Telefónica Reports Q1 Results

MADRID, Spain -- Sharp Improvement in All Business Lines Consolidates the Company's Growth Profile, Making It Stand out from the Rest of the Sector

These consolidated financial statements are presented on the basis of accounting principles generally accepted in International Financial Reporting Standards (IFRS). Certain accounting practices applied by the Group that conform with generally accepted accounting principles in IFRS may not conform with generally accepted accounting principles in other countries.

The Telefonica Group's results for the first quarter of 2005 featured solid operating growth and profitability (revenues rose 16.7% and OIBDA by 16.2%), despite the intense commercial activity carried out, as well as a sharp increase in cash flow generation (OIBDA-CapEx up 15.2%). Net income advanced 34.9% from the same period last year to 912.2 million euros. The Company has consolidated its growth profile with significant improvement in all business lines, and this makes it stand out from the rest of the sector.

As of 31st March, 2005, Telefonica Group had 131 million of total accesses (fixed telephony accesses, Internet and data accesses, Pay TV and cellular accesses), 28.6% more than in March 2004. If we include the Cesky Telecom's accesses, total accesses would amount to 140 million.

Cellular accesses were the highest contributor to this evolution, ending the quarter with a managed customer base of 81.4 million (+50.3% year-on-year), adding 3 million new customers in the first quarter 2005. Of the total customer base, 59.1 million corresponded to the Latin American operators, 19.1 million to Telefonica Moviles Espana and 3.2 million to Medi Telecom (Morocco).

Retail ADSL accesses in Spain and Latin America totaled 3.5 million as of March 31st, 2005, a year-on-year growth of 56.6%. Telefonica Group retail ADSL acceses in Spain totaled 2.1 million (+43.2 vs. March 2004), representing an estimated market share of 54.2% of total broadband market. Retail ADSL accesses in Latin America amounted to 1.5 million, compared with 815,268 a year ago. Among Latin America operators, it should be mentioned Telesp , with 880,183 retail ADSL accesses (+69.9% year-on-year).

Revenues amounted to 8,278.8 million euros during the first three months of 2005, a 16.7% increase over the same period of the previous year due to the general growth of all business lines, specially the cellular business, thanks to the incorporation of the Latin American operators acquired to BellSouth. The negative impact of exchange rates deducted only 0.6 percentage points from the revenues growth rate, while variations in the consolidation perimeter(1) added 8.1 percentage points.

By companies, the cellular business, the main contributor to the Group's growth, registered revenues of 3,675.9 million euros, which was 34.6% higher than that recorded in the first quarter of 2004 (variations in the consolidation perimeter(1) accounted for 25.5 percentage points of the growth rate). The Telefonica de Espana Group, the second largest contributor to the Group's growth, recorded revenues of 2,842 million euros during the first quarter of 2005, 6% higher than in January-March of the previous year. Revenues from the Telefonica Latinoamerica Group, the third largest contributor to the Group's growth, amounted to 1,735.2 million euros during the first quarter of this year to record a 4.5% growth in current euros with regard to the same period of the previous year. In constant euros, this increase is reduced to 3.4%, because of the positive effect of the variation in the exchange rates.

By geographic areas at the end of the quarter, Spain accounted for 56.6% of the Group's revenues, down 5.3 percentage points year-on-year as a result of the increased contribution from Latin America following the acquisition of the BellSouth Latin American operators (39.7% vs. 33.4% at March 31st 2004). In the Latin America region, it's worth to highlight Venezuela, which accounted for 3.2% of total sales in comparison with the 0.04% a year ago, Colombia (+1.9 percentage points to 2%) and Argentina (+1.1 percentage points to 5%). Brazil accounted for 16.6%, compared with 17.5% twelve months ago.

Similar to previous quarters, operating expenses reflected the aforementioned commercial efforts in the main business lines and the incorporation of BellSouth assets. Hence, there was a year-on-year increase of 18.2% to total 4,993.6 million euros during the first quarter of 2005.

Moreover, during the quarter there was a gain on sale of fixed assets for 120.6 million euros (+26.6 million euros on January-March 2004), mainly coming from the capital gains generated by the sale of Infonet, Radio Continental and Radio Estereo, both belonging to the ATCO Group, together with the capital gain related to real estate disposal.

