20-F 1 dp63632_20f.htm FORM 20-F

 

As filed with the Securities and Exchange Commission on February 26, 2016

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION 

WASHINGTON, D.C. 20549

 

 

 

FORM 20-F

 

(Mark One)    
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b)
OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
 
  OR  
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
 
  OR  
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
  OR  
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 

 

Commission file number: 001-09531

 

TELEFÓNICA, S.A.

(Exact name of Registrant as specified in its charter)

 

KINGDOM OF SPAIN

(Jurisdiction of incorporation or organization)

 

Distrito Telefónica, Ronda de la Comunicación, s/n
28050 Madrid, Spain

(Address of principal executive offices)

 

Consuelo Barbé Capdevila, Securities Market and Corporate Governance Legal Department
Distrito Telefónica, Ronda de la Comunicación, s/n, 28050 Madrid, Spain 

Tel. +34 91 482 3733, Fax. +34 91 482 3817, e-mail: amv@telefonica.com

Pablo Eguiron Vidarte, Head of Investor Relations,
Distrito Telefónica, Ronda de la Comunicación, s/n, 28050 Madrid, Spain
Tel. +34 91 482 8700, Fax. +34 91 482 8600, e-mail: ir@telefonica.com

(Name, Telephone, E-Mail and/or Facsimile number and Address of Company Contact Person)

 

 

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class

Name of each exchange on which registered

Ordinary Shares, nominal value 1.00 euro per share*
American Depositary Shares, each representing one
Ordinary Share
New York Stock Exchange
New York Stock Exchange

 

 

Guarantees** by Telefónica, S.A. of the $1,250,000,000 Fixed Rate Guaranteed Senior Notes Due 2016; $700,000,000 Fixed Rate Guaranteed Senior Notes Due 2017; $500,000,000 Floating Rate Guaranteed Senior Notes Due 2017; $1,250,000,000 Fixed Rate Guaranteed Senior Notes Due 2018; $1,000,000,000 Fixed Rate Notes Due 2019; $1,400,000,000 Fixed Rate Guaranteed Senior Notes Due 2020; $1,500,000,000 Fixed Rate Guaranteed Senior Notes Due 2021; $750,000,000 Fixed Rate Guaranteed Senior Notes Due 2023;  $2,000,000,000 Fixed Rate Guaranteed Senior Notes Due 2036; each of Telefónica Emisiones, S.A.U.; and of the $1,250,000,000 Fixed Rate Guaranteed Senior Notes Due 2030 of Telefónica Europe, B.V. New York Stock Exchange

 

*Not for trading, but only in connection with the listing of American Depositary Shares, pursuant to the requirements of the New York Stock Exchange.

 

**Not for trading, but only in connection with the listing of the $1,250,000,000 Fixed Rate Guaranteed Senior Notes Due 2016; $700,000,000 Fixed Rate Guaranteed Senior Notes Due 2017; $500,000,000 Floating Rate Guaranteed Senior Notes Due 2017; $1,250,000,000 Fixed Rate Guaranteed Senior Notes Due 2018; $1,000,000,000 Fixed Rate Notes Due 2019; $1,400,000,000 Fixed Rate Guaranteed Senior Notes Due 2020; $1,500,000,000 Fixed Rate Guaranteed Senior Notes Due 2021; $750,000,000 Fixed Rate Guaranteed Senior Notes Due 2023; and $2,000,000,000 Fixed Rate Guaranteed Senior Notes Due 2036; each of Telefónica Emisiones, S.A.U., and the $1,250,000,000 Fixed Rate Guaranteed Senior Notes Due 2030 of Telefónica Europe, B.V. (each a wholly-owned subsidiary of Telefónica, S.A.)

 

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

 

The number of outstanding shares of each class of capital stock of Telefónica, S.A. at December 31, 2015 was:

 

Ordinary Shares, nominal value 1.00 euro per share: 4,975,199,197

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

Yes ☒  No  

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

Yes ☐  No 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

 

Yes   No 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes   No 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Securities Exchange Act.

 

Large accelerated filer         Accelerated filer ☐        Non-accelerated filer 

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP☐  International Financial Reporting Standards as Issued by the International Accounting Standards Board  Other

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

 

Item 17 ☐     Item 18 

 

If this is an annual report indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act).

 

Yes   No 

 

 

TABLE OF CONTENTS

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS 5
CERTAIN TERMS AND CONVENTIONS 7
PRESENTATION OF CERTAIN FINANCIAL INFORMATION 10
PART I 11
Item 1. Identity of Directors, Senior Management and Advisors 11
A.  Directors and Senior Management 11
B.  Advisers 11
C. Auditors 11
Item 2.  Offer Statistics and Expected Timetable 11
Item 3.  Key Information 11
A.  Selected Financial Data 11
B. Capitalization and Indebtedness 15
C. Reasons for the Offer and Use of Proceeds 15
D. Risk Factors 15
Item 4. Information on the Company 27
A. History and Development of the Company 27
B. Business Overview 36
C. Organizational Structure 93
D. Property, Plant and Equipment 94
Item 4A. Unresolved Staff Comments 96
Item 5. Operating and Financial Review and Prospects 96
A. Operating Results 96
B. Liquidity and Capital Resources 109
C. Research and Development, Patents and Licenses, etc. 113
D. Trend Information 116
E. Off-Balance Sheet Arrangements 117
F. Tabular Disclosure of Contractual Obligations 118
Item 6. Directors, Senior Management and Employees 119
A. Directors and Senior Management 119
B. Compensation 129
C. Board Practices 129
D. Employees 129
E. Share Ownership 130
Item 7. Major Shareholders and Related Party Transactions 131
A. Major Shareholders 131
B. Related Party Transactions 131
C. Interests of Experts and Counsel 132
Item 8. Financial Information 132
Item 9. The Offering and Listing 139
A. Offer and Listing Details 139

