Interim Results-Part I

Telefonica SA 29 July 2004 Quarterly results January - June 2004 TABLE OF CONTENTS TELEFONICA GROUP Market Size Financial Highlights Consolidated Results Financial Data RESULTS BY BUSINESS LINES Fixed Line Business â€¢ Telefonica de Espana Group â€¢ Telefonica Latinoamerica Group Mobile Business Other Business â€¢ Directories Business â€¢ Terra Lycos Group â€¢ Atento Group â€¢ Content and Media Business â€¢ Telefonica Deutschland Group ADDENDA Companies included in each Financial Statement Key Holdings of the Telefonica Group and its Subsidiaries Significant Events Changes to the Perimeter and Accounting Criteria of Consolidation NOTE: The English language translation of the consolidated financial statements originally issued in Spanish has been prepared solely for the convenience of English speaking readers. Despite all the efforts devoted to this translation, certain omissions or approximations may subsist. Telefonica, its representatives and employees decline all responsibility in this regard. In the event of a discrepancy, the Spanish-language version prevails. These consolidated financial statements are presented on the basis of accounting principles generally accepted in Spain. Certain accounting practices applied by the Group that conform with generally accepted accounting principles in Spain may not conform with generally accepted accounting principles in other countries. TELEFONICA GROUP Market Size (Data in thousands) EUROPE AFRICA Spain Morocco WIRELINE WIRELESS T de Espana: 19,420 Medi Telecom: 2,149 WIRELESS T Moviles: 18,639 Deutschland/UK ADSL CONNECTIONS Grupo T Deutschland: 597 LATIN AMERICA Argentina Brazil Chile Mexico Puerto Rico WIRELINE WIRELINE WIRELINE WIRELESS WIRELESS T de Argentina: 4,378 Telesp: 12,826 CTC Chile: 2,562 TEM Mexico: 4,080 NewComm Wireless:155 WIRELESS WIRELESS WIRELESS TCP Argentina: 2,189 CRT Celular: 2,821 CTC Movil: 2,739 Peru Venezuela (*) TeleSudeste Cel: 3,924 WIRELINE WIRELINE TeleLeste Celular: 1,240 T del Peru: 2,185 CAN TV: 2,760 El Salvador Global Telecom: 2,128 Guatemala WIRELESS WIRELESS WIRELINE Telesp Cel. Group: 8,500 WIRELINE T Moviles: 1,796 CAN TV: 2,779 T. El Salvador: 56 TeleCentro Oeste: 4,901 T. Guatemala: 36 PAY-TV CUSTOMERS WIRELESS WIRELESS Cable Magico: 373 T. El Salvador: 293 T. Guatemala: 239 * Data for CanTV as of March 2004. TELEFONICA GROUP MARKET SIZE Unaudited figures (Thousands) Totals Weighted (*) Jun 2004 Jun 2003 % Chg. Jun 2004 Jun 2003 % Chg. Lines in service (1) 44,821.6 43,252.9 3.6 39,051.1 37,520.2 4.1 In Spain 19,420.4 18,859.5 3.0 19,420.4 18,859.5 3.0 In other countries 25,401.1 24,393.4 4.1 19,630.7 18,660.8 5.2 Cellular customers (2) 58,570.5 48,584.3 20.6 32,793.0 28,528.4 14.9 In Spain 18,638.8 18,877.2 (1.3) 17,240.9 17,450.1 (1.2) In other countries 39,931.6 29,707.2 34.4 15,552.1 11,078.3 40.4 Total (3) 103,765.2 92,182.2 12.6 72,206.7 66,383.5 8.8 Note: Data for CanTV as of March 2004. (*) Weighted by the equity interest of Telefonica in each of the companies. (1) Lines in service: includes all lines in service for Telefonica de Espana, Telefonica CTC Chile, Telefonica de Argentina, Telefonica del Peru, Telesp, CanTV, Telefonica Moviles El Salvador, Telefonica Moviles Guatemala and Telefonica Deutschland. (2) Cellular customers: includes all cellular customers of Telefonica Servicios Moviles Espana, MediTelecom, Telefonica Movil Chile, TCP Argentina, Telefonica Moviles Peru, Brasilcel (the Joint Venture with Portugal Telecom in Brazil), NewCom Wireless Puerto Rico, Telefonica Moviles Guatemala, Telefonica Moviles El Salvador, Telefonica Moviles Mexico and CanTV Celular. (3) Includes Pay TV customers of Cable Magico in Peru. TELEFONICA GROUP Financial Highlights The most relevant factors of the Telefonica Group results during the first half of 2004 are the following: â€¢ Strong operating growth, both at the revenues and EBITDA levels up by 5.6% and 6.9% respectively, in comparison with the same period of 2003. â€¢ Assuming constant exchange rates and excluding the changes in consolidation, revenues would be up by 9.4%, EBITDA by 8.2% and operating profit by 21.0%. â€¢ The Telefonica de Espana Group accelerated its rate of growth during the second quarter (revenues up by 2.7% compared with 1.7% in 1Q04; EBITDA up by 8.1% compared with 4.2% in 1Q04). â€¢ The cellular business revenues and EBITDA were 14.1% and 6.2% higher, respectively. â€¢ The Telefonica Latinoamerica Group achieved growth in constant currency of 10.3% in revenues and 7.8% in EBITDA. â€¢ Better results of the Other Businesses in revenues and EBITDA (Atento Group +15.5% and +61.3%; Terra Lycos Group +8.3% and positive EBITDA; Directories Business +12.5% and 39.9% respectively). â€¢ A substantial increase in the Group's profitability and operating free cash flow : â€¢ EBITDA margin of 44.5% compared with 43.9% a year ago. â€¢ The margins of Telefonica de Espana Group improved compared to June 2003, showing a positive contribution from the 2003-2007 Redundancy Program and despite the increased commercial efforts. â€¢ Significant growth of 13.4% in the operating free cash flow (EBITDA-CapEx) generated, amounting to 5,016.9 million euros. â€¢ Intense commercial effort reflected in the substantial growth of the total customer base to 103.8 million (up by 12.6% year on year): â€¢ High levels of commercial activity at Telefonica Moviles Group (net adds of 9.7 million year on year), especially in Latin America. The Group had 55.8 million customers at June 30 (up by 21.0%). â€¢ The Group's ADSL connections totalled 3.7 million compared with 1.9 million in June 2003. â€¢ Net income of 1,254.2 million euros compared with 1,425.6 million euros in the first half of 2003: â€¢ Excluding the net effect of the 2003-2007 Redundancy Program relating to 2004 in extraordinary results, net income would have risen by 15.9% to 1,652.2 million euros. â€¢ A 6.1% decrease in net debt over the past year down to 18,776.3 million euros. TELEFONICA GROUP Consolidated Results The results obtained by Telefonica Group and the management report included in this report are based on the actions carried out by the various business units in the Group and which constitute the units over which management of these businesses is conducted. This implies a presentation of results based on the actual management of the various businesses in which Telefonica Group is present, instead of adhering to the legal structure observed by the participating companies. In this sense, income statements are presented by business, which basically implies that each line of activity participate in the companies that the Group holds in the corresponding business, regardless of whether said holding has already been transferred or not, even though it might be the final intent of Telefonica, S.A. to do so in the future. It should be emphasized that this presentation by businesses in no case alters the total results obtained by Telefonica Group. These results are incorporated from the date of effective acquisition of the holding. Starting first quarter 2004, Telefonica Empresas results will be included in Telefonica de Espana Group and Telefonica Latinoamerica Group results. In that sense, Telefonica Data Espana and Telefonica Soluciones results will be incorporated within Telefonica de Espana Group, whereas Telelefonica Data in Latin America and TIWS will be incorporated in Telefonica Latinoamerica Group results. Finally, Telefonica Deutschland Group results will be incorporated to Other Companies in Telefonica S.A. accounts. Telefonica Group's results for the first half of 2004 reflect the strong growth in operations compared with the first half of 2003 (operating revenues up by 5.6%, EBITDA up by 6.9%), together with the increase in profitability (EBITDA margin of 44.5% compared with 43.9% in 1H03) and free cash flow generation (EBITDA-CapEx up by 13.4%). Moreover, net debt was reduced by 1,214.3 million euros compared to June 2003 to 18,776.3 million euros. Net income obtained by the Telefonica Group in the first half of 2004 amounted to 1,254.2 million euros, which was 12.0% lower than in the first six months of 2003. However, excluding the net effect on extraordinary results of the 2003-07 Redundancy Program related to 2004, net income would have risen by 15.9% to 1,652.2 million euros. Operating free cash flow generation (EBITDA-CapEx) as of June 30 was 5,016.9 million euros, 13.4% more than in the first half of 2003. With a year on year increase of 16.1%, Telefonica de Espana Group is the Group's biggest business line contributor to the rise in the Group's free cash flow generation. The cellular telephony business and the Telefonica Latinoamerica Group rose by 9.3% and 6.3%, respectively. Group's total customer base stood at 103.8 million at June 30, compared with 92.2 million at the end of June 2003 and 101.7 million at the end of March 2004. The number of customers managed at June 30 was 98.2 million, 12.9% more than in June 2003 and 2.2% more than in March 2004. It should be taken into account that these figures for total and managed customers do not include the 1.3 million inactive SIM cards, which have ceased to be included in the declared plant of Telefonica Moviles Espana. The number of cellular customers managed at the end of June totaled 55.8 million, registering a net add of more than 1.4 million in the second quarter and of 9.7 million year on year. With a net gain year on year of 1.7 million, ADSL connections totaled 3.7 million. In Spain, there were 2.0 million connections (58.0% more than in June 2003), giving the Group a 74% estimated share in the total broadband market. Telefonica Group retail ADSL customers in Spain totaled 1.6 million, representing a total estimated market share of 58%. In Latin America, ADSL connections exceeded one million (0.6 million in June 2003), with particularly noteworthy performance at Telesp, which had 0.6 million connections (a year on year increase of 58.0%). Telefonica Group's consolidated operating revenues totaled 14,324.5 million euros at the end of the first half of 2004, which was 5.6% more than in the same period of 2003, supported by the growth of all business lines, with the exception of the content and media business, which was affected by the deconsolidation of Antena 3TV from the consolidation perimeter. The slowdown in comparison with the first quarter was mainly due to two factors: on the one hand, the greater negative impact of exchange rates (which subtracted 2.1 percentage points in June compared with 1.2 percentage points in March) and, on the other hand, the lower rate of growth in the cellular business, which was announced in the first quarter report of 2004. Thus, excluding the impact of the variations in exchange rates and in the consolidation perimeter, revenues would grow by 9.4% compared with 10.3% in March. By company, Telefonica de Espana Group recorded operating revenues in the first half of 2004 of 5,399.4 million euros, representing a year on year increase of 2.2%. It is important to point out that the revenues from Internet and Broadband services at the Telefonica de Espana parent company (33.0% higher year on year) and from Data and Solutions services (7.1% higher year on year) boosted sales and more than made up for the lower revenues from Traditional services, which were down by 3.8% year on year. One of the positive aspects worth highlighting in the second quarter was the clear acceleration in the rate of revenue growth compared with the first quarter (2.7% compared with 1.7%) due, among other factors, to the increase in the monthly fee that came into force on April 1. The cellular business obtained operating revenues of 5,458.1 million euros in the first half of 2004, which was 14.1% more than in the first half of 2003. This growth is mainly explained by Telefonica Moviles Espana (up by 12.5%) and to a lesser extent by Mexico (up by 37.2% in local currency), Argentina (up by 50.2% in local currency) and Brazil (up by 27.9% in local currency). The rate of growth in revenues slowed in comparison with the first quarter (+20.4%) as a result of the lower growth in revenues from handset sales and services, mainly at Telefonica Moviles Espana. Revenues at the Telefonica Latinoamerica Group recorded growth in current euros of 4.6% (3,276.1 million euros), equivalent to 10.3% in constant terms. This variation is supported by Telesp and TASA, where revenues in local currency rose by 20.0% and 7.9%, respectively. It is important to highlight that this is the fourth consecutive quarter in which the revenues of the Telefonica Latinoamerica Group have risen in current euros. By country at the end of the second quarter, Spain accounted for 61.6% of the Group's consolidated revenues, a contribution that was down by 1.3 percentage points from June 2003 as a result of the increased contribution from Brazil (17.6% compared with 16.0%). Latin America increased its contribution to total revenues by 0.9 percentage points to 33.1%. Telefonica Group's total operating expenses in the first half of 2004 amounted to 8,308.6 million euros, which was 4.3% more than in the same period of 2003, and 0.7 percentage points less than the rise recorded in the first quarter of 2004. However, the greater negative impact of exchange rates (which subtracted 2.0 percentage points in the first quarter compared with 2.7 percentage points in the first half) meant that in constant euros expenses were up by 7.0% (the same percentage as in March). Assuming, therefore, constant exchange rates and excluding the changes in the consolidation perimeter, expenses would be 9.6% higher (9.7% in the first quarter) due to the cellular telephony business and the Telefonica Latinoamerica Group. The higher commercial costs incurred in the cellular telephony business as a result of the intensive commercial efforts made in 2004 in the main markets where Telefonica Moviles operates, particularly Spain, Brazil and Mexico, are reflected in the increase rate in operating expenses, which were 20.2% higher than in the first half of 2003. Operating expenses at the Telefonica Latinoamerica Group were up by 5.0% in current euros compared with the first half of 2003 (up by 11.4% in constant euros). This variation is primarily the result of the increase in long distance, ADSL and fixed -to-mobile interconnection expenses in Brazil, and the new products and services launched in Peru. At the Telefonica de Espana Group, operating expenses were down by 1.6% in comparison with the first quarter of 2003, thanks to the reduction in personnel expenses (down by 9.8%) related to the 2003-2007 Redundancy Program. This caption made up for the 14.2% increase in the external services item linked to the company's increased commercial efforts aimed at increasing the revenues function. Bad debt management continued to show good performance: bad debt provision as a percentage of revenues (excluding prepayment revenues) stood at 1.3% at June 2004 an improvement of 0.6 percentage points year on year and of 0.2 percentage points compared to the first quarter. By business lines and in comparison with June 2003, noteworthy was the 0.9 percentage points improvement in the mobile telephony business (0.9% of revenues) and of 0.7 percentage points at both the Telefonica de Espana Group (0.5% of revenues) and the Telefonica Latinoamerica Group (2.6% of revenues). By operators, it should be mentioned the ratio at Telesp, which was down to 3.3% of revenues, 0.8 and 0.6 percentage points better, respectively, than in June 2003 and March 2004. As a result of the performance in