Operating Income before D&A (OIBDA)

As a result, the Telefonica Group recorded Operating Income before D&A (OIBDA) of 3,414.7 million euros in the first quarter 2005, 16.2% more than in the same period of 2004. The Group's consolidated EBITDA margin was 41.2%, 0.2 percentage points lower than the one registered a year ago.

By companies, the cellular business is the Group's biggest contributor to consolidated OIBDA growth, amounting to 1,317.9 million euros in absolute terms to represent 38.6% of total. At the end of the first quarter, OIBDA at the Telefonica de Espana Group totaled 1,191.9 million euros (34.9% of consolidated OIBDA), a year-on-year increase of 11.9% over the same period of the previous year. OIBDA at the Telefonica Latinoamerica Group stood at 852.3 million euros during the first three months of 2005 (25% of total OIBDA), recording a year-on-year growth of 17.9% in current euros (16.8% in constant euros).

By geographic areas, Spain accounted for 63.1% of the Telefonica Group's consolidated OIBDA at March 31 2005, 5.6 percentage points less than one year ago due to higher contribution from Latin America (33.6% compared with 29.9% in March 2004) following the acquisition of assets from BellSouth.

Consolidated operating income (OI) amounted to 1,888.3 million euros during the first three months of the year, 25.5% more than in the same period of the previous year. Changes in the consolidation perimeter(2) and in exchange rates added 4.1 percentage points and 0.1 percentage points of growth, respectively.

Financial expenses amounted to 317.7 million euros in the first quarter, including a positive result from forex of 62.8 million euros. As such, the effective cost measured as a percentage of total average debt for the quarter was 4.6% (or 5.5% excluding the positive income from forex). Total financial expenses dropped by 1.2% with regard to those of the first three months of 2004 estimated under IFRS, as the lower costs mostly offset the 17.5% increase in average total debt.

The net free cash flow after CapEx generated by the Telefonica Group amounted to 1,164.8 million euros for the first quarter of the year. Of this, 906.3 million euros were devoted to financial investments (net of divestiture) and 224 million euros for net payment for dividends and treasury stock. Including the sum of 39.3 million euros received from the sale of real estate, the free cash flow after dividends available to reduce financial debt stood at 73.8 million euros. Free cash flow stood at 1,355.7 million euros (according to the criteria used at the 3rd and 4th Investor Conferences) prior to payments made to amortize commitments related to headcount reduction plan (and taking into account the almost absence of dividend payments to minority interests during the first quarter).

The Telefonica Group's net financial debt at the end of March 2005 stood at 23,948.1 million euros. Most of the increase in debt was due to the appreciation of the dollar and the Latin American currencies against the euro throughout the first quarter, which accounted for 292.4 million euros of the increase in debt. Total debt (including guarantees and labour commitments for a total of 3,648.2 million euros) amounted to 27,596.3 million euros, equivalent to 2 times OIBDA annualized for the quarter.

The negative results of associated companies recorded a year-on-year reduction of 69.1% in comparison to the first quarter of 2004 to total -9.1 million euros (-29.5 million euros a year before). The lower losses related to Sogecable, IPSE 2000, Medi Telecom and Lycos Europe and the higher stake in Portugal Telecom explain this performance.

The tax provision for the first three months of the year reached 579.9 million euros, even though the cash outflow will be more reduced for the Telefonica Group to the extent that negative tax bases obtained in previous years are offset.

Results attributed to minority interest deducted 69.4 million euros from the Group's net income for the January-March 2005 period in comparison with the -45.6 million euros of the same period of 2004. The 52.2% growth in this item is justified by the lower losses at Terra Networks Group.

Due to the performance of the above items, net income amounted to 912.2 million euros for the first three months of the year, a 35.9% year-on-year growth.

The Telefonica Group's CapEx for the first quarter of the year amounted to 744 million euros, registering a 20.1% year-on-year increase, due to the higher investments made by the cellular business (+39.7%) and by the Telefonica Latinoamerica Group (+24.3%).

(1) Includes the consolidation of the Latin American assets acquired to BellSouth in Argentina, Colombia, Chile, Ecuador, Guatemala, Nicaragua, Panama, Peru, Uruguay and Venezuela in the cellular business and Atrium in the Telefonica Latinoamerica Group from 1 January 2004.

Telefónica SA