 

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B. Plan of Distribution 145
C. Markets 145
D. Selling Shareholders 145
E. Dilution 145
F. Expenses of the Issue 146
Item 10. Additional Information 146
A. Share Capital 146
B. Memorandum and Articles of Association 146
C. Material Contracts 156
D. Exchange Controls 159
E. Taxation 160
F. Dividends and Paying Agents 164
G. Statements by Experts 164
H. Documents on Display 164
I. Subsidiary Information 165
Item 11. Quantitative and Qualitative Disclosures About Market Risk 165
Item 12. Description of Securities Other Than Equity Securities 167
D. American Depositary Shares 167
Part II 169
Item 13. Defaults, Dividend Arrearages and Delinquencies 169
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds 169
Item 15. Controls and Procedures 169
Item 16. [Reserved] 170
Item 16A. Audit Committee Financial Expert 170
Item 16B. Code of Ethics 170
Item 16C. Principal Accountant Fees and Services 171
Item 16D. Exemptions from the Listing Standards for Audit Committees 171
Item 16E.   Purchases of Equity Securities by the Issuer and Affiliated Purchasers 172
Item 16F. Change in Registrant’s Certifying Accountant 172
Item 16G. Corporate Governance 173
Part III 176
Item 17. Financial Statements 176
Item 18. Financial Statements 176
Item 19. Exhibits 176

 

4

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report contains statements that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements in this Annual Report can be identified, in some instances, by the use of words such as “will,” “shall,” “target,” “expect,” “aim,” “hope,” “anticipate,” “should,” “may,” “might,” “assume,” “estimate,” “plan,” “intend,” “believe” and similar language or other formulations of a similar meaning or, in each case, the negative formulations thereof. Other forward-looking statements can be identified in the context in which the statements are made or by the forward-looking nature of discussions of strategy, plans or intentions. These statements appear in a number of places in this Annual Report including, without limitation, certain statements made in “Item 3. Key Information—Risk Factors,” “Item 4. Information on the Company,” “Item 5. Operating and Financial Review and Prospects” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk” and include statements regarding our intent, belief or current expectations with respect to, among other things:

 

·the effect on our results of operations of competition in telecommunications markets;

 

·trends affecting our business financial condition, results of operations or cash flows;

 

·ongoing or future acquisitions, investments or divestments (including the sale of Telefónica Europe plc);

 

·our capital expenditures plan;

 

·our estimated availability of funds;

 

·our ability to repay debt with estimated future cash flows;

 

·our shareholder remuneration policies;

 

·supervision and regulation of the telecommunications sectors where we have significant operations;

 

·our strategic partnerships;

 

·the potential for growth and competition in current and anticipated areas of our business; and

 

·the outcome of pending or future litigation or other legal proceedings.

 

Such forward-looking statements are not guarantees of future performance and involve numerous risks and uncertainties, and actual results may differ materially from those anticipated in the forward-looking statements as a result of various factors. The risks and uncertainties involved in our businesses that could affect the matters referred to in such forward-looking statements include but are not limited to:

 

·changes in general economic, business or political conditions in the domestic or international markets in which we operate or have material investments that may affect demand for our services;

 

·exposure to currency exchange rates, interest rates or credit risk related to our treasury investments or in some of our financial transactions;

 

·existing or worsening conditions in the international financial markets;

 

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·the impact of current, pending or future legislation and regulation in countries where we operate, as well as any failure to renew or obtain the necessary licenses, authorizations and concessions to carry out our operations and the impact of limitations in spectrum capacity;

 

·compliance with anti-corruption laws and regulations and economic sanctions programs;

 

·customers’ perceptions of services offered by us;

 

·the actions of existing and potential competitors in each of our markets as well as the potential effects of technological changes;

 

·failure of suppliers to provide necessary equipment and services on a timely basis;

 

·the impact of unanticipated network interruptions including due to cyber-security actions;

 

·the effect of reports suggesting that electromagnetic fields may cause health problems;

 

·the impact of impairment charges on our goodwill and assets as a result of changes in the regulatory, business or political environment;

 

·potential liability resulting from our internet access and hosting services arising from illegal or illicit use of the internet, including the inappropriate dissemination or modification of consumer data; and

 

·the outcome of pending or future litigation or other legal proceedings.

 

Readers are cautioned not to place undue reliance on those forward-looking statements, which speak only as of the date of this Annual Report. We do not undertake any obligation to update any forward-looking statements that may be made to reflect events or circumstances after the date of this Annual Report including, without limitation, changes in our business or acquisition strategy or planned capital expenditures, or to reflect the occurrence of unanticipated events.