revenues and expenses described above, the consolidated EBITDA for the first six months of the year totaled 6,367.3 million euros, 6.9% more than in the same period of the previous year, thanks to the rise at the Telefonica de Espana Group and the cellular business (both up by 6.2%). In comparable terms, i.e. excluding the variations in exchange rates and in the consolidation perimeter, EBITDA rose by 8.2%. Exchange rates deducted 1.2 percentage points from growth in the first half, compared with 0.1 percentage points in the first quarter. In terms of operating profitability, the Group's EBITDA margin stood at 44.5% at the end of June, up by 0.5 percentage points year on year. The increase in the margin is due to the improvement in the margins at the Telefonica de Espana Group (up 1.7 percentage points to 46.1%), the Terra Lycos Group (up 15.3 percentage points to 0.9%), the directories business (up 5.3 percentage points to 27.2%) and the Atento Group (up 4.2 percentage points to 14.6%). EBITDA at Telefonica de Espana Group, which is the Group's biggest contributor to EBITDA (39.1% of the total) in absolute terms, totaled 2,487.5 million euros at the end of June, 6.2% more than in the first half of 2003, with an acceleration in the year on year growth rate achieved in the first quarter (+4.2%). Thus, EBITDA in the second quarter of 2004 rose by 8.1% in comparison with the same period of 2003 and the EBITDA margin was 46.3% (up by 2.3 percentage points year on year). Consequently, the 2003-2007 Redundancy Program had a significant positive impact on the margins, even despite the increased commercial efforts mentioned before. The cellular business EBITDA, which is the second biggest contributor in absolute terms (36.3% of the total), amounted to 2,309.2 million euros in the first half of the year and recorded growth of 6.2% in comparison with June 2003, supported by Telefonica Moviles Espana (+9.7%). The cellular business's EBITDA margin of 42.3% was 3.2 percentage points lower than in June 2003, as a result of the increase in commercial activity in the first six months of 2004, especially in the second quarter. At the end of the first half, EBITDA at the Telefonica Latinoamerica Group (23.0% of the Telefonica Group total) recorded year on year growth of 2.8% in current euros (1,464.0 million euros), equivalent to 7.8% in constant euros (+7.2% in March). The EBITDA margin of 45.0% was 0.7 percentage points higher in the second quarter of 2004 than in the first quarter of 2004. However, the EBITDA margin of the Telefonica Latinoamerica Group at the end of the first half of 2004 (44.7%) was lower than in the previous year (45.4%) mainly due to the higher weight of the new businesses in Brazil. By geographical region, Spain contributed 71.7% of the Telefonica Group's consolidated EBITDA at June 30, 2004 (71.1% a year ago) and Latin America accounted for 27.6% (29.7% in June 2003). The decline in the contribution from Latin America over the last twelve months is due to the higher losses recorded in Mexico and the lower contributions from Peru (3.7%, down by 0.8 percentage points), Chile (3.5%, down by 0.7 percentage points) and Argentina (4.3%, down by 0.3 percentage points). Brazil, however, accounted for 17.0% compared with 16.7% in 2003. The operating profit for the first half of 2004 amounted to 3,421.0 million euros, which was 21.4% more than in the same period of 2003 and 7.7 percentage points lower than in March. This decline in the growth rate since March 2004 is due to the slowdown in the EBITDA growth (+6.9% compared with +10.4%), which was offset by the higher decrease in amortization (-6.1% compared with -4.7%) due to the impact of the higher exchange rate. Thus, in constant euros, amortization was down year on year by 3.5% compared with 3.0% in the first quarter. Excluding the impact of the variations in exchange rates and in the consolidation perimeter, operating profit would have grown by 21.0% compared with 25.4% in March. The negative results for associated companies recorded an improvement of 80.3% to -26.2 million euros (-132.5 million euros at June 2003). This significant reduction was primarily due to the deconsolidation of Via Digital (Sogecable was incorporated in July 2003) and Audiovisual Sport, the lower losses related to Medi Telecom, IPSE 2000 and Infonet, and the better results at Pearson. Total net financial costs reached 486.9 million euros in the first half of 2004 compared to 296.5 million euros in January-June 2003. Excluding the positive impact of the Argentine peso's appreciation in both periods, and the positive result coming from the cancellation of US dollars denominated debt in the first half of 2003, the comparable results (488.8 million euros in 1H04 vs 802.4 million euros in 1H03) would drop 313.6 million euros (-39.1%). This fall in the net financial costs was due to the 12.2% decrease in the average net debt as well as the reduction of its average cost as a result of the drop in interest rates in the euro and in the Brazilian real. The free cash flow generated by Telefonica Group during the first half of 2004 was 3,260.4 million euros, of which 973.5 million euros were devoted to dividend payments by Telefonica S.A., 1,372.4 million euros to financial investments (net of real estate divestitures) and 369.8 million euros to cancellation of commitments acquired by the Group, derived basically from the headcount reduction plan. Thus, free cash flow after financial investments and dividend payments, which corresponds to the one available for debt reduction was 544.7 million euros. Net debt of Telefonica Group at the end of June 2004 stood at 18,776.3 million euros. The reduction of 459.0 million euros with respect to the consolidated debt at the end of 2003 (19,235.3 million euros) came mainly from the aforementioned generation of free cash flow after financial investments and dividend payments (544.7 million euros). Likewise, there was a 16.5 million euros increase due to the currencies movements effect on the non-euro denominated debt (mainly due to the appreciation of the dollar against the euro), as well as 69.2 million euros due to the changes in consolidation and other effect on financial statements. The goodwill amortization at the end of June amounted to 211.6 million euros, 0.3% less than in the first half of 2003. By business lines, it is worth to mention the reduction in the cellular business goodwill amortization (down by 15.0% year on year), largely due to the allocation in the fourth quarter of 2003 of part of the Telefonica Moviles Mexico goodwill as higher value of the operator's licenses. However, the content and media business rose by 46.6% in comparison with the first half of 2003, due to the inclusion of Sogecable's goodwill. Extraordinary results as of June 30, totaled -726.2 million euros, compared with +39.8 million euros in the first six months of 2003. This variation was explained by an extraordinary provision, which finally amounted to 653.3 million euros, related to the acceptance of the 2,362 applications received in 2004 for the 2003-2007 Redundancy Program. It is important to remember that a part of this provision (185.7 million euros) had already been allocated in the first quarter, related to the acceptance of 672 layoffs. Furthermore, other extraordinary expenses have occurred in the first half, such as the restructuring carried out at the Terra Lycos Group ( -34.4 million euros) and the impact for Telefonica of the arbitration award related to the claim presented by Radio Blanca Group to Uniprex (-31.4 million euros), arbitration award that is currently being appealed by Antena 3TV under the Provincial Court. The tax provision for the first six months of the year totaled 559.0 million euros, although this will mean a very reduced cash outflow in the Group due to the compensation of negative tax bases obtained in previous years. The results attributed to minority interests deducted 156.9 million euros from the Group's net income in the first six months of 2004, compared with -75.3 million euros in the first half of 2003. This increase of 108.4% is mainly due to the smaller losses in Terra Lycos Group , the higher stake in this subsidiary and the increase in net income at VIVO, Telesp and CTC Chile. Telefonica Group CapEx of the first half of 2004 amounted to 1,350.4 million euros, down by 11.9% year on year. However it is important to note the strong cyclical component of the investment, so this performance cannot be extrapolated to the full year. Finally, the average workforce of the Telefonica Group at June 30 was 151,536 employees, a year on year decrease of 0.3% (395 employees). The layoffs carried out at Telefonica de Espana (2003-2007 Redundancy Program) and at Telesp in 2003 and in March 2004, together with the reduction in workforce due to changes in the consolidation perimeter, were almost offset by the increase in the number of employees of Atento to deal with the higher activity. TELEFONICA GROUP Financial Data TELEFONICA GROUP SELECTED FINANCIAL DATA Unaudited figures (Euros in millions) January - June 2004 2003 % Chg Operating revenues 14,324.5 13,563.3 5.6 EBITDA 6,367.3 5,956.0 6.9 Operating profit 3,421.0 2,818.0 21.4 Income before taxes 1,970.1 2,216.6 (11.1) Net income 1,254.2 1,425.6 (12.0) Net income per share 0.253 0.284 (11.0) Avg. No of shares, millions (1) 4,955.9 5,013.8 (1.2) (1) Weighted average number of shares in the period adjusted by free capital increases funded by reserves, that mean a change in the number of shares that did not produce any variation of equity structure, as if they were done at the beginning of the first period presented. That relates the two capital increases funded by a charge on freely disposable reserves, recorded with the Mercantile Register on February 18, 2003 and on April 24, 2003. Moreover, the number of shares in 2003 is affected by the capital reduction by amortization of treasury stock shares, from April 11, 2003, when the AGM was held, and that was recorded with the Mercantile Register on June 10, 2003. Accordingly, there was an average number of shares outstanding at the end of the period of 4,955,891,361 TELEFONICA GROUP RESULTS BY COMPANIES Unaudited figures (Euros in millions) REVENUES EBITDA OPERATING PROFIT Jun 2004 Jun 2003 % Chg Jun 2004 Jun 2003 % Chg Jun 2004 Jun 2003 % Chg Telefonica de Espana Group 5,399.4 5,282.9 2.2 2,487.5 2,343.0 6.2 1,249.9 1,005.9 24.3 Telefonica Latinoamerica 3,276.1 3,132.7 4.6 1,464.0 1,423.8 2.8 639.4 546.5 17.0 Group Cellular Business 5,458.1 4,782.8 14.1 2,309.2 2,175.0 6.2 1,545.0 1,410.7 9.5 Directories Business 220.2 195.7 12.5 59.9 42.8 39.9 49.1 30.0 63.9 Terra Lycos Group 273.9 252.8 8.3 2.4 (36.6) c.s. (36.4) (74.1) (50.9) Atento Group 279.4 241.9 15.5 40.9 25.3 61.3 21.4 (2.1) c.s. Content & Media Business 571.1 781.7 (26.9) 87.1 127.2 (31.6) 72.7 95.1 (23.5) Other companies 445.6 417.3 6.8 (76.4) (102.6) (25.5) (141.6) (179.1) (21.0) Eliminations (1,599.3) (1,524.5) 4.9 (7.2) (42.0) (82.9) 21.2 (14.7) c.s. Group 14,324.5 13,563.3 5.6 6,367.3 5,956.0 6.9 3,421.0 2,818.0 21.4 TELEFONICA GROUP CAPEX BY BUSINESS LINES Unaudited figures (Euros in millions) January - June 2004 2003 % Chg Telefonica de Espana Group 527.6 654.9 (19.4) Telefonica Latinoamerica Group 237.2 270.0 (12.1) Cellular Business 515.2 533.3 (3.4) Directories Business 7.5 5.7 30.3 Terra Lycos Group 11.3 38.1 (70.4) Atento Group 8.2 6.5 25.8 Content & Media Business 12.3 18.7 (34.5) Other companies & Eliminations 31.3 5.7 n.s. Group 1,350.4 1,532.9 (11.9) TELEFONICA GROUP CONSOLIDATED INCOME STATEMENT Unaudited figures (Euros in millions) January - June April - June 2004 2003 % Chg 2004 2003 % Chg Operating revenues 14,324.5 13,563.3 5.6 7,365.5 7,104.3 3.7 Internal expend capitalized in 206.5 225.9 (8.6) 110.9 123.7 (10.3) fixed assets (1) Operating expenses (8,093.5) (7,700.6) 5.1 (4,196.6) (4,005.1) 4.8 Supplies (3,364.0) (2,973.7) 13.1 (1,779.5) (1,534.5) 16.0 Personnel expenses (2,177.1) (2,344.8) (7.2) (1,097.0) (1,178.8) (6.9) Subcontracts (2,303.5) (2,155.1) 6.9 (1,197.4) (1,169.9) 2.4 Taxes (249.0) (227.0) 9.7 (122.7) (122.0) 0.5 Other net operating income (70.1) (132.6) (47.1) (24.7) (86.0) (71.3) (expense) EBITDA 6,367.3 5,956.0 6.9 3,255.1 3,136.9 3.8 Depreciation and amortization (2,946.4) (3,138.0) (6.1) (1,459.0) (1,577.0) (7.5) Operating profit 3,421.0 2,818.0 21.4 1,796.1 1,559.9 15.1 Profit from associated companies (26.2) (132.5) (80.3) (11.8) (81.9) (85.6) Financial net income (expense) (486.9) (296.5) 64.2 (271.5) (50.3) n.s. Amortization of goodwill (211.6) (212.2) (0.3) (106.1) (109.3) (2.9) Extraordinary net income (expense) (726.2) 39.8 c.s. (457.8) 71.3 c.s. Income before taxes 1,970.1 2,216.6 (11.1) 948.9 1,389.7 (31.7) Income taxes (559.0) (715.7) (21.9) (171.2) (452.0) (62.1) Net income before minority 1,411.1 1,500.9 (6.0) 777.7 937.7 (17.1) interests Minority interests (156.9) (75.3) 108.4 (81.8) (55.5) 47.4 Net income 1,254.2 1,425.6 (12.0) 695.9 882.2 (21.1) Average shares (millions) (2) 4,955.9 5,013.8 (1.2) 4,955.9 4,973.8 (0.4) Net income per share 0.253 0.284 (11.0) 0.140 0.177 (20.9) (1) Including work in process. (2) Weighted average number of shares in the period adjusted by free capital increases funded by reserves, that mean a change in the number of shares that did not produce any variation of equity structure, as if they were done at the beginning of the first period presented. That relates the two capital increases funded by a charge on freely disposable reserves, recorded with the Mercantile Register on February 18, 2003 and on April 24, 2003. Moreover, the number of shares in 2003 is affected by the capital reduction by amortization of treasury stock shares, from April 11, 2003, when the AGM was held, and that was recorded with the Mercantile Register on June 10, 2003. Accordingly, there was an average number of shares outstanding at the end of the period of 4,955,891,361 TELEFONICA GROUP CONSOLIDATED BALANCE SHEET Unaudited figures (Euros in millions) June 2004 2003 % Chg Subscribed shares not paid-in 0.0 228.7 n.s Long-term assets 43,161.6 47,634.7 (9.4) Start up expenses 485.4 597.2 (18.7) Intangible net assets 7,423.7 7,516.2 (1.2) Fixed net assets 23,139.8 26,050.1 (11.2) Investment 12,112.6 13,471.3 (10.1) Goodwill on consolidation 6,131.2 6,345.6 (3.4) Deferred expenses 454.8 615.5 (26.1) Current assets 10,985.5 11,656.5 (5.8) Inventories 599.8 422.6 41.9 Accounts receivable 6,340.9 6,167.9 2.8 Short-term investments 2,703.1 2,061.3 31.1 Cash and banks 640.0 2,652.9 (75.9) Others 701.7 351.9 99.4 Assets = Liabilities 60,733.1 66,481.0 (8.6) Shareholder's equity 15,218.6 16,878.9 (9.8) Minority interests 4,336.6 5,642.7 (23.1) Badwill on consolidation 11.7 10.5 11.3 Deferred income 548.2 873.0 (37.2) Provisions for risks and expenses 7,965.1 6,867.0 16.0 Long-term debt 17,514.8 20,382.0 (14.1) Accrued taxes payable 719.5 1,371.9 (47.6) Short-term debt including current maturities 5,114.1 4,755.9 7.5 Interest payable 375.9 405.7 (7.3) Other creditors 8,928.5 9,293.6 (3.9) Financial Data Consolidated net debt (1) 18,776.3 19,990.6 (6.1) Consolidated debt ratio (2) 47.4% 44.7% 2.8 p.p. (1) Net debt: Long-term debt + Short-term debt including current maturities - Short-term and Long-term finantial investments - Cash and banks (2) Debt ratio: Net debt / (Shareholders' equity + Minority interests + Deferred income + Accrued taxes payable + Net debt) TELEFONICA GROUP FREE CASH FLOW AND CHANGE IN DEBT Unaudited figures (Euros in millions) January - June 2004 2003 % Chg I Cash flows from operations 5,741.3 