in the Investor Day in London.

So the negotiations will accelerate and take place in the next few weeks, and we'll keep you posted. But so far, we are moving according to the calendar, but there's no news to report.

Good afternoon, Torsten. Taking your question on Argentina, in fact, in the last -- in the previous year, we accounted for a very big contract that we have with the government to distribute [PCs] jointly with our connection, and that has somehow altered the comparison.

Overall, in the first quarter, Argentina, we have a very strong quarter. Revenues in the country are -- were up around 16%, 15.8%, compared with 12.9% a year ago, which is the most comparable figure. I know OIBDA is up in the country 11% compared to 10.7% a year ago, again, the most comparable figure.

Both units are doing very well. Our wireline business is growing 16% revenues, that was 11% a year ago, and 12% OIBDA versus last -- roughly, 3% a year ago. And where this business is growing very nicely, 16% revenue growth, and now roughly 11% OIBDA growth, with trends being sound and very focused on value.

So in fact, in Argentina, we think that we have a very strong quarter growth financially and commercially, and if you were to exclude this contract that we had last year, the trends are even better than the previous year.

Next question, please.

The next question comes from James Ratzer from New Street Research.

Yes, good afternoon. I had two questions, please. The first one was regarding your performance in Brazil -- clearly, a very strong quarter, and it looks like a lot of acceleration in growth. Vivo is being driven by your changing strategy on DLD calling and using the 15 code. I wonder if you could just talk us through a little bit more what your plans are with regard to this. Are you planning to cut prices more aggressively? To what extent do you see volumes can further grow and help accelerate revenue growth in Brazil? I mean clearly, it's been a boost for [Tim]. Do you see a similar performance ahead for yourself?

And the second question was regarding your Spanish broadband business. I'm still struggling a little bit with the revenue outlook on broadband. You say you're not competing, so -- or, it's harder to compete for new net adds at the moment, which I understand. But at the same time, we're seeing ARPUs on your existing customers actually come down at an accelerating rate.

I mean, is this a customer spinning down and bill optimizing on the fixed line as well? And if it is, could you say how much further you think this has to run from current ARPU levels? Thank you.

Well, taking your question on Brazil, Brazil as a whole was a very strong quarter, both units performed pretty well, Telesp and Vivo. Telesp has been affected at the level of OIBDA by heavy rains, and therefore, that's what we have been doing to preserve quality. And I think this customer in satisfaction, and in fact, we are one of the very few industries or companies, if not the only one, that has been stepping out of the crisis even stronger, while revenue growth has been positive for the third quarter in a row.

So I would say just to focus on Telesp, because in spite of the fact that we have been incurring more costs in order to preserve quality, I think that quality is going to pay up -- pay back in the short run.

Taking the specific question on Vivo, in fact, Vivo posted that very solid set of results, and now it's focused on the levers that we anticipated in London, that were announced via Vivo conference call, in fact. We keep focus on value. We are not fighting just the number of customers, and that's why we have been lagging behind our competitors in terms of the prepay market share in this quarter.

But in fact, we have increased significantly our market share in contract, in these last 12 months. In fact, we already have 35.5% market share in contract in Brazil, which is roughly 5 percentage points above our average market share, 14% more -- that 14% of the net adds in the quarter have been based in contract. Therefore, we are pretty focused on gaining the bulk of the value of our Brazilian market.

Traffic is up 13% year on year, with all net traffic growing much more than that. MOU and ARP are practically (inaudible) now with a very slight decrease. Service revenues growing in the neighborhood of 15%. We have seen a great acceleration in [recharges]. We proved that our commercial offer is attractive. And a very consistent growth in data revenues with 31% increase.

This proved that we have the best brand, that we have the best network, and that we are leaders in quality, and those are the levers upon which we are aiming to build on.

And that explains, as well, the difference in margins, because we are pretty focusing on getting the value of the market and the growth of the market where it really matters.

By the way, data revenue has been increasing 47%.

So very, very strong performance in a very strong and dynamic market, and we are very enthusiastic about the future.

Can I just (inaudible) on the DLD, obviously -- I mean, to what extent do you think that has further growth to add? Thank you.