 

6

 

CERTAIN TERMS AND CONVENTIONS

 

Our ordinary shares, nominal value 1.00 euro per share, are currently listed on each of the Madrid, Barcelona, Bilbao and Valencia stock exchanges (collectively, the “Spanish Stock Exchanges”) and are quoted through the Automated Quotation System under the symbol “TEF.” They are also listed on the London and Buenos Aires stock exchanges. American Depositary Shares (“ADSs”), each representing the right to receive one ordinary share, are listed on the New York Stock Exchange and on the Lima Stock Exchange. ADSs are evidenced by American Depositary Receipts (“ADRs”) issued under a Deposit Agreement with Citibank, N.A., as Depositary.

 

As used herein, “Telefónica,” “Telefónica Group,” “Group”, the “Company” and terms such as “we,” “us” and “our” mean Telefónica, S.A. and its consolidated subsidiaries, unless the context requires otherwise.

 

As used herein, “Atento” means Atento Holding, Inversiones y Teleservicios, S.A. and its consolidated subsidiaries, unless the context requires otherwise.

 

Below are definitions of certain technical terms used in this Annual Report:

 

“Access” refers to a connection to any of the telecommunications services offered by Telefónica. Telefónica presents its customer base using accesses as a data point because the integration of telecommunications services in bundled service packages has changed the way residential and corporate customers contract for Telefónica’s services. A single fixed customer may contract for multiple services, and Telefónica believes that it is more useful to count the number of accesses a customer has contracted for, than to merely count the number of Telefónica’s customers. For example, a customer that has fixed line telephony service and broadband service is counted as two accesses rather than as one customer. For mobile customers, Telefónica counts each active SIM as an access regardless of the number of services contracted through the SIM, e.g. voice and data.

 

“ARPU” is the average revenues per user per month. ARPU is calculated by dividing total gross service revenues (excluding inbound roaming revenues) from sales to customers for the preceding 12 months by the weighted average number of accesses for the same period, and then dividing by 12.

 

“Bundles” refer to combination products that combine fixed services (wirelines, broad band and television) and mobile services.

 

“Churn” is the percentage of disconnections over the average customer base in a given period.

 

“Cloud computing” is the delivery of computing as a service rather than a product, whereby shared resources, software and information are provided to computers and other devices as a utility over a network (typically the Internet).

 

“Commercial activity” includes the addition of new lines, replacement of handsets and migrations.

 

“Data ARPU” is the average data revenues per user per month. Data ARPU is calculated by dividing total data revenues from sources such as Short Message Service (SMS), Multimedia Messaging Services (MMS), other mobile data services such as mobile connectivity and mobile Internet, premium messaging, downloading ringtones and logos, mobile mail and wireless application protocol (WAP) connectivity from sales to customers for the preceding 12 months by the weighted average number of accesses for the same period, and then dividing by 12.

 

“Data revenues” include revenues from SMS, MMS, other mobile data services such as mobile connectivity and mobile Internet, premium messaging, downloading ringtones and logos, mobile mail and WAP connectivity from sales to customers.

 

“Data traffic” includes all traffic from Internet access, messaging (SMS, MMS) and connectivity services that is transported by the networks owned by Telefónica.

 

“FaasT” is a cybersecurity technology that scans an organization’s system 24 hours a day, seven days a week, in order to prevent cybernetic attacks.

 

“Final client accesses” means accesses provided directly to residential and corporate clients.

 

7

 

“Fixed telephony accesses” includes public switched telephone network, or PSTN, lines (including public use telephony), and integrated services digital network, or ISDN, lines and circuits. For purposes of calculating Telefónica’s number of fixed line accesses, Telefónica multiplies its lines in service as follows: PSTN (x1); basic ISDN (x1); primary ISDN (x30, x20 or x10); 2/6 digital accesses (x30).

 

“Fixed termination rates” is an established fixed network tariff that applies when a customer makes a call to someone in a network operated by another operator.

 

“FTTx” is a generic term for any broadband network architecture that uses optical fiber to replace all or part of the metal local loop.

 

“Gross adds” means the gross increase in the customer base measured in terms of accesses in a period.

 

“HDTV” or “high definition TV” has at least twice the resolution of standard definition television (SDTV), allowing it to show much more detail than an analog television or digital versatile disc (DVD).

 

“Incoming revenues” refers to the interconnection revenues derived from the completion of calls made from outside mobile or fixed carriers into Telefónica’s network.

 

“Interconnection revenues” means revenues received from other operators which use Telefónica’s networks to connect or to finish their calls and SMS or connect to their customers.

 

“Internet and data accesses” include broadband accesses (including retail asymmetrical digital subscriber line “ADSL,” very high bit-rate digital subscriber line “VDSL”, satellite, fiber optic and circuits over 2 Mbps), narrowband accesses (Internet service through the PSTN lines) and the remaining non-broadband final customer circuits. Internet and data accesses also include “Naked ADSL”, which allows customers to subscribe for a broadband connection without a monthly fixed line fee.

 

“IPTV” (Internet Protocol Television) refers to distribution systems for television subscription signals or video using broadband connections over the IP protocol.