5,753.6 (0.2) II Extraord. payments related to operating activities and (467.1) (443.7) commitm. III Net interest payment (1) (446.4) (759.7) IV Payment for income tax (66.8) (114.4) A= Net cash provided by operating activities 4,761.0 4,435.8 7.3 I+II+III+IV B Payment for investment in fixed and intangible assets (1,707.3) (1,697.8) C=A+B Net free cash flow after CAPEX 3,053.7 2,738.0 11.5 D Cash received from sale of Real State 204.1 268.4 E Net payment for financial investment (1,576.5) (663.1) F Dividends paid (2) (1,136.6) (134.2) G=C+D+E+F Free cash flow after dividends 544.7 2,209.1 (75.3) H Effects of exchange rate changes on net debt 16.5 (531.4) I Effects on net debt of changes in consolidation and others 69.2 198.0 J Net debt at beginning of period 19,235.3 22,533.1 K=J-G+H+I Net debt at end of period 18,776.3 19,990.6 (6.1) (1) Including cash received from dividends paid by subsidiaries that are not under full consolidation method. (2) Dividends paid by Telefonica S.A. and dividend payments to minoritaries from subsidiaries that are under full consolidation method. TELEFONICA GROUP RECONCILIATIONS OF CASH FLOW AND EBITDA MINUS CAPEX Unaudited figures (Euros in millions) January - June 2004 2003 % Chg EBITDA 6,367.3 5,956.0 6.9 - CAPEX accrued during the period (EoP exchange rate) (1,350.4) (1,532.9) - Extraord. payments related to operating activities (467.1) (443.7) and comm. - Net interest payment (446.4) (759.7) - Payment for income tax (66.8) (114.4) - Investment in working capital (982.9) (367.2) = Net Free Cash Flow after Capex 3,053.7 2,738.0 11.5 + Cash received from sale of Real Estate 204.1 268.4 - Net payment for financial investment (1,576.5) (663.1) -Dividends paid (1,136.6) (134.2) = Free Cash Flow after dividends 544.7 2,209.1 (75.3) Note: At the Investor Conference held in October 2003, the concept expected 'Free Cash Flow' 2003-2006 was introduced to reflect the amount of cash flow available to remunerate Telefonica S.A. Shareholders, to protect solvency levels (financial debt and commitments), and to accomodate strategic flexibility. The differences with the caption 'Net Free Cash Flow after Capex' included in the table presented above, are related to 'Free Cash Flow' being calculated before payments related to commitments (workforce reductions and guarantees) and after dividend payments to minoritaries, due to cash recirculation within the Group. jan-jun 2004 jan-jun 2003 Net Free Cash Flow after Capex 3,053.7 2,738.0 + Payments related to cancellation of commitments 369.8 358.2 - Dividend payments to minoritaries (163.1) (134.2) = Free Cash Flow 3,260.4 2,962.0 TELEFONICA GROUP NET FINANCIAL DEBT AND COMMITMENTS Unaudited figures (Euros in millions) June 2004 Long-term debt 17,514.8 Short term debt including current maturities 5,114.1 Cash and Banks (640.0) Short and Long-term financial investments (1) (3,212.6) A Net Financial Debt 18,776.3 Guarantees to IPSE 2000 557.7 Guarantees to Sogecable 80.0 Guarantees to Newcomm 50.2 B Commitments related to guarantees 687.9 Gross commitments related to workforce reduction (2) 5,464.1 Value of associated Long-term assets (3) (633.8) Taxes receivable (4) (1,420.7) C Net commitments related to workforce reduction 3,409.6 A + B + C Total Debt + Commitments 22,873.9 Net Financial Debt / EBITDA (5) 1.4x Total Debt + Commitments/ EBITDA (5) 1.8x (1) Short term investments and certain investments in financial assets with a maturity profile longer than one year, whose amount is included in the caption 'Investment' of the Balance Sheet. (2) Mainly in Spain, except 69.9 million euros related to the provision of pension fund liabilities of corporations outside Spain. This amount is detailed in the caption 'Provisions for Contingencies and Expenses' of the Balance Sheet, and is the result of adding the following items: 'Provision for Pre-retirement, Social Security Expenses and Voluntary Severance', 'Group Insurance', 'Technical Reserves', and 'Provisions for Pension Funds of Other Companies'. (3) Amount included in the caption 'Investment' of the Balance Sheet, section 'Other Loans'. Mostly related to investments in fixed income securities and long-term deposits that cover the materialization of technical reserves of the Group insurance companies. (4) Net present value of tax benefits arising from the future payments related to workforce reduction commitments. (5) Calculation based on twelve months rolling EBITDA, that is from July 2003 to June 2004. TELEFONICA GROUP EXCHANGES RATES APPLIED P&L (1) Balance Sheet and CapEx (2) Jan - Jun 2004 Jan - Jun 2003 % Chg Jun 2004 Jun 2003 US Dollar / Euro 1.226 1.103 1.216 1.143 Argentinean Peso / Euro 3.562 3.306 3.595 3.200 Chilean Peso / Euro 780.309 771.080 773.423 798.884 Brasilian Real / Euro 3.641 3.549 3.777 3.282 Peruvian Nuevo Sol / Euro 4.258 3.829 4.220 3.967 Mexican Peso / Euro 13.994 11.560 13.871 11.976 (1) These exchange rates are used to convert the P&L accounts of the Group foreign subsidiaries from local currency to euros. P&L accounts for subsidiaries that use inflation adjusted accounting criteria (Mexico, Chile, Peru, Colombia and Venezuela), are first converted to US dollars at the closing exchange rate, and then the conversion into euros is made according to the average exchange rate. (2) Exchange rates as of 30/06/04 and 30/06/03 RESULTS BY BUSINESS LINES Fixed Line Business TELEFONICA DE ESPANA GROUP During the first half of 2004, the Telefonica de Espana Group achieved growth in both revenues and EBITDA of 2.2% and 6.2% respectively, compared to the same period of 2003, presenting a clear acceleration of the rates registered in the first quarter of the year (1.7% and 4.2%, respectively). This strong performance was the result of the Group's increased commercial efforts and the progress that is being made to enhance the efficiency and profitability of operations. These initiatives are in line with the strategic priority of transforming the Telefonica de Espana Group with a clear leadership of the broadband market, based on a more agile and flexible company model, with a greater commercial focus. The main progress made over the quarter in terms of developing the company's broadband commercial program was as follows: â€¢ CMT's recent approval of Telefonica de Espana's application to double the speeds of the current ADSL product offering. Thus, the basic service option will have a download speed of 512 Kbps for the same price as the previous option of 256 Kbps, which will be eliminated from the portfolio. In turn, the highest speed option will rise to 4 Mbps under the same price conditions as the previous option of 2 Mbps. These new conditions will be applied two months after their formal approval. â€¢ The launch of the guaranteed high throughput ADSL service for the business client segment. â€¢ The launch of offers to promote the ADSL service, including most notably the free subscription campaign in May and the offer to new customers subscribing in June-August of free monthly fees until September. â€¢ An Imagenio marketing campaign focused on current ADSL customers that have resulted in 1,077 new customers in June alone, thereby nearly doubling the number of Imagenio customers, which stood at 2,553 at June end. Other remarkable commercial actions taken by the Company in the second quarter of 2004 are: â€¢ The launch of the new Famitel Agenda wireless handset, capable of downloading the mobile handset agenda from the SIM card; it also includes a colour screen, polyphonic ringing tones, text messaging, games and hands-free option. â€¢ Increased efforts in the subscriber win back campaign, achieving a decline in the number of preselected lines for the first time in a quarter since 1998. â€¢ A new advertising campaign for modular plans 'Combinados' product offering, leading to a net gain of 414,295 'Combinados' in the quarter and a total of 775,279 operative plans at the end of June. â€¢ An advertising campaign to promote the 11822 Information Service. Additionally, 157 new sales representatives joined the Telefonica de Espana staff in May, as envisaged under the Social Plan included in the Redundancy Program (2003-2007). Among the most significant regulatory factors to have occurred to date is the commencement at the instigation of the CMT of a Public Consultation Process lasting 45 days and ending on August 20, for the precise definition of relevant markets in conformity with the EU framework transposed into Spanish legislation in the General Telecommunications Law promulgated in November 2003. Telefonica de Espana revenues totaled 5,399.4 million euros at June 30, 2004, representing a 2.2% growth in comparison with the same period of the previous year and 0.5 percentage points higher than the 1.7% growth recorded during the first quarter of 2004. The Telefonica de Espana parent company contributed revenues of 5,175.5 million euros to this good result, which represented a year on year growth rate of 1.4% as compared with the rate of 0.7% in the first quarter of 2004. The lower growth in revenues at Telyco in the second quarter, following the end of Christmas and Father's Day campaigns, led to a reduction in this company's contribution to the growth of Telefonica de Espana Group revenues in comparison with the first quarter of 2004. Particularly noteworthy when analyzing the Telefonica de Espana parent company revenues by services is the good progress made by revenues from the Internet and Broadband Services which posted a growth of 131.6 million euros in the first half of 2004 as compared with the same period of the previous year and were the main source of revenue growth, almost offsetting the 139.4 million euro decline in Traditional Services revenues recorded in the same period. With the inclusion of the higher revenues booked from the Data and Solutions Business and the Wholesale Business of 31.4 million euros and 45.5 million euros, respectively, revenues at the parent company rose by a total of 69.2 million euros in the first half of 2004. â€¢ The aggregate revenues from Traditional Services of 3,524.9 million euros at June end were 3.8% lower than the figure for the same period of 2003. Despite the appreciable decrease in the first half as a whole, the rate of decline clearly slowed in the second quarter - it was 2.9% - due mainly to the impact of the 4.35% rise in the monthly fee which came into effect in April. Revenues from Client Network Access amounted to 1,467.5 million euros at June end, which was 1.5% lower than in June 2003 as a result of the decline in plant in service. It should however be mentioned that these revenues performed better in the second quarter, with a fall of only 0.6%, due to the rise in the monthly fee mentioned above. Telefonica's estimated access market share stood at 89.3% at the end of June, which was 0.6 percentage points lower than in March 2004 and 2.2 percentage points lower than in June 2003. In absolute terms, 69,859 lines (PSTN and ISDN basic access) were lost during the quarter, compared with the 28,594 lines lost in the previous quarter, when the free subscription campaign was launched, and the 102,390 lines lost in the second quarter of 2003. The aggregate number of lines lost in the first half of 2004 was 98,453, compared with the 199,358 lines lost in the same period of 2003. The unbundled loops by competitors of Telefonica de Espana in the second quarter of 2004 have been 16,808 as fully unbundled local loops and 2,113 as shared access loops; being the total number of unbundled loops 43,422 at June end, of which 41,100 were fully unbundled and 2,322 were shared loops. Revenues from voice usage amounted to 1,622.4 million euros in the first half of the year, down by 5.1% from the same period of the previous year, although the rate of decline has slowed in recent months. The lower decline in revenues is due primarily to the changes in the price and the bonus discount scheme of the ' Servicio Integral de Mantenimiento (SIM)' (Comprehensive Maintenance Service) contract: the discount, which is no longer linked to voice usage, has been reduced and it is evenly applied to all customers contracting the service; thus, starting April 2004, voice usage revenues are no longer reduced by the SIM bonus, which is now booked under the Handset sales and Maintenance caption. In addition, there has been an 11.5% price cut in the SIM, also effective from April 2004. As regards voice traffic, the estimated total volume of the market in Spain, expressed in minutes, was down by 4.7% in the first half of 2004 in comparison with the same period of the previous year. Telefonica de Espana's estimated share of the voice market stood at 72.8% in June 2004, 4.6 percentage points lower than in June 2003. Noteworthy is the slowdown in the loss of market share: it was 5.2 percentage points in the 12 months to March 2004 and 5.5 percentage points in the 12 months to December 2003. The estimated total volume of minutes processed by Telefonica de Espana during the quarter amounted to 64,487 million, experiencing a decline of 6.9%. Total outgoing traffic (including Internet), which accounted for 56.3% of total traffic, amounted to 36,305 million minutes, and fell by 16.0% from June 2003. Traditional outgoing traffic totaled 24,755 million minutes at June end, down by 10.5% year on year due to the negative performance of the market and the loss in market share aforementioned. The negative trend in traffic continued during the first six months of the year, with very significant year on year falls in domestic fixed line-to-fixed line traffic: local traffic was down by 13.3%, provincial traffic by 10.3%, and DLD traffic by 9.1%. There was also a 1.0% drop in fixed-to-mobile traffic in the first half of the year. Only international traffic maintained a positive trend in the first six months, with year on year growth of 1.9%. The number of outgoing minutes to the Internet amounted to 11,550 million and continued to show a negative year on year variation of 25.9%, mainly as a result of switched Internet traffic cannibalization by broadband ADSL services. Finally, incoming traffic rose by 8.4% year on year to 28,182 million minutes. For the first time since the introduction of preselection in 1998, and as a result of the intensive commercial efforts made by the Company over the last few months in customer win back campaigns, the number of preselected lines in the second quarter of 2004 fell by 34,423 lines. As a result, the net gain in preselected lines during the first half of the year amounted to 17,501, compared with 288,284 in the first half of 2003. In regard to Value-Added Services, Voice Mailbox and Caller ID services should be noted. By the end of June 2004, the number of services activated amounted to 11,744,278 and 7,232,641, respectively, with positive progress in the quarter. The growing acceptance of the Text messaging service continued, the number of text messages having increased by 9.8% compared with the previous quarter. â€¢ Internet and Broadband Services recorded aggregate revenues of 530.5 million euros in the first half of the year, representing year on year growth of 33.0%. The important milestone of having reached 2 million ADSL lines in service took place in the second quarter of 2004. Specifically, at the end of June the plant in service amounted to 2,043,728 ADSL connections. The ADSL net gain in the second quarter was 196,415 accesses, representing an increase of 24.7% on the same period of 2003. The number of retail ADSL accesses reached a total of 1,339,747 accesses, representing an increase of 12.2% compared to the retail