Telefonica Nine-Month Consolidated Net Profit Rises 44% - Company Financial Information

Cambridge Telcom Report, Nov 22, 1999

Summary: -- Telefonica Group net profit, excluding non- recurring items, rose 19.1%

-- Reductions in tariff and interconnect rates, in effect since July, partially offset by commercial policy and new services

-- Telefonica Moviles reaches 7.7 million clients, with an increase of 2.8 clients since January, making it the fastest-growing mobile phone company in Europe

-- Telefonica Internacional has more than 31.3 million customers, after doubling the number of its mobile phone clients in one year, to 9.2 million

-- Terra Networks, Telefonica's internet affiliate had 860,930 ISP access customers and 290 million page views during the month of September

-- Terra has continued its expansion in the Spanish- and Portuguese- speaking markets and is now present in seven countries

Telefonica's net profit for the first nine months of 1999 totaled 1.414 billion euros, an increase of 44% over the same period a year before.

This growth cannot be extrapolated to the full year, since it is affected by extraordinary events which took place during the previous quarter, such as the capital gains from the initial public offering of the yellow pages unit TN-Paginas Amarillas and the sale of Temasa. After eliminating the effects of these extraordinary revenues, net profit grew 19.1%.

Growth was driven by the increase in EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), which accounted for 4 percentage points of the rise in net profit. The remaining 15.1 percentage points come from the combined effect of greater amortizations, the results of Latin American subsidiaries and the rest of the non-operational (financial, extraordinary and fiscal) items.

The following aspects of the results, related to the third quarter, are worth noting:

-- An impact of approximately 145 million euros less in revenues at Telefonica de Espana, the effect of lower tariffs and interconnection rates. Without these factors, net profit at the Telefonica Group would have risen 29%, while EBITDA would have grown 1.2% at Telefonica de Espana and 3.4% in the consolidated group.

-- In spite of lower tariffs and interconnection rates, consolidated revenues increased 9.6%, two points higher than the growth rate during the first half of 1999. This performance, which eased the slowdown in EBITDA growth ( 0.8%), can be attributed to the positive results of the sales campaigns which took place during the January - September period and to the contribution from new services.

-- EBITDA at Telefonica Moviles grew 11.3%, compared with 7% during the first half of 1999. As a percentage of revenues, EBITDA at Telefonica Moviles was 37.6% (36.1% in June), in spite of greater acquisition costs.

-- The strong increase in the client base of the companies held by Telefonica Internacional, particularly mobile phone clients, which doubled in the past year. This guarantees the future growth of Telefonica Interacional's Latin American operators, once the economic growth cycle in the region begins.

-- Pre-tax profit rose 36.2%. This increase is attributable to the decline in negative extraordinary results, excluding the net effect of capital gains and writedowns in the second quarter of the year; to the improvement in negative financial results and, on the other hand, to the economic slowdown in Latin America.

Analysis of the Results by Company Lines Grupo Telefonica de Espana Operating

revenues totaled 7.642 million euros, reflecting a slowdown in their growth rate, which went from 3.6% in the first semester to 2.8% in the January - September period. This was due fundamentally to the reductions in tariffs and interconnection rates, which caused a decline of 145 million euros in revenues. Following are the principal reasons for this growth:

-- Increased revenues from new services, strong expansion of the Intelligent Network, leased circuits and of ISDN, which had 293,007 basic accesses and 7,998 primary accesses, with growth rates of 99.1% and 73.5%, respectively.

-- A slowdown in the decline of market share, thanks to the important commercial efforts by Telefonica.

-- Growth of 13.9% in total traffic, derived from an increase of 6.1% in the number of lines in service, and the growth in usage which went rose 9.8% to 12.95 minutes per line, per day.

-- An increase in revenues from interconnection. In spite of the reductions in price which have taken place in the last 12 months, these represent 3.1% of Telefonica de Espana's revenues.

-- A reduction of tariffs in July, which has meant 87 million pesetas less in revenues during the third quarter of 1999. The application of Reference Interconnection Rates to other mobile phone operators, starting in July, had an estimated negative impact of 58 million euros during the third quarter.

-- Operating costs rose 6.3% in the year through September. Discounting the effects of higher costs from interconnection, due to greater activity in the market, these costs would have fallen 2.0%.

Telefonica Moviles Group During the first nine months of the year, Telefonica Moviles had a net gain in customers of 2,805,468, bringing the total client base to 7,699,732 and making TM the fastest-growing European mobile operator.