 

“ISP” means Internet service provider.

 

“IT”, or information technology, is the acquisition, processing, storage and dissemination of vocal, pictorial, textual and numerical information by a microelectronics-based combination of computing and telecommunications.

 

“Latch” is a cybernetic application, protecting accounts and on-line services.

 

“Local loop” means the physical circuit connecting the network termination point at the subscriber’s premises to the main distribution frame or equivalent facility in the fixed public telephone network.

 

“LTE” means Long Term Evolution, a 4G mobile access technology.

 

“M2M”, or machine to machine, refers to technologies that allow both mobile and wired systems to communicate with other devices of the same ability.

 

“Market share” is the percentage ratio of the number of final accesses or operator revenues over the existing total market in an operating area.

 

“Metashield” is a cybernetic product for protecting metadata (information on data) in digital documents and archives.

 

“Mobile accesses” includes accesses to the mobile network for voice and/or data services (including connectivity). Mobile accesses are categorized into contract and pre-pay accesses.

 

“Mobile broadband” includes Mobile Internet (Internet access from devices also used to make voice calls such as smartphones), and Mobile Connectivity (Internet access from devices that complement fixed broadband, such as PC Cards/dongles, which enable large amounts of data to be downloaded on the move).

 

“MTR” means mobile termination rate, which is the charge per minute or SMS paid by a telecommunications network operator when a customer makes a call to another network operator.

 

8

 

“MVNO” means mobile virtual network operator, which is a mobile operator that is not entitled to use spectrum for the provision of mobile services. Consequently, an MVNO must subscribe to an access agreement with a mobile network operator in order to provide mobile access to their customers. An MVNO pays a determined tariff to such a mobile network operator for using the infrastructure to facilitate coverage to their customers.

 

“Net adds” means the number of new accesses in a certain period.

 

“Non SMS data revenues” means data revenues excluding SMS revenues.

 

“OTT services” or “over the top services” means services provided through the Internet (such as television).

 

“Outgoing revenues” refers to mobile voice or data revenues (SMS, MMS) derived from our consumers’ consumed service.

 

“P2P SMS” means person to person short messaging service (usually sent by mobile customers).

 

“Pay TV” includes cable TV, direct to home satellite TV, or DTH, and Internet Protocol TV, or IPTV.

 

“Revenues” means net sales and revenues from rendering of services.

 

“Service revenues” means revenues less revenues from handset sales. Service revenues are mainly related to telecommunications services, especially voice revenues and data revenues (SMS and data traffic download and upload revenues) consumed by Telefónica’s customers.

 

“SIM” means subscriber identity module, a removable intelligent card used in mobile handsets, USB modems, etc. to identify the user in the network.

 

“Tacyt” is a cybersecurity tool that supervises, stores, analyzes, correlates and classifies mobile applications.

 

“Unbundled local loop” or “ULL” includes accesses to both ends of the copper local loop leased to other operators to provide voice and DSL services (fully unbundled loop, fully ULL) or only DSL service (shared unbundled loop, “shared ULL”).

 

“VoiceTraffic” means voice minutes used by Telefónica’s customers over a given period, both outbound and inbound.

 

“VoIP” means voice over Internet protocol.

 

“Wholesale accesses” means accesses Telefónica provides to its competitors, who then sell services over such accesses to their residential and corporate clients.

 

“Wholesale ADSL” means accesses of broadband or fiber that we provide to our competitors, who then sell services over such accesses to their residential and corporate clients.

 

9

 

PRESENTATION OF CERTAIN FINANCIAL INFORMATION

 

In this Annual Report, references to “U.S. dollars,” “dollars” or “$,” are to United States dollars, references to “pounds sterling,” “sterling” or “£” are to British pounds sterling, references to “reais” refer to Brazilian reais and references to “euro”, “euros” or “€” are to the single currency of the participating member states in the Third Stage of the European Economic and Monetary Union pursuant to the treaty establishing the European Community, as amended from time to time.

 

Our consolidated financial statements as of December 31, 2014 and 2015, and for the years ended December 31, 2013, 2014 and 2015 included elsewhere in this Annual Report including the notes thereto (the “Consolidated Financial Statements”), are prepared in conformity with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

 

Retrospective revisions

 

The consolidated income statement and cash flow data for the years ended December 2013 and 2014 (and also for the years ended December 2011 and 2012 in “Item 3. Key InformationSelected Financial Data”) included in this Annual Report has been retrospectively revised to show the reclassification of the results attributable to our operations in the United Kingdom as discontinued operations. This reclassification resulted from the signing of an agreement on March 24, 2015 between us and Hutchison 3G UK Investments Limited and Hutchison 3G UK Holdings (CI) Limited (together, “Hutchison”), for the sale and purchase of the entire issued share capital of Telefónica Europe plc. A breakdown of the results and cash flows for discontinued operations is included in Note 23 to our Consolidated Financial Statements. This reclassification has had no impact on our previously reported consolidated statement of financial position as of the end of prior periods. Completion of the sale of Telefónica Europe plc is subject, among other conditions, to the approval of the applicable regulatory authorities and the obtainment of waivers to certain contractual provisions affected by the sale, including those related to network alliances as well as change of control provisions under certain contractual arrangements with third parties. The sale purchase agreement entered into with Hutchison establishes that the conditions must be satisfied by no later than June 30, 2016; however, this date may be extended to September 30, 2016 in specified circumstances.