accesses in service as of March 2004, and a net gain of 145,459 new accesses in the second quarter. This figure represents 74.1% of the net gain in total ADSL accesses in the Spanish market during the second quarter of 2004, and is 7.7 percentage points higher than the figure for the first quarter of the year. In turn, Telefonica de Espana's retail ADSL broadband access achieved a 53.3% share in the net gain of total broadband accesses in the Spanish market. Value Added Services on the retail ADSL service continued to show strong performance, amounting to 714,255 operative services. Of these, 'ADSL Solutions' recorded growth of 18.5% compared with March 2004, with a total of 139,939 operative units (42,651 Net-LAN and remote access solutions). The ADSL service ' Mantenimiento Integral ADSL' (ADSL Comprehensive Maintenance Service) also presents strong growth, having reached 107,925 clients. Hence, revenues from the Telefonica de Espana's retail broadband services grew 57.0% to reach 391,6 million euros. On the other hand, narrowband Internet revenues continued to decline: they were down 7.1% to 138.9 million euros, due primarily to the migration of customers to broadband services. â€¢ The Data and Solutions Business recorded growth of 7.1% in the first half and totaled 474,4 million euros at the end of June. The main item of these revenues, comprising 53.6% of Data and Solutions revenues, relates to the planning and operation of virtual private networks, where its limited revenue growth of 0.5% is the result of the combined effects of the increase in plant and the migration of data products to IP technology. On the other hand, Solutions and Value-Added Services for Businesses segment recorded year on year growth of 30.0% in the first half and accounted for 26.8% of total Data and Solutions revenues. There are currently 153 agreements for the management or outsourcing of services for big corporations, of which 99 are client management centers operated by Telefonica, and there has been a 57.3% increase in the number of hosting servers. â€¢ Wholesale Business contributed with 645.6 million euros to consolidated revenues, a 7.6% increase in relation to the same period of the previous year. The 28.7% of these revenues came from domestic interconnection services, which were increased by 5.7% due, basically, to the 33.0% growth in the fixed-to-mobile interconnection revenues and a slight decrease of fixed-to-fixed interconnection revenues. In addition, it is important to highlight the substantial 48.0% growth in the wholesale ADSL service with revenues totaling 110.7 million euros. Telefonica de Espana Group's operating expenses experienced a year on year decrease of 0.4% to 2,971.3 million euros. Among other items comprising operating expenses, it should be noted the 9.8% reduction in personnel expenses in comparison with the same period of 2003, which amounted to a total of 1,061.6 million euros, as a result of the staff joining the 2003-2007 Redundancy Program. Telefonica de Espana parent company headcount reaches 35,825 employees at June end, representing a reduction of 1,234 employees since the beginning of the year. Up to the end of June 2004, 1,356 employees had left Telefonica de Espana under the Redundancy Program. The remaining employees included in the total figure of 2,310 redundancies accepted by the Company in 2004 will leave Telefonica de Espana in the remaining months of the year. Contrary to personnel expenses evolution, the Company's increased commercial activities aimed at revenue growth led to a 14.2% rise in external services & others which totaled 578.0 million euros. Supplies expenses, amounting to 1,243.0 million euros, grew by 2.6% despite the slight 1.3% decrease in interconnection expenses, due basically to the reduction in fixed-to-mobile interconnection tariffs that came into effect in November 2003. The increase in expenses at Telyco linked to the handset sale business had a decisive impact on the evolution of supplies expenses at the Telefonica de Espana Group; without them, the Group's supplies expenses growth would have fallen to just 0.5%. Telefonica de Espana Group EBITDA amounted to 2,487.5 million euros at, up 6,2% year on year. The Group's EBITDA margin reached 46.1% (0.3 percentage points higher than in the first quarter of 2004 and 1.7 percentage points higher than in the first half of 2003). Telefonica de Espana parent company's EBITDA amounted to 2,481.8 million euros, up by 6.3% on the previous year. Telefonica de Espana Group's operating profit amounted to 1,249.9 million euros in the first half of 2004, up by 24.3% on that of the same period of the previous year as a result of the positive evolution of the EBITDA and the 7.4% decrease in amortization and depreciation. All of the 2,310 applications to join the Redundancy Program received by Telefonica de Espana during the first quarter of 2004 have been accepted. CapEx by Telefonica de Espana Group dropped by 19.4% to 527.6 million euros to reach a CapEx over Revenues ratio of 9.8%, reflecting Telefonica de Espana's aim of taking forward the transformation process into a and less capital-intensive company. Operating free cash flow, defined as EBITDA minus CapEx, amounted to 1,959.9 million euros, up by 16.1% on the same period of 2003. TELEFONICA DE ESPANA SELECTED OPERATING DATA Unaudited figures (Thousands) June 2004 2003 % Chg Equivalent lines (1) 19,420.4 18,859.5 3.0 PSTN Lines 14,941.8 15,230.7 (1.9) ISDN equivalent basic access 1,847.7 1,792.3 3.1 ISDN equivalent primary accesses y 2/6 equivalent 546.1 534.2 2.2 accesses Fully unbundled local loops 41.1 8.8 366.7 ADSL connections 2,043.7 1,293.6 58.0 Telefonica de Espana retail ADSL 1,339.7 846.6 58.2 Traffic (minutes in millions) (2) 64,487.0 69,237.0 (6.9) Employees (units) 35,825 42,413 (15.5) (1) PSTN (including Public Use Telephony) (x 1) - ISDN Basic accesses (x 2) - ISDN Primary access (x 30) - 2 /6 Accesses (x 30) - ADSL Lines (x1). (2) January - June cumulative data. TELEFONICA DE ESPANA PARENT COMPANY OPERATING REVENUES Unaudited figures (Euros in millions) January - June April - June 2004 2003 % Chg 2004 2003 % Chg Traditional Services 3,524.9 3,664.3 (3.8) 1,794.1 1,848.1 (2.9) Client network access (1) 1,467.5 1,489.6 (1.5) 747.4 751.9 (0.6) Voice usage (Net total) (2) 1,622.4 1,709.2 (5.1) 837.4 859.5 (2.6) Local 394.9 420.2 (6.0) 197.8 206.5 (4.2) Provincial 126.5 132.5 (4.5) 63.8 66.0 (3.3) Domestic long distance 221.7 232.8 (4.8) 111.5 116.0 (3.9) International long distance 126.5 122.5 3.3 67.9 64.0 6.1 Fixed to mobile 594.3 623.5 (4.7) 310.4 317.5 (2.3) IRIS and others (3) 158.3 177.9 (11.0) 86.1 89.6 (3.9) Handsets sales and maintenance 317.4 353.7 (10.3) 150.7 178.9 (15.7) Other business lines (4) 117.6 111.8 5.1 58.7 57.7 1.6 Internet and Broadband Services 530.5 399.0 33.0 276.6 208.0 33.0 Narrowband 138.9 149.6 (7.1) 65.3 69.7 (6.3) Broadband (retail) 391.6 249.4 57.0 211.3 138.3 52.7 Data and Solutions Services 474.4 443.0 7.1 246.1 227.8 8.1 Corporate networks (5) 347.2 345.1 0.6 176.8 176.3 0.3 Solutions 127.3 97.9 30.0 69.4 51.5 34.8 Wholesale Services 645.6 600.1 7.6 330.8 312.4 5.9 National interconnection 185.2 175.3 5.7 95.3 91.8 3.8 Wholesale ADSL (Megabase, Megavia and 110.7 74.8 48.0 58.4 39.1 49.4 GigADSL) International operators services 152.3 148.1 2.8 80.5 76.2 5.7 Other national operators services (6) 197.4 201.9 (2.2) 96.7 105.4 (8.3) Total operating revenues 5,175.5 5,106.3 1.4 2,647.7 2,596.2 2.0 Note: Starting first quarter 2004, Telefonica Data Espana and Telefonica Soluciones results will be incorporated within Telefonica de Espana Group. 2003 figures are proforma for the benefit of comparison. (1) Revenues derived from monthly and connection fees (PSTN, Public Use Telephony, ISDN and Corporate Services), public telephone booths and network services. (2) Voice usage net of discounts, foreign participation (international long distance) and payments to Intelligent Network providers. (3) Services included: Intelligent Network services, Special Valued Services and others. (4) Special Projects, Services agency and others. (Broadcasting included) (5) Included leased circuits, VPN and delicated internet access. (6) Services included: Commercial wholesale services (access, carrier and maintenance), wholesale leased circuits, other IP services and ULL. TELEFONICA DE ESPANA PARENT COMPANY OPERATING REVENUES - PROFORMA 2003 Unaudited figures (Euros in millions) 2003 Jan - Mar Jan - Jun Jan - Sep Jan - Dec Traditional Services 1,816.2 3,664.3 5,453.6 7,243.3 Client network access (1) 737.8 1,489.6 2,224.0 2,950.0 Voice usage (Net total) (2) 849.6 1,709.2 2,539.0 3,366.1 Local 213.6 420.2 603.0 816.9 Provincial 66.6 132.5 195.2 259.5 Domestic long distance 116.8 232.8 341.9 461.6 International long distance 58.5 122.5 190.2 243.9 Fixed to mobile 305.9 623.5 945.7 1,257.9 IRIS and others (3) 88.3 177.9 263.1 326.3 Handsets sales and maintenance 174.8 353.7 523.4 706.0 Other business lines (4) 54.1 111.8 167.2 221.1 Internet and Broadband Services 191.0 399.0 610.6 849.0 Narrowband 79.9 149.6 216.4 291.9 Broadband (retail) 111.1 249.4 394.3 557.1 Data and Solutions Services 215.3 443.0 679.8 928.6 Corporate networks (5) 168.8 345.1 527.1 705.4 Solutions 46.4 97.9 152.7 223.3 Wholesale Services 287.7 600.1 914.8 1,256.7 National interconnection 83.5 175.3 260.4 356.6 Wholesale ADSL (Megabase, Megavia & GigADSL) 35.7 74.8 115.0 166.1 International operators services 71.9 148.1 233.6 309.3 Other national operators services (6) 96.5 201.9 305.8 424.7 Total operating revenues 2,510.1 5,106.3 7,658.9 10,277.6 Note: Starting first quarter 2004, Telefonica Data Espana and Telefonica Soluciones results will be incorporated within Telefonica de Espana Group. 2003 figures are proforma for the benefit of comparison. (1) Revenues derived from monthly and connection fees (PSTN, Public Use Telephony, ISDN and Corporate Services), public telephone booths and network services. (2) Voice usage net of discounts, foreign participation (international long distance) and payments to Intelligent Network providers. (3) Services included: Intelligent Network services, Special Valued Services and others. (4) Special Projects, Services agency and others. (Broadcasting included). (5) Included leased circuits, VPN and delicated internet access. (6) Services included: Commercial wholesale services (access, carrier and maintenance), wholesale leased circuits, other IP services and ULL. TELEFONICA DE ESPANA GROUP CONSOLIDATED INCOME STATEMENT Unaudited figures (Euros in millions) January - June April - June 2004 2003 % Chg 2004 2003 % Chg Operating revenues 5,399.4 5,282.9 2.2 2,764.3 2,692.9 2.7 Internal expend capitalized in 66.3 83.8 (20.9) 36.5 42.6 (14.4) fixed assets (1) Operating expenses (2,971.3) (2,983.7) (0.4) (1,516.6) (1,523.1) (0.4) Other net operating income (7.0) (40.1) (82.4) (3.1) (27.5) (88.8) (expense) EBITDA 2,487.5 2,343.0 6.2 1,281.1 1,184.8 8.1 Depreciation and amortization (1,237.6) (1,337.1) (7.4) (606.6) (661.4) (8.3) Operating profit 1,249.9 1,005.9 24.3 674.5 523.4 28.9 Profit from associated companies (0.6) (0.6) 4.1 (0.3) (0.1) 161.5 Financial net income (expense) (198.3) (228.4) (13.2) (98.8) (111.3) (11.3) Amortization of goodwill (1.7) 0.2 c.s. (0.8) 0.9 c.s. Extraordinary net income (expense) (611.0) 18.7 c.s. (412.3) 21.7 c.s. Income before taxes 438.3 795.8 (44.9) 162.3 434.5 (62.6) Income taxes (112.9) (226.4) (50.1) (26.8) (122.0) (78.0) Net income before minority 325.4 569.4 (42.9) 135.5 312.5 (56.6) interests Minority interests (0.1) (0.1) (3.3) (0.0) (0.0) (2.4) Net income 325.4 569.4 (42.9) 135.4 312.4 (56.7) Note: Starting first quarter 2004, Telefonica Data Espana and Telefonica Soluciones results will be incorporated within Telefonica de Espana Group. 2003 figures are proforma for the benefit of comparison. (1) Including work in process. TELEFONICA DE ESPANA GROUP CONSOLIDATED INCOME STATEMENT - PROFORMA 2003 Unaudited figures (Euros in millions) 2003 Jan - Mar Jan - Jun Jan - Sep Jan - Dec Operating revenues 2,590.0 5,282.9 7,946.7 10,695.4 Internal expend capitalized in fixed 41.2 83.8 120.8 174.6 assets (1) Operating expenses (1,460.6) (2,983.7) (4,506.6) (6,048.7) Other net operating income (expense) (12.5) (40.1) (56.6) (58.9) EBITDA 1,158.2 2,343.0 3,504.4 4,762.4 Depreciation and amortization (675.7) (1,337.1) (1,992.8) (2,638.8) Operating profit 482.5 1,005.9 1,511.6 2,123.6 Profit from associated companies (0.4) (0.6) (0.7) (0.9) Financial net income (expense) (117.1) (228.4) (340.1) (447.5) Amortization of goodwill (0.7) 0.2 0.2 (2.8) Extraordinary net income (expense) (3.0) 18.7 21.5 (1,374.1) Income before taxes 361.3 795.8 1,192.5 298.2 Income taxes (104.4) (226.4) (340.5) (18.1) Net income before minority interests 257.0 569.4 852.0 280.1 Minority interests (0.0) (0.1) (0.0) (0.0) Net income 256.9 569.4 851.9 280.1 Note: The incorporation of the assets corresponding to Telefonica Empresas into Telefonica de Espana Group in 2004, implies the presentation of Telefonica de Espana Group proforma financial statements for fiscal year 2003, under the same criteria, for the benefit of comparisons. In February 27th, 2004, the company notified the main metrics of these proforma financial statements for fiscal year 2003 under the new consolidation perimeter. The final definition of the assets to be incorporated to Telefonica de Espana Group makes these metrics to vary slightly with respect to the ones previously presented (-4.4 million euros in revenues and -10.4 million euros in EBITDA), a change that does not imply modifications in neither Telefonica de Espana Group nor Telefonica Group published accounts in the above mentioned fiscal year. (1) Including work in process. RESULTS BY BUSINESS LINES Fixed Line Business TELEFONICA LATINOAMERICA GROUP Results at Telefonica Latinoamerica continued to record positive growth for the fourth consecutive quarter in current euros, both in terms of operating revenues and EBITDA. In the second quarter of 2004 the Latin American currencies fell slightly against the dollar (with the exception of the Argentinean peso, which remained stable), although this was largely offset by the rise in the average dollar/euro exchange rate. However, on a year on year basis, these currencies continued to record levels of depreciation against the dollar that were higher than those of the first quarter of 2004, implying an increase in the negative impact of exchange rates on performance during the first half. Operating revenues amounted to 3,276.1 million euros, representing year on year growth of 4.6%, which in constant euros becomes 10.3%, keeping the growth rate recorded in the first quarter of 2004. The evolution of the revenues in constant euros reflects the behavior of revenues at: â€¢ Telesp (up 20.0% in local currency), as a result of the positive progress made by the traditional business (up 18.6%), assisted by the good performance of the new businesses (SMP, long distance outside Sao Paulo,...), the July 2003 tariff increase, and the increase in fixed-to-mobile and public telephones traffic. â€¢ TASA (up 7.9% in local currency), due to the good performance of the plant and traffic operating variables in comparison with 2003, despite the tariff freeze in force since January 2002, which made it possible to achieve growth of 6.0% in revenues from traditional services. â€¢ CTC recorded a fall in revenues of 9.4% in local currency, with a slow down in the decreasing rate recorded in the first quarter (-10.2%). CTC continues to be affected by the lower plant in service, the