Yes. In fact, the DLD, the domestic long distance code that go on, or co-used by Vivo and Telesp, was owned by Telesp and used by, as well as by Vivo, with 0% margin with Telesp. All of the different [billions] between the two companies were quite inefficient in terms of indirect taxation, and on top of -- and as well, in terms of bundling their products.

So now that the restructuring process is over, and it's over just from three weeks ago, we are going to be able to compete with our closest competitors in the region in a much more efficient manner in the long distance, domestic long distance market, with less inefficiency as a whole. And therefore, we are -- we think that we would be more present on this market with more attractive prices for our customers.

But still not flowing through the P&L, as the restructuring was not over yet.

James, this is Guillermo. Regarding your questions about (inaudible), two things. First, regarding the ARPU ratios, there is already the impact of the promotions, but not only the promotion that were put in place this quarter, but the promotions that were put in place in the past.

For example, last year, in the first quarter, we have a lot of activity on our side in promotions, one 12 month promotion, meaning that a customer will sign up for EUR19.90 per month, or the equivalent, for 12 months, and then the price will -- after 12 months, will go up to EUR40. What happens at the end of any promotion, in any company and (inaudible), is that a percentage of customers remains with the service provider with increased price, and some other customers churn.

What we have seen in the past -- that's why one of the things we are looking more carefully in terms of value -- is that the percentage of customers that, after the promotion, the churn is higher. So the value of the promotion is more questionable than in the past.

So that's why we decelerate a little bit in the last months, in terms of putting new promotion in place, because the postmortem numbers are different, because the crisis is shaping -- obviously, changing the customer behavior of our customers.

So, maybe that impacts on our number, because we can follow lots of promotions that were expiring in the first quarter, and we were not adding new promotion and higher volume to our base.

Looking to the future, besides the fact that the increase from the (inaudible), as I mentioned before, remember that we are accelerating and deploying the average in (inaudible) that we started last year. This means that, for example, the people that were up to 1 megabit for the same price goes up to 6 megabits, and the people that were in 6 megabits, we are moving them to 10 megabits. Just -- we're trying to, for the same price, to give them more and more value, and trying to sustain a lower churn.

So I hope that's a -- help you to understand the dynamics of this quarter, where again, lower promotion this quarter, and a lot of promotions one year ago with behavior that was not as good as expected as in the past. I think the same is happening in the rest of the market, because we are starting to see some minor movements in the competition of trying to improve a little bit the conditions on their side, not on the customer side, because I guess they are also questioning the economics of the promotions.

Okay, thank you.

We'll have time for the last question.

The final question comes from Javier Borrachero from Kepler Capital Markets. Please go ahead with your question.

Yes, good afternoon. I have a question on Germany. One, in terms of the [EBITDA] margins. On slide 17, you mentioned this progress in restructuring that may deliver more efficiencies in Q2. So maybe if you can comment on, to what extent we can really see EBITDA margin expansion coming from this restructure, or maybe the pressure from this commercial cost may keep them more subdued.

And also, maybe, if you can comment a bit more on the HanseNet, the cross selling opportunities with HanseNet, whether you could expect maybe some top line acceleration in coming quarters in Germany. Thank you.

Hi, Javier, it's Matthew. Let me pick up your point. Yes, in Santiago's presentation, he spoke about OIBDA margins. The reason the declared number has gone down is because clearly, we're now consolidating HanseNet, and it's not quite like for like versus last June, the first quarter. Once you strip HanseNet out, it's broadly flat.

The restructuring benefits will start to come through in Q2. They'll ramp up during the year, and by the end of the year, they'll get to about 3 percentage points of margin.

The other key dynamic you should see in the margin is certainly around My Handy, and the increasing proportion of My Handy, which clearly impacts service revenue as well.

So the combination of HanseNet, until we were one statutory company, German law didn't allow us to cross sell products. Now we are one statutory company, we can. So it's a major focus for us in Germany, to exploit the -- certainly, the O2 base from a DSL perspective, and the HanseNet base from a mobile perspective. So we're hoping to see some results of that during the second half of the year.

There are no more questions.

Okay, with this intervention by Matthew, (inaudible), I'd like to thank you for having attended these first quarter results from Telefonica. I wish you the best, and have a very nice weekend. We'll be holding the next conference call at the end of July.