 

In addition, our 2014 and 2013 financial information by operating segment has been revised to reflect our current reporting structure: Telefónica Spain, Telefónica Brazil, Telefónica Germany and Telefónica Hispanoamérica (formed by the Group’s operators in Argentina, Chile, Peru, Colombia, Mexico, Venezuela and Central America, Ecuador and Uruguay). Our prior organizational structure, which was approved by the Board of Directors of Telefónica, S.A. on February 26, 2014, was made up of one additional segment: Telefónica UK, which consisted of our operations in the United Kingdom.

 

Moreover, our consolidated statement of financial position as of December 31, 2014 has been adjusted to reflect the finalization of the purchase price allocation for the acquisition of E-Plus Mobilfunk GmbHCo KG (“E-Plus”). The impact of such finalization on our 2014 net income was immaterial and adjusted against retained profits as of December 31, 2014. As a result, we have not restated the consolidated income statement for the year ended December 31, 2014 in connection with this finalization.

 

10

 

PART I

 

Item 1. Identity of Directors, Senior Management and Advisors

 

A. Directors and Senior Management

 

Not applicable.

 

B. Advisers

 

Not applicable.

 

C. Auditors

 

Not applicable.

 

Item 2. Offer Statistics and Expected Timetable

 

Not applicable.

 

Item 3. Key Information

 

A. Selected Financial Data

 

The following table presents certain selected consolidated financial data. It is to be read in conjunction with “Item 5. Operating and Financial Review and Prospects”, “Item 4. Information on the Company—Business Overview” and the Consolidated Financial Statements. The consolidated income statement and cash flow data for the years ended December 31, 2013, 2014 and 2015 and the consolidated statement of financial position data as of December 31, 2014 and 2015 set forth below are derived from, and are qualified in their entirety by reference to the Consolidated Financial Statements. The consolidated income statement and cash flow data for the years ended December 31, 2011, 2012, 2013 and 2014 set forth below have been retrospectively revised to show the reclassification of the results attributable to our operations in the United Kingdom as discontinued operations and are not derived from Telefónica, S.A.’s consolidated financial statements for such years, which are not included herein. See “Presentation of Certain Financial InformationRetrospective revisions”. The consolidated statement of financial position data as of December 31, 2014 set forth below has been retrospectively revised to show the finalization of the purchase price allocation for the acquisition of E-Plus and is not derived from Telefónica, S.A.’s consolidated financial statements for such year, which are not included herein. See “Presentation of Certain Financial InformationRetrospective revisions”. The consolidated statement of financial position data as of December 31, 2011, 2012 and 2013 set forth below are derived from Telefónica, S.A.’s consolidated financial statements for such years, which are not included herein.

 

Our Consolidated Financial Statements have been prepared in accordance with IFRS as issued by the IASB.

 

11

 

The basis of presentation is described in detail in Note 2 to our Consolidated Financial Statements.

 

Millions of euros 2011 2012 2013 2014 2015
Revenues 55,977 55,337 50,547 43,458 47,219
Other income 2,037 2,164 1,491 1,521 1,841
Supplies (14,712) (14,461) (13,758) (11,750) (12,910)
Personnel expenses (10,534) (8,097) (6,659) (6,621) (9,800)
Other expenses (14,303) (15,367) (14,144) (12,827) (14,936)
Depreciation and amortization (9,084) (9,440) (8,616) (7,431) (8,517)
OPERATING INCOME 9,381 10,136 8,861 6,350 2,897
Share of profit (loss) of investments accounted for by the equity method (635) (1,275) (291) (498) (5)
Net finance expense (2,742) (3,047) (2,675) (2,479) (2,310)
Net exchange differences (158) (596) (167) (300) (271)
Net financial expense (2,900) (3,643) (2,842) (2,779) (2,581)
PROFIT BEFORE TAX 5,846 5,218 5,728 3,073 311
Corporate income tax (166) (1,443) (1,201) (260) (13)
PROFIT AFTER TAX FROM CONTINUING OPERATIONS 5,680 3,775 4,527 2,813 298
Profit after tax from discontinued operations 504 628 442 439 2,582
PROFIT FOR THE YEAR 6,184 4,403 4,969 3,252 2,880
Non-controlling interests (781) (475) (376) (251) (135)
PROFIT FOR THE YEAR ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT 5,403 3,928 4,593 3,001 2,745
Weighted average number of shares-Basic (thousands)(1) 4,803,739 4,711,457 4,736,401 4,714,374 4,928,478
Basic and diluted earnings (loss) per share from continuing operations attributable to equity holders of the parent (euro)(1) 1.02 0.70 0.87 0.50 (0.02)
Basic and diluted earnings per share from discontinued operations attributable to equity holders of the parent (euro)(1) 0.10 0.13 0.09 0.09 0.52
Basic and diluted earnings per share attributable to equity holders of the parent (euro)(1) 1.12 0.83 0.96 0.60 0.51
Basic and diluted earnings (loss) per ADS (euro)(1)(2) 1.12 0.83 0.87 0.50 (0.02)
Weighted average number of ADS-Basic (thousands)(1)(2) 4,803,739 4,711,457 4,736,401 4,714,374 4,928,478
Dividends per ordinary share (cash and scrip) (euro) 1.52 0.83 0.35 0.75 0.75
Dividends per ordinary share (cash and scrip) ($)(3) 2.14 1.06 0.47 0.98 0.83
Consolidated Statement of Financial Position Data          
Cash and cash equivalents 4,135 9,847 9,977 6,529 2,599
Property, plant and equipment 35,469 35,021 31,040 33,156 30,549
Total assets 129,623 129,773 118,862 122,348 122,974