reduction in tariffs for calls terminating on mobile networks (CPP), the cannibalization of mobile telephony and the poor performance of the long distance market. â€¢ TdP, with a 13.4% increase year on year in its plant of equivalent lines, recorded revenue growth of 0.9% in local currency, since the 1.6% fall in Traditional Business revenues was offset by the 62.8% rise in Internet (narrowband + broadband) revenues. â€¢ Telefonica Empresas America and TIWS, where the positive trend of the previous quarter continued with growth of 17.2% and 19.2%, respectively, in constant euros. The total operating expenses of Telefonica Latinoamerica stood at 1,845.7 million euros at June 30, 2004, which was 5.0% more in current euros than in the same period of 2003. In constant euros, these expenses rose by 11.4% (compared with 13.3% in the first quarter) as a result of the increase in expenses in local currency at the fixed-line operators, except for CTC. Expenses at Telesp were up by 24.5%, due to the higher interconnection expenses associated with the increased revenues from fixed -to-mobile and long distance traffic and to the company's increased commercial activity. Expenses at TASA rose 7.3%, due to increased activity, and at TdP the increase was 1.0%. Conversely, expenses at CTC fell by 11.4% as a result of the lower interconnection (fixed-to-mobile) expenses and the company's cost containment efforts. Expenses at Telefonica Empresas rose 12.4% in constant euros due to the increased activity, although the company achieved greater efficiency in relation to revenues (up by 17.2%). TIWS succeeded in reducing its expenses (by 6.0% in constant euros) despite the big increase in revenues. EBITDA at the end of the first half stood at 1,464.0 million euros, representing growth of 2.8% which rises to 7.8% in constant euros (7.2% in the first quarter), achieving an EBITDA margin of 45.0% in the second quarter, compared to 44.3% in the first one. The decrease in amortization and depreciation (down by 1.5% in constant euros) made it possible to achieve an operating profit of 639.4 million euros, representing an improvement of 22.1% in constant euros. In the first half, Telefonica Latinoamerica recorded extraordinary net income of 10.4 million euros, of which 8.9 million euros arose in the first quarter, compared with the previous year's figure of -47.0 million euros. In 2004 this item includes lower extraordinary expenses at the operators relating to workforce restructuring and the positive impact of CTC's sale of Publiguias. The financial results stood at -157.1 million euros, compared with the previous year's figure of +129.1 million euros, which was the result of the exchange gains recorded by the Argentinean companies in 2003 (more than 190 million euros), as well as the profit recorded in 2003 as a result of the cancellation of the debt denominated in dollars (approximately 250 million euros). Excluding the impact of the exchange rate differences, Telefonica Latinoamerica net financial results were down by 64.1% as a result of the lower interest expenses connected with the lower volume of debt and lower interest rates in Brazil and in the Euro zone. These results, together with a tax provision of 59.5 million euros, allowed to record a net income of 322.5 million euros, with a year on year increase of 11.9%. CapEx at Telefonica Latinoamerica amounted to 237.2 million euros, which was 12.1% less than in 2003 (-2.9% year on year in constant euros). This evolution reflects the containment of investment at the fixed-line operators, at Telefonica Empresas and TIWS. The operating free cashflow (EBITDA-CapEx) generated at Telefonica Latinoamerica in the first half of 2004 amounted to 1,226.8 million euros, with year on year growth of 6.3% (10.3% in constant euros). Telefonica de Latinoamerica's plant of equivalent lines totaled 22.0 million, which was 1.7% more than in June 2003, thanks to the efforts made in the broadband business, which are reflected in the strong growth in plant, with 243,518 new customers since the beginning of the year and more than one million users at the end of June (up by 78.6% on the first half of 2003). It should be pointed out that the growth in broadband connections increased (up by 71.6% in the first quarter of 2004) and these connections now represent 4.6% of equivalent lines, compared with 2.6% in June 2003. In turn, traditional business lines totaled 20.9 million, 0.4% less year on year, since the growth recorded at TdP (+9.5%) and TASA (+2.2%) was not able to compensate for the losses of lines at Telesp (-1.5%) and CTC (-6.6%), the latter being affected by the disconnections made in 2003 because of bad debt problems. There was a net gain of 85,973 lines in the first half, with the biggest contribution being made by TdP. The move in plant towards products that are better suited to customer needs are reflected in the increase in prepaid or restricted usage plant, which at the end of June represented 12.0% of the total plant of traditional lines compared with 9.7% in the same period of the previous year. Telesp From the regulatory point of view there are two significant events that have occurred in recent weeks. The first of them is Anatel's approval on June 30 of the 2004 tariff review in conformity with the conditions of the privatization contract. This means that the local telephony basket tariffs rise by an average of 6.89% and domestic long distance tariffs rise by 3.2%, with effect from July 2. The second significant event is the judgment handed down by the Higher Court of Justice on July 1 which rules in favor of the fixed line telephony operators with regard to the 2003 tariff increase, which had provisionally been set by the courts on the basis of the retail price index, despite Anatel's approval of the IGP-DI wholesale price index as the reference index. The judgment is not retroactive, and the details of its application are now being negotiated by Anatel and the fixed line telephony operators. At the end of June the plant in service (traditional business + ADSL lines) at Telesp amounted to 12.8 million lines, slightly more (0.3%) than in 2003, since the increases recorded in the ADSL plant, which was up by 58.0%, made up for the decrease in traditional lines which were down by 1.5%. Although the decline in the long distance market as a whole continued, Telesp continued to gain market share, both year on year and with respect to March 2004. Its estimated share in the intra-state long distance market was over 87%, which is slightly more than in the previous quarter. In inter-state long distance the company had an estimated market share around 54%, which was almost 7 percentage points more year on year (and nearly 4 percentage points more than in March 2004). The situation in international long distance was similar, with an estimated market share of 47% and increases of 8 percentage points over June 2003 and 6 percentage points over March 2004. Telesp continued to pursue its strategic priority of broadband expansion with a total of 605,548 connections at the end of June, signifying a year on year increase of 58.0%. Sales efforts were stepped up in the quarter, achieving a net gain of 87,373 connections - Telesp's biggest ever - compared with the 33,861 connections of the second quarter of 2003 and the 33,782 connections of the first quarter of 2004. Telesp's ISP 'itelefonica' reached a total of 1.7 million users, and the upward trend recorded since its launch continued with a market share that had stabilized at around 25%. Telesp obtained operating revenues of 1,789.6 million euros in the first half of the year, an increase of 20.0% compared to June 2003 in local currency, thanks to the positive progress made by the traditional business (up by 18.6% and contributing 93.7% of total operating revenues) assisted by the good performance of the new businesses (SMP, long distance outside Sao Paulo,...), the July 2003 increase in tariffs, and the increase in fixed-to-mobile and public telephone traffic. There was also a 45.2% increase in local currency in Internet revenues (narrowband + broadband), due mainly to the growth in the ADSL customer base, revenues from which increased by 76.1% in local currency. Although operating expenses were 24.5% higher in local currency than in June 2003, the rate of increase had slowed appreciably (10.6 percentage points lower than in March). This increase was the result of the higher interconnection expenses (+38.8%) associated with the increased fixed-to-mobile, SMP and long distance traffic revenues. Personnel expenses were 11.9% lower as a result of the reduction in the average workforce due to the layoffs that took place in 2003 and in May 2004. Subcontracting expenses rose by 23.8% due to the increased commercial activity, the rise in co-billing expenses, and the indexing of some contracts and the higher level of outsourcing. Bad debt provision as a percentage of revenues stood at 3.3%, an improvement of 0.8 percentage points on the previous year, thanks to more restrictive entry filters. EBITDA stood at 792.3 million euros at the end of June, which represented a year on year increase of 9.8% in local currency. Although the EBITDA margin was down by 4.1 percentage points from June 2003, due to the higher proportion of revenues accounted for by the new businesses (fixed-to-mobile, long distance outside Sao Paulo, SMP), it recovered slightly in the second quarter and stood at 44.6% in comparison with the 44.0% of the previous quarter. Telesp is currently re-evaluating projects in terms of cost-effectiveness and the strategic nature of the investment and this has made it possible to reduce CapEx by 24.2% year on year in local currency to 119.7 million euros. Accordingly, the operating free cash flow (EBITDA-CapEx) generated amounted to 672.6 million euros, an increase of 19.8% year on year in local currency. Telesp had 7,015 employees at June end, a decrease of 15.3% due to the layoff schemes implemented in 2003 and May 2004. Telefonica de Argentina The stable economic situation that began in 2003 continued in the first half of 2004. The performance of the main macroeconomic variables, particularly the growth in activity and the stability of the peso against the dollar (with a 0.9% depreciation in the exchange rate from December 2003 to June 30, 2004), together with management of Telefonica de Argentina in keeping with the recovery of the fixed line telephony market, meant that plant and traffic operating indicators performed well, even managing to achieve levels similar to those of 2001, the year before the crisis. At 4.3 million lines, the plant of traditional lines recorded growth of 2.2% with respect to 2003 as a result of the sharp increase in gross additions (55.3% year on year). There has been a net gain so far this year of more than 100,000 lines, of which an increasing proportion are prepaid (27.8% of the total plant at the end of June, 1.5 percentage points more than in 2003). The good performance in plant was accompanied by the recovery in total traffic per line, which was 8.7% higher than in 2003, driven mainly by the increase in prepaid traffic, both in cards and prepaid lines. There was also a substantial increase in the ADSL plant (up by 137.3%), which stood at 108,211 lines with a net gain of 38,884 lines since the beginning of the year (compared with 11,184 in the same period of 2003), enabling the company to achieve a 5.4 percentage points increase in its estimated broadband market share in the Southern area (69.4%). The ratio of lines to employee stood at 544 lines, representing an increase of 3.7% over June 2003. The good performance of the operating variables of plant and traffic with respect to 2003 resulted in revenues of 397.8 million euros, a year on year increase of 7.9% in local currency, despite the tariff freeze in place since January 2002. When comparing the figures for 2004 with those of the previous year, it is important to remember that it was in the second quarter of 2003 that the impact of agreements with operators for mutual invoicing applying CER (inflation indexing of wholesale offerings) was recorded, and not only the impact relating to the first half of 2003, but also to the whole 2002. Excluding the impact relating to 2002, TASA's revenues rose by 11.9% in local currency. Broken down by business, revenues from traditional services (accounting for 93.2% of the total) rose 6.0% in local currency, due to the growth in traffic and plant, while revenues from the Internet (narrowband + broadband) business rose 41.7%. The big increase in sales is reflected in the 7.3% increase in local currency in operating expenses, despite the fact that TASA continues to apply a strict policy for cost rationalization and control. Of particular note in the first half was the effective management of bad debts thanks to the measures applied as a result of the crisis in 2002, which has made it possible to maximize debt recovery and ensure that profitable customers are maintained. Thus, the bad debt provision as a percentage of revenues stood at around 1%. The increased sales, together with the policy of cost containment mentioned above, enabled TASA to achieve EBITDA of 239.4 million euros in the first half of the year, an increase in local currency of 8.3% on that of the same period of 2003. Comparison of EBITDA in uniform terms (excluding the impact on 2003 results of the CER invoicing relating to 2002) gives a year on year growth rate of 13.1%. The EBITDA margin for the first half of 2004 was 0.2 percentage points higher than in the same period of 2003, at 60.2%. The growth in EBITDA enabled the company to achieve an operating free cash flow (EBITDA - CapEx) of 197.3 million euros, 6.7% less in local currency than in 2003, due to the sharp increase in investment, in line with the recovery of activity and focused primarily on massive ADSL rollout, which accounted for 46% of CapEx. The to revenues ratio stood at 10.7% in local currency. Telefonica CTC Chile With effect from May 6, 2004, CTC's accounts include the impact of the new tariff decree, although the effects of its implementation have not yet been passed on to customers (the main implications of the new decree are: increases in the monthly fee and access charges of 7.2% and 42.3%, respectively, and a 19.7% reduction in the local fixed-to-fixed tariff). Traditional lines in service at the end of June totaled 2.4 million, down 6.6% year on year as a result of the loss of lines due to bad debt problems in 2003. June 2003 saw the launch of the 'Control Line' (complemented subsequently with the launch of the 'Full Variable' product), which increased the company's range of prepaid products. At the end of the first half of 2004, 13.1% of the plant was prepaid, compared with 9.3% in June 2003. The domestic long distance market continued to decline and in the first half of 2004 was down 8% year on year. However, as observed in the previous quarter, CTC succeeded in increasing its market share by 5.4 percentage points over June 2003, giving it a market share of 43.9% and with a higher rate of growth than in March (4.6 percentage points more than in March 2003). In contrast, the international long distance market in which CTC has a market share of 31.1%, continued its upward trend with growth of 3.4% in the first half of 2004. CTC had a total of 164,513 broadband connections at June 30, 2004, which is practically double the plant in June 2003, with a net gain of 39,251 lines since the beginning of the year (up 30.7% year on year). Revenues for the first half of the