 

12

 

Non-current liabilities 69,662 70,601 62,236 62,318 60,549
Equity net 27,383 27,661 27,482 30,321 27,556
Capital stock 4,564 4,551 4,551 4,657 4,975
Consolidated Cash Flow Data          
Net cash provided by operating activities 17,483 15,213 14,344 12,193 13,615
Net cash provided by operating activities from continuing operations 16,107 13,588 12,907 10,879 11,831
Net cash provided by operating activities from discontinued operations 1,376 1,625 1,437 1,314 1,784
Net cash used in investing activities (12,497) (7,877) (9,900) (9,968) (12,917)
Net cash used in investing activities from continuing operations (11,773) (6,880) (8,604) (9,076) (11,751)
Net cash used in investing activities from discontinued operations (724) (997) (1,296) (892) (1,166)
Net cash used in financing activities (4,912) (1,243) (2,685) (4,041) (3,612)
Net cash used in financing activities from continuing operations (4,910) (1,243) (2,704) (4,041) (3,612)
Net cash (used)/provided by financing activities from discontinued operations (2) 18
 
(1)The per share and per ADS computations for all periods presented have been presented using the weighted average number of shares and ADSs, respectively, outstanding for each period, and have been adjusted to reflect the stock dividends which occurred during the periods presented, as if these had occurred at the beginning of the earliest period presented and have also been adjusted for mandatorily convertible notes issued in 2014. In accordance with IAS 33 (“Earnings per share”), the weighted average number of ordinary shares and ADSs outstanding for each of the periods covered has been restated to reflect the issuance of shares pursuant to Telefónica’s scrip dividend in June 2012, December 2014 and December 2015. As a consequence, basic and diluted earnings per share have also been restated from 2011 to 2014.

(2)Until January 20, 2011, each ADS represented the right to receive three ordinary shares. Since January 21, 2011, each ADS represents the right to receive one ordinary share. The above figures have been restated accordingly. Figures do not include any charges of the ADS Depositary.

(3)Quantities in U.S. dollars are calculated in accordance with the conversion rate published by the Depositary (Citibank, N.A.) in connection with each dividend payment.

 

13

 

Exchange Rate Information

 

As used in this Annual Report, the term “Noon Buying Rate” refers to the rate of exchange for euro, expressed in U.S. dollars per euro, in the City of New York for cable transfers payable in foreign currencies as certified by the Federal Reserve Bank of New York for customs purposes. The Noon Buying Rate certified by the New York Federal Reserve Bank for the euro on February 19, 2016 was $1.1127 = 1.00 euro. The following tables describe, for the periods and dates indicated, information concerning the Noon Buying Rate for the euro. Amounts are expressed in U.S. dollars per 1.00 euro.

 

Noon Buying Rate        
Year ended December 31, Period end Average (1) High Low
2011 1.2973 1.4002 1.4875 1.2926
2012 1.3186 1.2909 1.3463 1.2062
2013 1.3779 1.3303 1.3816 1.2774
2014 1.2101 1.3155 1.3816 1.2447
2015 1.0859 1.1032 1.2015 1.0524
2016 (through February 19, 2016) 1.1127 1.0980 1.1362 1.0743

Source: Federal Reserve Bank of New York.

(1)The average of the Noon Buying Rates for the euro on the last day reported of each month during the relevant period.

 

Noon Buying Rate    
Month ended High Low
August 31, 2015 1.1580 1.0868
September 30, 2015 1.1358 1.1104
October 31, 2015 1.1437 1.0963
November 30, 2015 1.1026 1.0562
December 31, 2015 1.1025 1.0573
January 31, 2015 1.0964 1.0743
February 26, 2015 (through February 19, 2016) 1.1362 1.0888

Source: Federal Reserve Bank of New York.

 

Monetary policy within the member states of the euro zone is set by the European Central Bank.

 

Our ordinary shares are quoted on the Spanish Stock Exchanges in euro. Currency fluctuations may affect the dollar equivalent of the euro price of our shares listed on the Spanish Stock Exchanges and, as a result, the market price of our ADSs, which are listed on the New York Stock Exchange. Currency fluctuations may also affect the dollar amounts received by holders of ADSs on conversion by the depositary of any cash dividends paid in euro on the underlying shares.

 

Our consolidated results are affected by fluctuations between the euro and the currencies in which the revenues and expenses of some of our consolidated subsidiaries are denominated and recorded (principally the Brazilian real, the pound sterling, the Argentine peso, the Peruvian nuevo sol, the Chilean peso, the Colombian peso, the Mexican peso and the Venezuelan bolívar fuerte). See Note 3 (b) to our Consolidated Financial Statements for information on the exchange rate translation methodology we used in preparing our consolidated financial information.

 

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B. Capitalization and Indebtedness

 

Not applicable.

 

C. Reasons for the Offer and Use of Proceeds

 

Not applicable.

  

D. Risk Factors

 

The Telefónica Group’s business is conditioned by a series of intrinsic risk factors that affect exclusively the Group, as well as a series of external factors that are common to businesses of the same sector. The main risks and uncertainties facing the Company which could affect its business, financial position, reputation, corporate image and brand and its results of operations, must be considered jointly with the information in the Consolidated Financial Statements, and are as follows:

 

Group-Related Risks

 

Worsening of the economic and political environment could negatively affect Telefónica’s business.

 

Telefónica’s international presence enables the diversification of its activities across countries and regions, but it exposes Telefónica to various legislations, as well as to the political and economic environments of the countries in which it operates. Any adverse developments or even uncertainties in these countries, including exchange-rate or sovereign-risk fluctuations, may adversely affect the business, financial position, cash flows and/or the performance of some or all of the Group’s financial indicators.

 

Economic conditions may adversely affect the level of demand of existing and prospective customers as they may no longer deem critical the services offered by the Group.

 

Growth in Europe may be affected by political uncertainty in some European countries (including Spain), a possible revival of the crisis in Greece, restructuring of the banking sector, the impact of steps taken towards a EU banking union and a capital markets union and the referendum to be held in the near future in the United Kingdom, among others. In 2015, the Telefónica Group obtained 26.3% of its revenues in Spain and 16.7% in Germany.

 

In Latin America, higher exchange rate risks stand out after the large depreciation undergone by most currencies in this region, affected by the fall in commodity prices, the uncertainties about growth in China, and the interest rate evolution in the United States, among other macroeconomic factors. Abrupt exchange rate movements could especially be triggered by scenarios characterized by high inflation and fiscal and external deficits. In this regard, it should be noted that the Venezuelan bolivar exchange rate quoted in SIMADI has remained stable for a year despite the high increase in prices accumulated over this period, increasing the risk of readjustment. In addition, the Argentine peso (which already experienced a sharp depreciation in December 2015) is experiencing some depth constraints in its trading market, and the Brazilian real (which also experienced a depreciation in 2015) has remained volatile at the beginning of 2016. Cash flows from countries in this region could decrease, and financial conditions could become more unfavorable if any of these elements were to worsen in the future.

 

Some of the most significant macroeconomic risk factors in the region affect Brazil, where there is a combination of high inflation, negative economic growth rates and significant internal and external financing needs. All these elements have led to new downgrades to the country’s credit rating.

 

Moreover, the recent fall in oil prices and other commodity prices is having a negative impact on the external and fiscal accounts in Chile, Peru, Colombia, Mexico, and Ecuador (which has a dollarized economy, and is currently experiencing a lower supply of U.S. dollars).

 

15

 

In Argentina, the new government is focused on resolving Argentina’s macroeconomic and financial imbalances and on recovering international confidence. Although reforms taking place may have positive effects in the medium term, short term risks persist.

 

In Venezuela after the parliamentary elections in which the Democratic Unity Roundtable (an opposition coalition to the ruling United Social Party of Venezuela) claimed the majority of seats in the National Assembly, a new economic emergency decree was announced which could increase state control on private businesses. In addition, there continues to be very limited access to U.S. dollars.

 

For the year ended December 31, 2015, Telefónica Hispanoamérica and Telefónica Brazil represented 30.5% and 23.4% of the Telefónica Group’s revenues, respectively. Moreover, approximately 35.6% of the Group’s revenues in the telephony business were generated in countries that do not have investment grade status (in order of importance Brazil, Argentina, Ecuador, Venezuela, Nicaragua, Guatemala, El Salvador and Costa Rica), and other countries are only one notch away from losing this threshold. At December 31, 2015 the percentage of Telefónica’s net financial debt in Latin American currencies stood at 13%.

 

“Country risk” factors include the following, among others:

 

unexpected adverse changes in regulation or administrative policies, including changes that modify the terms and conditions of licenses and concessions and their renewal (or delay their approval);

 

abrupt exchange rate movements;

 

expropriation or nationalization of assets, adverse tax decisions, or other forms of state intervention;

 

economic-financial downturns, political instability and civil disturbances; and

 

maximum limits on profit margins imposed in order to limit the prices of goods and services through the analysis of cost structures (for example, in Venezuela, a maximum profit margin has been introduced that will be set annually by the Superintendence for Defense of Socioeconomic Rights).

 

Any of the foregoing may adversely affect the business, financial position, results of operations and cash flows of the Group.

 

The Group’s financial condition and results of operations may be adversely affected if it does not effectively manage its exposure to foreign currency exchange rates, interest rates or financial investment risks.

 

At December 31, 2015, 49.1% of the Group’s net debt was pegged to fixed interest rates for a period greater than one year, while 28% was denominated in a currency other than the euro.