year amounted to 401.7 million euros, which was 9.4% lower in local currency than for the same period of 2003 and a slight improvement on the previous quarter (-10.2%). Excluding the effect of the CPP tariff reduction in force since the beginning of the year, the variation would be -5.0%, reflecting the variation in plant and local traffic, as well as the poor performance of the long distance business, in this case due to the squeeze in the long distance market. The traditional business, which accounted for 94.5% of total revenues, was down by 11.4% in local currency, whereas revenues from the Internet business were up by 48.8%. Expenses were 11.4% lower, continuing the trend of the previous quarter as a result of both the strict expense containment policy and the lower interconnection expenses due to the CPP tariffs and the lower volume of traffic. Noteworthy in the second quarter was the improvement in the ratio of bad debts to revenues, which was down from 3.8% in the first quarter to 3.6% at June 30. EBITDA stood at 180.0 million euros at the end of the first half, which was 6.5% less in local currency than in 2003, and 2.3 percentage points less than in March due to the reduction in the decline in revenues. The investments made up to the end of June signified CapEx of 34.2 million euros, which was 11.8% more than in June 2003 in local currency due to the efforts made in ADSL. The ratio of CapEx to revenues was 8.5% in local currency. Although the operating free cash flow (EBITDA - CapEx) generated was 10.0% lower in local currency than in the same period of 2003, the improved performance of EBITDA meant that this reduction was 1.1 percentage points lower than the fall recorded in the previous quarter. Telefonica del Peru On July 20 the Peruvian telecom regulator, OSIPTEL, set the new productivity factor for the price cap system (CPI-x) that regulates the local and long distance telephony tariffs of Telefonica del Peru. This new factor, which will be 10.07% for baskets C (installation fee) and D (monthly fee and local calls), and 7.8% for long distance tariffs, will come into force on September 1 for a period of three years. Telefonica del Peru continued to record strong growth in the plant of equivalent lines (up 13.4% year on year and 1.0 percentage points higher than in the previous quarter), as a result of the 9.5% growth in traditional lines (largely as a result of the marketing of the new plans since March 2003), as well as the growth in broadband connections (up by 147.9%) which, with a net gain of 44,236 connections (up 120.7% year on year), totaled 134,925 lines. Telefonica del Peru ended the first half of 2004 with revenues of 499.0 million euros, representing year on year growth of 0.9% in local currency and reversing the downward trend of previous quarters. The 62.8% growth in Internet revenues (narrowband + broadband), which accounted for 6.3% of operating revenues made up for the 1.6% fall in revenues from the Traditional Business. Revenues from the Basic Telephone Service (down by 6.6%) were affected by the impact of the migrations to new plans, which now account for 60.8% of the traditional plant (44.0% in December 2003 and 52.7% in March 2004). With a fall in revenues of 5.5%, the Long Distance business continued to be affected by competition. At the end of June, the company's shares of the domestic and international long distance markets stood at 72.2% and 57.5%, respectively, which represented slight reductions of 1.0 percentage points and 3.0 percentage points, respectively, from the shares of the previous quarter, due to the strong competition in prepaid cards, which are the leading product in Long Distance. The expense containment policy implemented by TdP, together with the lower interconnection expenses due to the decrease in traffic terminating on mobile networks, resulted in a 1.0% increase in operating expenses in spite of the higher level of activity, and a 3.3% increase in personnel expenses due to the increase in the average workforce. As in the previous quarter, TdP recorded an improvement in the level of bad debts, which stood at 2.9% of revenues, compared with 3.2% in the first half of 2003. The company's EBITDA rose by 0.6% in local currency to 218.3 million euros, thereby reversing the downward trend of previous quarters. Despite the increase in CapEx of 5.0% in local currency, the control of investments (23.6 million euros) made it possible to achieve an operating free cash flow (EBITDA - CapEx) of 194.6 million euros, in line with the first half of 2003 (+0.1% in local currency). At June 30, 2004, the company had a workforce of 3,189 employees, which was 3.1% lower year on year (including the workforce at subsidiaries, the total number of employees was 4,979, up by 1.9%). As a result, the productivity ratio stood at 685 lines per employee, up by 17.1% year on year. TELEFONICA EMPRESAS AMERICA Telefonica Empresas America is the business unit of Telefonica Latinoamerica dedicated to the big companies segment with overall responsibility for the data communications and corporate solutions businesses in America and specifically in Brazil, Argentina, Chile, Peru, Mexico, USA and Colombia. Operating revenues amounted to 215.9 million euros, representing strong growth over 2003 (an increase of 17.2% in constant terms). Continuing with the policy for the optimization of resource management, EBITDA recorded growth of 90.0% (93.5% in constant terms) and totaled 23.9 million euros, thereby achieving an EBITDA margin of 11.1%. All of this, together with a restrictive growth-oriented CapEx policy, made Telefonica Empresas America to record an operating free cash flow (EBITDA-CapEx) of +11.9 million euros at June end compared with -3.2 million euros at the end of June 2003. Telefonica Empresas Brazil continued to drive growth at Telefonica Empresas America, since it accounted for more than a third of revenues and achieved growth of 21.5% in local currency. EBITDA rose by 64.2% year on year, with a 5 percentage points improvement in the EBITDA margin over the first half of 2003. Argentina, Chile, Peru and Colombia, whose joint operating revenues amounted to 104.8 million euros, continued to generate positive operating free cash flow (EBITDA-CapEx), particularly Chile, which achieved growth in local currency of 13.6% in revenues and 23.8% in EBITDA, and maintained a high EBITDA margin for this business of 29.0%. Mexico and the United States, which together contributed around 14% of Telefonica Empresas America revenues, showed substantial growth in revenues in local currency at the end of June (+140.1% and +19.9%, respectively). Both operations continued to achieve improvements in the EBITDA margin (up by 25.3 percentage points and 8.4 percentage points, respectively) by recording joint EBITDA of -8.2 million euros, compared with -9.9 million euros in the first half of 2003. As regards products, and in line with the strategy of commercial transformation, growth continued in the services offering the greatest added value: Hosting / ASP and Solutions, which recorded growth of 83.4% and 35.4%, respectively, in constant currency. These services now account for 18% of total operating revenues. TELEFONICA INTERNATIONAL WHOLESALE SERVICES (TIWS) TIWS continued to focus on increasing profitability. In the first half of 2004 the company recorded growth of 13.4% in its operating revenues, which totaled 72.2 million euros, thereby accelerating the trend displayed in the first quarter (+7.6%), while operating expenses continued to decrease (-13.8%) at a rate similar to that of the first quarter, thanks to the fall in supplies (down by 16.5%) and subcontracts (down by 19.5%). As a result, this business line obtained an EBITDA margin of 26.5% compared with 2.8% in the same period of 2003. The improvement in operating free cash flow (EBITDA-CapEx), which amounted to 13.8 million euros, therefore continued. TELEFONICA LATINOAMERICA GROUP SELECTED OPERATING DATA Unaudited figures (Thousands) June 2004 2003 % Chg Telesp Lines (1) 12,826.3 12,785.5 0.3 PSTN Lines 11,136.1 11,212.0 (0.7) ISDN equivalent accesses 28.7 33.1 (13.0) 2/6 Accesses for PBX and Ibercom 1,056.0 1,157.3 (8.8) ADSL connections 605.5 383.2 58.0 Employees (units) (2) 7,015 8,281 (15.3) Traffic (millions of minutes) (3) 40,574.4 41,509.2 (2.3) Telefonica de Argentina Lines (1) * 4,378.1 4,222.1 3.7 PSTN Lines 4,189.2 4,095.8 2.3 ISDN equivalent accesses 6.3 6.5 (2.5) 2/6 Accesses for PBX and Ibercom 74.4 74.2 0.2 ADSL connections 108.2 45.6 137.3 Employees (units) (2) 8,053 8,050 0.0 Traffic (millions of minutes) (3) 18,910.2 17,078.6 10.7 Telefonica CTC Chile Lines (1) * 2,561.9 2,650.6 (3.3) PSTN Lines 2,248.4 2,417.7 (7.0) ISDN equivalent accesses 94.1 91.3 3.1 2/6 Accesses for PBX and Ibercom 54.8 57.4 (4.4) ADSL connections 164.5 84.2 95.4 Employees (units) (2) 3,159 3,243 (2.6) Traffic (millions of minutes) (3) 11,219.1 12,029.7 (6.7) Telefonica del Peru Lines (1) 2,184.7 1,926.4 13.4 PSTN Lines 2,015.9 1,837.7 9.7 ISDN equivalent accesses 33.9 34.3 (1.2) 2/6 Accesses for PBX and Ibercom 0.0 - n.d ADSL connections 134.9 54.4 147.9 Employees (units) (2) 4,979 4,886 1.9 Traffic (millions of minutes) (3) 6,539.0 6,479.4 0.9 TELEFONICA LATINOAMERICA GROUP Lines (1) 21,951.1 21,584.6 1.7 PSTN Lines 19,589.7 19,563.1 0.1 ISDN equivalent accesses 163.0 165.1 (1.3) 2/6 Accesses for PBX and Ibercom 1,185.2 1,288.9 (8.0) ADSL connections 1,013.2 567.4 78.6 Employees (units) (4) 23,206 24,460 (5.1) Traffic (millions of minutes) (3) 77,242.7 77,096.9 0.2 * In 2003, number of lines is affected by internal reclassification in line with 2003 criteria, homogeneous within the operators. (1) PSTN (including Public Use Telephony) (x 1) - ISDN Basic access (x 2) - ISDN Primary access (x 30) - 2/6 Accesses (x 30) - ADSL Lines (x1) and Cablemoden (in Peru). (2) Calculated with the wireline company staff of the fixed telephone operator (OTF) and the subsidiaries that are consolidated by the full integration method. (3) Including total invoiced incoming and outgoing traffic: Local, PUTs (except at Telesp in 2002, not available), DLD and ILD. January-March accumulated data. (4) Calculated with the wireline company staff of the fixed telephone operator (OTF) and the subsidiaries that are consolidated by the full integration method. Does not included the employees of Telefonica Empresas America and those of TIWS. As of 30/06/04 day were 2.404 and 249 respectively. TELEFONICA LATINOAMERICA GROUP SELECTED FINANCIAL DATA Unaudited figures (Euros in millions) January - June 2004 2003 % Chg Telesp Operating revenues (1) 1,789.6 1,530.4 16.9 EBITDA 792.3 740.1 7.0 EBITDA margin 44.3% 48.4% (4.1 p.p.) Telefonica de Argentina Operating revenues 397.8 397.4 0.1 EBITDA 239.4 238.2 0.5 EBITDA margin (2) 60.2% 60.0% 0.2 p.p. Telefonica CTC Chile Operating revenues 401.7 450.2 (10.8) EBITDA 180.0 195.5 (8.0) EBITDA margin 44.8% 43.4% 1.4 p.p. Telefonica del Peru Operating revenues 499.0 549.9 (9.3) EBITDA 218.3 241.2 (9.5) EBITDA margin 43.7% 43.9% (0.1 p.p.) Telefonica Empresas America Operating revenues 215.9 196.4 9.9 EBITDA 23.9 12.6 90.0 EBITDA margin 11.1% 6.4% 4.7 p.p. TIWS Operating revenues 72.2 63.7 13.4 EBITDA 19.1 1.8 981.2 EBITDA margin 26.5% 2.8% 23.7 p.p. Note: EBITDA before management fees. Data for Telefonica de Argentina include the ISP business of Advance, while those of Telefonica del Peru includes CableMagico. (1) Net of international accounting payments, homogeneous within Latin America operators. Criteria applied retroactively in 2003. (2) Net of fixed to mobile interconnection. TELEFONICA LATINOAMERICA GROUP CONSOLIDATED INCOME STATEMENT Unaudited figures (Euros in millions) January - June April - June 2004 2003 % Chg 2004 2003 % Chg Operating revenues 3,276.1 3,132.7 4.6 1,646.0 1,634.5 0.7 Internal expend capitalized in fixed 19.3 22.2 (13.2) 9.8 11.9 (17.4) assets (1) Operating expenses (1,748.7) (1,650.9) 5.9 (865.6) (865.5) 0.0 Other net operating income (expense) (82.7) (80.3) 3.0 (49.0) (40.6) 20.7 EBITDA 1,464.0 1,423.8 2.8 741.3 740.3 0.1 Depreciation and amortization (824.6) (877.3) (6.0) (412.4) (448.9) (8.1) Operating profit 639.4 546.5 17.0 328.9 291.5 12.8 Profit from associated companies (0.8) 2.3 c.s. (0.3) (3.9) (91.7) Financial net income (expense) (157.1) 129.1 c.s. (106.0) 142.6 c.s. Amortization of goodwill (43.3) (46.6) (7.0) (21.6) (23.2) (6.9) Extraordinary net income (expense) 10.4 (47.0) c.s. 1.5 (5.4) c.s. Income before taxes 448.6 584.4 (23.2) 202.5 401.5 (49.6) Income taxes (59.5) (247.4) (76.0) 14.4 (154.9) c.s. Net income before minority interests 389.2 337.0 15.5 216.9 246.6 (12.1) Minority interests (66.6) (48.8) 36.6 (34.5) (22.7) 51.8 Net income 322.5 288.2 11.9 182.4 223.9 (18.5) Note: Starting first quarter 2004, Telefonica Data in Latin America and TIWS results will be incorporated in Telefonica Latinoamerica Group. 2003 figures are proforma for the benefit of comparison. (1) Including work in process. TELEFONICA LATINOAMERICA GROUP CONSOLIDATED INCOME STATEMENT - PROFORMA 2003 Unaudited figures (Euros in millions) 2003 Jan - Mar Jan - Jun Jan - Sep Jan - Dec Operating revenues 1,498.2 3,132.7 4,921.5 6,744.9 Internal expend capitalized in fixed assets (1) 10.3 22.2 34.5 47.4 Operating expenses (785.4) (1,650.9) (2,583.8) (3,548.5) Other net operating income (expense) (39.7) (80.3) (119.8) (142.5) EBITDA 683.4 1,423.8 2,252.4 3,101.3 Depreciation and amortization (428.4) (877.3) (1,338.7) (1,805.7) Operating profit 255.1 546.5 913.7 1,295.6 Profit from associated companies 6.3 2.3 1.0 2.5 Financial net income (expense) (13.5) 129.1 (71.8) (228.6) Amortization of goodwill (23.4) (46.6) (68.8) (91.1) Extraordinary net income (expense) (41.5) (47.0) (84.8) (128.1) Income before taxes 182.9 584.4 689.3 850.3 Income taxes (92.5) (247.4) (275.0) (169.7) Net income before minority interests 90.3 337.0 414.3 680.7 Minority interests (26.1) (48.8) (74.0) (122.1) Net income 64.3 288.2 340.3 558.5 (1) Including work in process. RESULTS BY BUSINESS LINES Mobile Business Telefonica Moviles obtained net income of 889.1 million euros in the first six months of 2004, an increase of 14.2% compared to the first half of 2003. Commercial activity remained strong in the second quarter of 2004 in the main areas of operation, extending the trend of the first quarter of 2004. The Group operators maintained their competitive positioning despite stiffer competition from their main rivals. Growth in cellular telephony was particularly strong in the Latin America markets in which the Group is present. In all, the companies managed by Telefonica Moviles in the region achieved net adds of over 2.6 million customers in the second quarter of 2004, tripling the number seen in the second quarter of 2003 and 25.6% higher than in the first quarter of 2004. Telefonica Moviles ended June 2004 with close to 56 million managed customers in all its markets (+21.0% vs. the first half of 2003), 35 million from its Latin American operators and 18.6 million from Telefonica Moviles Espana(1) . -------------------------- (1) At the close of the first half of 2004 the Company decided it will no longer include 1.3 million inactive prepaid SIM cards in its reported customer base. For reporting purposes, this adjustment has been made from April 1st 2004 and all the operating metrics corresponding to the second quarter of 2004 and the first half of 2004 have been calculated taking this adjustment into account. -------------------------- Including the customers from BellSouth's Latin American operators(2), whose acquisition was agreed in March, Telefonica Moviles' would have over 68 million managed customers, 47.5 million of which corresponding to Latin America. -------------------------- (2) Figures for BellSouth's Latin American operators at the end of the second quarter of 2004, ended on May 04. -------------------------- Key aspects of the first half of 2004 results are as follows: â€¢ Y-o-y growth of 14.1% in operating revenues to 5,287.9 million euros in the first half of 2004. Assuming constant exchange rates and excluding the impact of TCO's contribution to the consolidated results during the first four months of 2004 and changes in the consolidation perimeter, revenues would have grown 14.7% y-o-y. As pointed out in the first quarter of 2004 results, the pace of y-o-y growth in operating revenues eased in the second quarter of 2004, in line with the Company's target of more than 13% growth for the full year (assuming constant exchange rates and excluding changes in the consolidation perimeter from December 2003). It must be remembered that TCO's incorporation to the Group's consolidation perimeter took place on May 1st, 2003, and therefore the impact on comparisons is significantly reduced when comparing the second quarter of 2004 vs. the second quarter of 2003. By components, service revenues (4,643 million euros) advanced 10.6% vs. the first half of 2003, while handset sales (644 million euros) rose 47.1% y-o-y. The sharp slowdown in the y-o-y growth rate of handset sales was mostly due to the lower growth recorded by Telefonica Moviles Espana (+75% in the first quarter of 2004 vs. the first quarter of 2003; +18% in the second quarter of 2004 vs. the second quarter of 2003). By companies, Telefonica Moviles Espana obtained operating revenues of 3,904.0 million euros in the first half of 2004 (+12.5% vs. the first half of 2003). Operating revenues from consolidated Latin American operators showed absolute growth in euros of 19.3% and accounted for 26% of Group revenues in the first half of 2004. Excluding the impact of exchange rates and TCO's contribution to the consolidated results during the first four months of 2004, these revenues would have shown growth of 21.5% vs. the first half of 2003. â€¢ Increase of 6.8% in consolidated EBITDA vs. the first half of 2003 to 2,270.8 million euros. Excluding the impact of exchange rates, TCO's contribution to the consolidated results during the first four months of 2004 and changes in the Group's consolidation perimeter, consolidated EBITDA would have grown 4.6% vs. the first half of 2003. The Company maintains its 2004 forecasts growth of over 7% in consolidated EBITDA for the full year (assuming constant exchange rates and excluding changes in the consolidation perimeter from December 2003). The EBITDA margin was 42.9% in the first half of 2004. The decline in the margin vs. the first half of 2003 (-2.9 percentage points) was due to the stronger commercial activity recorded in the first six months of the year, especially in the second quarter, which led to higher commercial costs. Telefonica Moviles Espana obtained EBITDA of 2,058.7 million euros in the first half of 2004, 9.7% higher than in the first half of 2003, leaving an EBITDA margin of 52.7%. EBITDA for the Group's consolidated Latin American subsidiaries in euros fell by 15.4% vs. the first half of 2003, reflecting the Company's strategy to capture the growth potential existing in our markets, despite the short term impact of commercial efforts in EBITDA margins. Assuming constant exchange rates and excluding TCO's contribution to the consolidated results during the first four months of 2004, these companies' EBITDA would have declined 30.1% vs. the first half of 2003. â€¢ As for consolidated CapEx, it amounted to 483.8 million euros in the first half of 2004, a 4% y-o-y increase, fuelled by the rollout of Telefonica Moviles Espana's UMTS network and the GSM network in Argentina. CapEx committed at the end of June was 1,119 million euros, reflecting the CapEx related to GSM network rollout in Mexico and higher CapEx in Brazil to increase the capacity of VIVO's networks. Regarding the evolution of the Mobile Business of Telefonica Group (including Telefonica Movil Chile), the operating revenues totalled 5,458.1 million euros as of June 2004, a y-o-y increase of 14.1% compared to the same period last year. On the other hand, EBITDA reached 2,309.2 million euros, a y-o-y increase of 6.2%. SPAIN Within an increasingly mature market and more aggressive commercial efforts by competitors, especially in number portability actions, the Company has focused its efforts on the segments with higher value. Given the growing trend of second lines and of shared lines which become inactive, in spite of the different actions taken by Telefonica Moviles Espana to stimulate their usage, and in order to more accurately monitor the fundamental business ratios and the real contribution of clients to revenue generation, the Company decided at the close of the first half of 2004 it would no longer include 1.3 million inactive prepaid SIM cards in its reported customer base, or in the calculation of its business metrics. For reporting purposes, this adjustment has been made from April 1st 2004 and all the operating metrics corresponding to the second quarter of 2004 and the first half of 2004 have been calculated taking this adjustment into account. As a result, at the close of June 2004, the reported customer base of Telefonica Moviles Espana was over 18.6 million. It should be pointed out that this decision has no impact on the economic results of the Company. It should be noted that in order to determine the relative positions of the operators in the market, their market share should be analyzed in terms of revenues. As the Spanish telecommunications regulator (CMT) has noted in its recent report, based on information provided by the companies, Telefonica Moviles Espana is the only operator whose market share in terms of service revenue(3) is clearly larger than its market share in terms of lines. This gives an idea of the greater relative quality of the customer base of Telefonica Moviles Espana. -------------------------- (3) Service revenues: Subscription and monthly fees, outgoing traffic, SMS, Roaming-Out and data revenues. Source: CMT. -------------------------- As for commercial activity in the first half of 2004, there was an increase of 13% in total volume (including additions, migrations and handset upgrades) vs. the first half of 2003. Reflecting the company's focus on customers' value, we would highlight the rapid pace of prepaid to contract migration, still one of the main growth drivers of Telefonica Moviles Espana's MOU and ARPU. In the second quarter of 2004, there were close to 256,000 migrations, taking the total for the first half of 2004 to over 563,000 (+11% vs. the first half of 2003). The migration process has contributed to the 8.5 percentage points increase in the weight of the contract segment within Telefonica Moviles Espana's total customer base to 46.2% at the end of the second quarter of 2004 vs. the second quarter of 2003. In a context of strong and increasingly aggressive competition in number portability actions, where related high commercial costs can only be justified in the high-value segments, the Company has decided not to carry out proactive initiatives in the prepaid segment, concentrating its efforts on residential contract customers and the corporate segment. This commercial strategy has produced a small net loss in the prepaid segment in the first half of 2004, although Telefonica Moviles Espana continues to have a positive net balance in the higher value segments. As regards other loyalty activities, the Company continues to record high handset upgrade rates through the MoviStar Plus points programme and the Estrena programme designed exclusively for prepaid customers. In all, there were more than 1,739,000 handset upgrades through loyalty initiatives in the first half of 2004. Meanwhile, and in line with the Company strategy of capturing the strong growth potential offered by specific segments, various commercial offers and services, targeted at such segments, have been launched. As for the main traffic and customer usage ratios, traffic carried on Telefonica Moviles Espana's networks totaled 10,600 million minutes in the second quarter of 2004 (+13.6% vs. the second quarter of 2003) and nearly 20,500 million in the first half of 2004 (+15.2% vs. the first half of 2003), driven by growth in outgoing traffic (+15.6% vs. the first half of 2003). MOU for the first half of 2004 was 120 minutes, with a 7.4% y-o-y increase. Including the impact of the SIM cards not considered in the reported customer base(4) MOU would have reached 124 minutes in the first half of 2004 (132 in the second quarter of 2004). -------------------------- (4) At the close of 1H04 the Company decided it will no longer include 1.3MM inactive prepaid SIM cards in its reported customer base. For reporting purposes, this adjustment has been made from 1 April 2004 and all the operating metrics corresponding to 2Q04 and 1H04 have been calculated taking this adjustment into account. -------------------------- With respect to data services, we would underline the increasing number of users of GPRS technology services, which now number more than 2.5 million. Telefonica Moviles Espana now has some 780,000 users of its multimedia messaging (MMS) and 450,000 users of its i-mode service. At the end of May, Telefonica Moviles Espana began marketing its first UMTS video-telephone services in Spain, while extending the possibilities of the ' Oficin@ MoviStar UMTS/GPRS' mobile connectivity service to its residential customers. Also, reflecting progress in the FreeMove alliance, it is worth noting the launch of the new Single European Tariff for calls to Western Europe between networks of the alliance operators. This makes the price structure much more transparent to customers using their mobile phones outside Spain by presenting a single price of 0.75 euros per minute, regardless of where or when the call is made. Thanks to all these factors, ARPU has continued to grow, showing a 5.9% increase vs. the first half of 2003 to reach 30.3 euros in the first half of 2004 (31.0 euros in the second quarter of 2004). Including the impact of the SIM cards not considered in the reported customer base4, ARPU would have reached 31.2 euros in the first half of 2004 and 33.0 euros in the second quarter of 2004. We would also highlight the 17% increase in Telefonica Moviles Espana's data revenues vs. the first half of 2003 to more than 467 million euros. This gives a data ARPU of 3.9 euros in the first half of 2004 (+10.1% vs. the first half of 2003). Including the impact of the SIM cards not considered in the reported customer base4 data ARPU would have reached 4.0 euros in the first half of 2004. Highlights of Telefonica Moviles Espana's financial results in the period are as follows: â€¢ Operating revenues rose 8.3% y-o-y in the second quarter of 2004 (to 2,021 million euros) and 12.5% in the first half of 2004. The slowdown in operating revenue growth was mostly the result of the lower y-o-y increase in handset sales, which rose 18.3% in the second quarter of 2004 vs. the second quarter of 2003 (+75.4% in the first quarter of 2004 vs. the first quarter of 2003). Also, the growth of service revenues (1,779 million euros in the second quarter of 2004 and 3,480 million euros in the first half of 2004) eased due to increased loyalty efforts(5), higher traffic promotions and the lower growth of the customer base. Telefonica Moviles Espana maintains its guidance for achieving over 9% growth in operating revenues for the full year. -------------------------- (5) Loyalty programs points are accounted as lower service revenues -------------------------- The weight of subscriber acquisition and retention costs over operating revenues in the first half of 2004 was 8.1% (7.9% in the second quarter of 2004). The increase vs. the first half of 2003 (+6.9%) is the result of the aforementioned increase in commercial activity (+13% vs. the first half of 2003), with an increasing weight of number portability initiatives, which bear a high commercial cost. â€¢ EBITDA in the second quarter of 2004 was 1,056 million euros, an increase of 6.5% vs. the second quarter of 2003. EBITDA in the first half of 2004 was 2,058.7 million euros (+9.7% vs. the first half of 2003). In a context of aggressive commercial activity, and given the Company's greater focus on high-value customers, which has caused an increase in commercial costs, the EBITDA margin reached 52.2% in the second quarter of 2004 and 52.7% in the first half of 2004, maintaining Telefonica Moviles Espana's position as one of the most efficient companies in the sector. Despite the tougher competitive environment, the Company maintains its guidance of achieving an EBITDA margin above 50% for 2004. When analysing the EBITDA margin quarterly evolution one should consider the higher weight of handsets sales over total operating revenues in the second quarter of 2004 (12%) vs. the first quarter of 2004 (10%). We note that, since March 1st 2004, the fee for using the UMTS spectrum has no longer been capitalised, nor have the other expenses related to this technology, with an impact of 7.7 million euros on EBITDA in the first half of 2004. UMTS-related expenses capitalised up to now have started being depreciated, with a 20 million euros impact on depreciation. â€¢ CapEx in the first half of 2004 totalled 268 million euros, 23.3% more than in the first half of 2003, mostly due to the rollout of the new UMTS network. CapEx committed up to June reached 517 million euros. MOROCCO Medi Telecom ended June with 2.1 million customers (+21.9% vs. June 2003). Net adds in the second quarter amounted to nearly 110 thousand customers, recovering the growth trend after the slight contraction seen in the previous quarter. Operating revenues continued to advance, reaching 77 million euros in the second quarter of 2004, driven by both customer and traffic growth. In the first half of 2004 operating revenues reached 149 million euros (+17.7% vs. the first half of 2003). More noteworthy was the performance of EBITDA, which nearly doubled the figure for the second quarter of 2003. Although the Company increased its commercial activity, the EBITDA margin of 45% in the second quarter of 2004 was even higher than that of the first quarter of 2004. EBITDA in the first half of 2004 amounted to 65 million euros, 78.1% more than in the first half of 2003, reaching a 44% EBITDA margin (29.0% in the first half of 2003). Thanks to another positive operating results performance and to scaling back CapEx, operating cash flow reached 50 million euros, outstripping the total for 2003. LATIN AMERICA Brazil In the second quarter of 2004 the growth of the Brazilian cellular market continued to accelerate, driven by the Mother's Day and Valentine's Day commercial campaigns. Despite a tough competitive environment, Vivo continued to lead the growth of the Brazilian market. In the second quarter of 2004, Vivo achieved net adds of over 1.6 million customers, vs. 1.2 million in the first quarter of 2004 and 0.55 million in the second quarter of 2003 (0.6 million including TCO from April 2003), ending the second quarter of 2004 with more than 23.5 million customers, 34.2% more than in the second quarter of 2003 and 7.5% more than in the first quarter of 2004. This gives it an estimated market share of 44% for Brazil as a whole and an average of 55% in its areas of operation, practically the same as in previous quarters. As for customer usage, total MOU in the second quarter of 2004 was 90 minutes (-2% vs. the first quarter of 2004), while total ARPU was 33 reais (-4% vs. the first quarter of 2004). The quarterly decline in ARPU was due to the sharp growth in the customer base mostly in the lower ARPU prepaid segment, and to strong traffic promotions both during this quarter and previous one. At the end of June 2004, the prepaid segment accounted for 79.3% of Vivo's total customers vs. 77.9% in March 2004 and 73.3% in the second quarter of 2003. Assuming the same customer mix as in the first quarter of 2004, ARPU in the second quarter of 2004 would remain flat. We would underline the growth of outgoing traffic (+10% vs. the first quarter of 2004), which more than compensated for lower incoming traffic growth. It must be remembered that figures for the second quarter of 2004 are not comparable with the second quarter of 2003 due to the incorporation of TCO in May 2003 and the impact of the migration to SMP. Meanwhile, the usage of data services continued to grow. These now represent more than 4% of Vivo's total service revenues, doubling the weight of the first half of 2003. As regards Vivo's results, operating revenues in the first half of 2004 were 731.9 million euros, a y-o-y increase of 27.9% in local currency, thanks mainly to the increased commercial activity and higher service revenues. Excluding TCO's contribution during the first four months of 2004, operating revenues would have grown 12.5% vs. the first half of 2003 in local currency. EBITDA for the second quarter was 14.9% lower vs. the first quarter of 2004 in reais on the back of the strong commercial activity in the quarter, which saw two of the year's main campaigns, leading to a 35% increase in net adds vs. the first quarter of 2004. EBITDA for the first half of 2004, in local currency, increased 23.7% y-o-y. Excluding TCO's contribution during the first four months of 2004 EBITDA would have grown 5.6% vs. the first half of 2003. The EBITDA margin after management fees was 31.7% in the second quarter of 2004 and 35.8% in the first half of 2004, reflecting the impact of higher commercial costs. With respect to CapEx, Vivo operators invested 71 million euros in the first half of 2004, an increase of 69% vs. the first half of 2003. The growth was mainly the result of TCO's consolidation and larger CapEx to expand coverage of Vivo's 1XRTT networks and boost the capacity of the operators' networks in order to meet the growth of the customer base. Committed CapEx in the first half of 2004 amounts to 182 million euros. Mexico Telefonica Moviles Mexico (TMM) has continued to strengthen its position in the country, especially in the growing GSM market. In the second quarter of 2004, TMM's commercial activity increased 14% vs. the first quarter of 2004, with net adds in the period of 308 thousand customers, nearly tripling the figure of the second quarter of 2003. TMM's total customer base at the end of June 2004 was 4.1 million (+60.7% vs. the second quarter of 2003; +8% vs. the first quarter of 2004), driven by GSM customer acquisition. At that date, GSM customers accounted for nearly 50% of TMM's total customers (vs. 38% at the end of March 2004). Note also the positive results in gross adds from the first approaches to the corporate business segment, based on the product range already being offered to companies in Spain. As for the GSM network rollout, coverage was extended in the second quarter of 2004 to 70% of the national GDP, while the distribution network was expanded to over 8,500 points of sale. On the other hand, early in July TMM announced the rollout of EDGE technology on its GSM network, providing the most advanced broadband service in Mexico. In line with the growth of the customer base, total traffic in the second quarter of 2004 grew 8% vs. the first quarter of 2004, with MOU in the second quarter of 2004 of 62 minutes (+1.0% vs. the first quarter of 2004) and ARPU of 171 Mexican pesos (-1.4% vs. the first quarter of 2004). As regards financial results, we would underline the improvement in service revenues, which in the second quarter of 2004 showed growth of 8% vs. the first quarter of 2004 in local currency, in line with the growth of the customer base. The decrease in total operating revenues of 5% in local currency vs. the first quarter of 2004 is due to the decline in handset sales, as the distribution channel was supplied at the end of the previous quarter with handsets for the Mother's Day campaign. Meanwhile, EBITDA losses were 31.7 million euros in the second quarter of 2004, -33% vs. the first quarter of 2004, despite the more intense commercial activity. In the first half of 2004, TMM posted an EBITDA loss of -78.9 million euros. Total CapEx in the first six months of the year was 49 million euros, with CapEx committed at the end of June of 286 million euros. Argentina The increase growth of the Argentine cellular market, driven since the previous quarter by the GSM network rollout and high levels of commercial activity, continued to accelerate in the second quarter of 2004, reaching an estimated penetration rate of 25% (vs. 18% in the first half of 2003). At the end of June 2004, Unifon had 2.2 million customers, 36.1% more than the year before and 11% more than in March 2004. In the second quarter of 2004, the faster development of the GSM network, alongside the increase in the number of points of sale and the specific campaigns carried out in the quarter, underpinned further growth in net adds, which totaled more than 219 thousand in the second quarter of 2004 (61 thousand in the second quarter of 2003) and far exceeding those of the first quarter of 2004 (+50%). By the end of the quarter, four months after the commercial launch of the service, GSM customers accounted for 5% of Unifon's total customer base. We would highlight that the growth in the customer base was accompanied by an improvement in customer usage ratios. MOU showed y-o-y growth of 24% vs. the second quarter of 2003 and 6% vs. the first quarter of 2004 on the back of a recovery in consumption and campaigns aimed at boosting the usage of services. The increase in traffic led to an 18% increase in ARPU in local currency vs. the second quarter of 2003 and 3% vs. the first quarter of 2004. In terms of results, Unifon recorded a y-o-y increase in operating revenues in the first half of 2004 of 50.2% in pesos, underpinned by higher traffic and increased handset sales on the back of the growth in gross adds. The greater commercial activity and higher costs associated with the launch of GSM undermined EBITDA in the second quarter of 2004, which saw a decline of 29.4% in the first half of 2004 in local currency, leaving an EBITDA margin of 14.6% in the first half of 2004 and 7.2% in the second quarter of 2004. As for CapEx, the company continued to roll out the GSM network, having extended coverage in the second quarter to Cordoba, Rosario, Tucuman, Salta, Bahia Blanca, Neuquen, San Luis, Comodoro Rivadavia and San Juan, reaching coverage of 66% of the national GDP. Total CapEx for Unifon as of June 2004 was 60 million euros, with CapEx committed of 83 million euros. Peru The Peruvian cellular market continues to show strong growth, ending the second quarter of 2004 with an estimated 3.4 million users, with penetration of 12.4%, 3.2 percentage points, higher than at the end of second quarter of 2003. In this context, TM Peru continues to lead market growth, with net adds of over 161 thousand customers in the second quarter of 2004, 2.5 times higher than the figure recorded in the second quarter of 2003 and 25.4% higher than first quarter of 2004. Efforts in customer acquisition led to increased y-o-y growth in the customer base in both segments (contract 10% vs. +7% in the first quarter of 2004 and prepaid +46% vs. +39% in the first quarter of 2004). The company ended the second quarter of 2004 with a customer base of 1.8 million, +37.7% vs. the end of the second quarter of 2003. It is also worth noting that at the close of the second quarter of 2004, 25% of the customer base had a handset with CDMA 2000 1xRTT technology, vs. 15% in the previous quarter. As regards financial results, TM Peru's operating revenues in local currency grew 8.3% in the first half of 2004 vs. the first half of 2003. This was due largely to the increase in the customer base and growth in prepaid outgoing traffic, which were partly offset by the lower interconnection revenues due to the decline in traffic from fixed networks. As a result of the increase in operating expenses deriving from the intense commercial activity, EBITDA in local currency declined by 23.3% in the first half of 2004, leaving an EBITDA margin of 25.9% vs. 36.6% in the first half of 2003. The EBITDA margin in the second quarter of 2004 remains stable with respect to the first quarter of 2004 despite the strong commercial activity thanks to cost control. Chile Telefonica Movil - company acquired by Telefonica Moviles - ended the second quarter of 2004 with 2.7 million customers, with y-o-y growth of 40.8%. The company has once again led growth in the market, with 238 thousand net adds in the second quarter of 2004 (vs. 61 thousand in the second quarter of 2003), thanks to the positive performance of GSM net adds. In little more than a year after its launch (April 2003), the company has a GSM customer base of 923 thousand, 34% of the total customer base. As for financial results in the first half of 2004, the strong increase in the customer base, together with higher outgoing traffic, continue boosting operating revenues' advance. Meanwhile, the EBITDA margin reduction from the first quarter of 2004 (20.8% in the second quarter of 2004 and 24.3% in the first quarter of 2004) is due to the higher commercial activity as well as the impact from the reduction in mobile interconnection tariffs from February 2004. Thus, EBITDA margin for the first half of 2004 stood at 22.6%. Guatemala and El Salvador The total customer base managed by Telefonica Moviles' operators in Guatemala and El Salvador at the end of June 2004 stood at 531 thousand customers (238 thousand in Guatemala and 293 thousand in El Salvador), a y-o-y increase of 48%. The sharp increase in customers compared to the previous quarter reflects the larger net adds (over 71 thousand customers in the second quarter of 2004 vs. 55 thousand in the first quarter of 2004), as a result of the commercial effort made in the Mother's Day campaign. As regards financial results, we would highlight the 16.9% y-o-y increase in operating revenues from both operations vs. the first half of 2003 in constant euros, fuelled by the growth of the customer base. EBITDA performance reflects the larger commercial effort made. The EBITDA margin was 13.2% in the first half of 2004 vs. 12.2% in the second quarter of 2004. CELLULAR BUSINESS SELECTED FINANCIAL DATA Unaudited figures (Euros in millions) January - June 2004 2003 % Chg Telefonica Moviles Espana Operating revenues 3,904.0 3,469.6 12.5 EBITDA 2,058.7 1,875.9 9.7 EBITDA margin 52.7% 54.1% (1.3 p.p.) Brasilian companies (1) Operating revenues 731.9 585.3 25.1 EBITDA 262.0 217.3 20.6 EBITDA margin (1) 35.8% 37.1% (1.3 p.p.) Telefonica Moviles Mexico Operating revenues 301.4 266.0 13.3 EBITDA (78.9) (16.7) 373.1 EBITDA margin (26.2%) (6.3%) (19.9 p.p.) TCP Argentina Operating revenues 146.8 105.3 39.4 EBITDA 21.4 32.6 (34.5) EBITDA margin 14.6% 31.0% (16.4 p.p.) Telefonica Moviles Peru Operating revenues 118.2 121.3 (2.6) EBITDA 30.6 44.4 (31.0) EBITDA margin 25.9% 36.6% (10.7 p.p.) Telefonica Moviles Guatemala and El Salvador Operating revenues 84.5 81.1 4.2 EBITDA 11.2 13.3 (15.9) EBITDA margin 13.2% 16.4% (3.2 p.p.) Telefonica Movil Chile Operating revenues 172.3 149.1 15.5 EBITDA 38.9 48.0 (18.8) EBITDA margin 22.6% 32.2% (9.6 p.p.) Note: Telefonica Cellular Business includes Telefonica Movil Chile. (1) Year over year comparision is affected by TCO incorporation from May 2003. CELLULAR BUSINESS SELECTED OPERATING DATA: CELLULAR CUSTOMERS Unaudited figures (Thousands) June 2004 % Chg 04/03 T Moviles Espana 18,639 (1.3) Contract 8,605 21.0 Prepaid 10,034 (14.7) Brasilcel 23,514 34.2 Contract 4,873 4.2 Prepaid 18,641 45.1 TCP Argentina 2,189 36.1 Contract 733 50.4 Prepaid 1,456 29.9 T Moviles Peru 1,795 37.7 Contract 318 10.0 Prepaid 1,478 45.6 TEM El Salvador 293 25.9 Contract 71 19.7 Prepaid 222 28.0 TEM Guatemala 238 89.3 Contract 51 11.9 Prepaid 187 133.1 NewCom Wireless Puerto Rico (1) 155 (13.9) Contract 107 5.4 Prepaid 48 (38.9) Telefonica Moviles Mexico 4,080 60.7 Contract 218 (21.6) Prepaid 3,862 70.8 Medi Telecom 2,149 21.9 Contract 142 7.7 Prepaid 2,006 23.1 Telefonica Movil Chile 2,739 40.8 Contract 445 0.3 Prepaid 2,294 52.8 Total Managed 55,791 21.0 Note: Telefonica Cellular Business includes Telefonica Movil Chile. (1) In order to fulfil the commitments to develop the cellular business in Puerto Rico, Telefonica Group has the option to obtain shares respresenting 50.1% of total equity in the company. TELEFONICA MOVILES GROUP CONSOLIDATED INCOME STATEMENT Unaudited figures (Euros in millions) January - June April - June 2004 2003 % Chg 2004 2003 % Chg Operating revenues 5,287.9 4,635.9 14.1 2,727.4 2,506.2 8.8 Operating expenses (3,048.1) (2,525.6) 20.7 (1,589.0) (1,373.6) 15.7 Other net operating income 30.9 16.7 85.1 13.7 1.3 n.s. (expense) EBITDA 2,270.8 2,127.0 6.8 1,152.2 1,133.8 1.6 Depreciation and amortization (718.2) (724.8) (0.9) (359.5) (367.5) (2.2) Operating profit 1,552.6 1,402.2 10.7 792.7 766.4 3.4 Profit from associated companies (21.0) (47.7) (55.9) (9.3) (24.1) (61.5) Financial net income (expense) (152.4) (157.0) (2.9) (96.5) (78.1) 23.5 Amortization of goodwill (38.6) (46.5) (17.1) (17.8) (25.5) (30.1) Extraordinary net income (expense) (14.6) 6.0 c.s. (20.7) 1.0 c.s. Income before taxes 1,325.9 1,156.9 14.6 648.5 639.7 1.4 Income taxes (438.2) (388.9) 12.7 (188.2) (217.7) (13.6) Net income before minority 887.8 768.0 15.6 460.4 422.0 9.1 interests Minority interests 1.4 10.8 (87.4) 5.5 (2.1) c.s. Net income 889.1 778.9 14.2 465.9 419.8 11.0 CELLULAR BUSINESS CONSOLIDATED INCOME STATEMENT Unaudited figures (Euros in millions) January - June April - June 2004 2003 % Chg 2004 2003 % Chg Operating revenues 5,458.1 4,782.8 14.1 2,810.3 2,582.8 8.8 Internal expend capitalized in 36.7 40.3 (9.0) 17.9 21.3 (16.0) fixed assets (1) Operating expenses (3,168.1) (2,611.2) 21.3 (1,647.3) (1,416.3) 16.3 Other net operating income (17.5) (37.0) (52.5) (11.8) (29.3) (59.7) (expense) EBITDA 2,309.2 2,175.0 6.2 1,169.1 1,158.5 0.9 Depreciation and amortization (764.2) (764.3) (0.0) (382.4) (388.4) (1.5) Operating profit 1,545.0 1,410.7 9.5 786.7 770.1 2.1 Profit from associated companies (22.1) (47.7) (53.6) (9.8) (24.1) (59.2) Financial net income (expense) (165.6) (174.2) (4.9) (102.0) (86.6) 17.8 Amortization of goodwill (44.9) (52.9) (15.0) (21.0) (28.7) (27.1) Extraordinary net income (expense) (14.1) 6.0 c.s. (20.5) 0.6 c.s. Income before taxes 1,298.2 1,141.8 13.7 633.3 631.3 0.3 Income taxes (434.7) (385.2) 12.9 (186.5) (216.0) (13.7) Net income before minority 863.5 756.6 14.1 446.8 415.2 7.6 interests Minority interests 14.4 17.3 (16.8) 12.6 1.6 n.s. Net income 877.8 773.9 13.4 459.5 416.9 10.2 Note: Telefonica Cellular Business includes Telefonica Movil Chile. (1) Including work in process. This information is provided by RNS The company news service from the London Stock Exchange

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