 

To illustrate the sensitivity of financial expenses to a change in short-term interest rates at December 31, 2015: (i) a 100 basis points increase in interest rates in all currencies in which Telefónica has a financial position at that date would lead to an increase in financial expenses of 245 million euros, (ii) whereas a 100 basis points decrease in interest rates in all currencies except the euro, the U.S. dollar and the pound sterling (these to zero rates in order to avoid negative rates), would lead to a reduction in financial expenses of 75 million euros. These calculations were made assuming a constant currency and a balance position equivalent to the position at that date and bearing in mind the derivative financial instruments arranged.

 

According to the Group’s calculations, the impact on net financial expense by changes in the value of a 10% depreciation of Latin American currencies against the U.S. dollar and a 10% depreciation of the rest of the currencies against the euro would result in exchange losses of 33 million euros, primarily due to the weakening of the Venezuelan bolívar fuerte and the Argentine peso. These calculations were made assuming a constant currency position with an impact on profit or loss at December 31, 2015, including derivative instruments in place. At December 31, 2015, 31.3% of the Telefónica Group’s operating income before depreciation and amortization (OIBDA) was concentrated in Telefónica Brazil and 38.2% in Telefónica Hispanoamérica.

 

16

 

The Telefónica Group uses a variety of strategies to manage these risks, mainly through the use of financial derivatives, which themselves also expose us to risk, including counterparty risk. Furthermore, the Group’s risk management strategies may not achieve the desired effect, which could adversely affect the Group’s business, financial condition, results of operations and cash flows.

 

Existing or worsening conditions in the financial markets may limit the Group’s ability to finance, and consequently, the ability to carry out its business plan.

 

The performance, expansion and improvement of the Telefónica Group’s networks, the development and distribution of the Telefónica Group’s services and products, the development and implementation of Telefónica’s strategic plan and new technologies, the renewal of licenses or the expansion of the Telefónica Group’s business in countries where it operates, may require a substantial amount of financing.

 

A decrease in the liquidity of the Company, a difficulty in refinancing maturing debt or raising new funds as debt or equity, could force Telefónica to use resources allocated to investments or other commitments to pay its financial debt, which could have a negative effect on the Group’s business, financial condition, results of operations or cash flows.

 

Funding could be more difficult and costly in the event of a significant deterioration of conditions in the international or local financial markets (especially considering the recent volatility resulting from uncertainties regarding China, the decline in commodity prices and the hikes in interest rates approved by the Federal Reserve, all of which impact Latin America), or if there is an eventual deterioration in the solvency or operating performance of the Company, or if Telefónica’s divestment of its operations in the United Kingdom were to not be completed, or as a consequence of a credit rating downgrade of Spanish sovereign risk by rating agencies.

 

At December 31, 2015, gross financial debt scheduled to mature in 2016 amounted to 11,275 million euros (which includes the net position of derivative financial instruments and certain current payables), and gross financial debt scheduled to mature in 2017 amounted to 8,461 million euros.

 

In accordance with its liquidity policy, the Company has fully covered its gross debt maturities until the end of 2016 with cash and credit lines available at December 31, 2015, including a syndicated credit facility signed in November 2015 with several national and foreign institutions amounting to 3,000 million euros with a maturity of up to 27 months. Our liquidity could be affected if Telefónica’s divestment of its operations in the United Kingdom is finally not consummated, or if market conditions make it difficult to renew existing undrawn credit lines, 8.7% of which, at December 31, 2015, were scheduled to mature prior to December 31, 2016.

 

In addition, given the interrelation between economic growth and financial stability, the materialization of any of the economic, political and exchange rate risks referred to above could lead to a negative impact on the availability and cost of Telefónica’s financing and its liquidity strategy; which could have, as well, a negative effect on the Group’s business, financial condition, results of operations or cash flows.

 

Telefónica’s divestment of its operations in the United Kingdom may not materialize.

 

On March 24, 2015, Telefónica and Hutchison signed an agreement for the acquisition by the latter of Telefónica’s operations in the UK (O2 UK) for a price (firm value) of 10,250 million pounds sterling in cash (approximately 14,000 million euros at the exchange rate as of the date of the agreement), composed of (i) an initial amount of 9,250 million pounds sterling (approximately 12,640 million euros as of the date of the agreement) which would be paid at closing and (ii) an additional deferred payment of 1,000 million pounds sterling (approximately 1,360 million euros) to be paid once the cumulative cash flow of the combined company in the United Kingdom has reached an agreed threshold.

 

Completion of the transaction is subject to, among other conditions, the approval of the European Commission and the obtainment of waivers to some contractual provisions affected by the sale, including those related to network alliances, as well as change of control provisions under certain contractual arrangements with third parties. As of the date of this Annual Report, such conditions had not been met. The European Commission authorization process is ongoing.

 

17

 

As completion of the share purchase agreement is conditional on the satisfaction (or, if applicable, waiver) of certain conditions, the acquisition may or may not proceed. If the abovementioned divestment is ultimately not consummated, or it is consummated under conditions other than those initially reported, this could have a material adverse effect on the trading price of Telefónica’s ordinary shares, bonds and financial instruments, and its leverage.

 

Risks Relating to the Group’s Industry

 

The Group operates in a highly regulated industry which requires government concessions for the provision of a large part of its services and the use of spectrum, which is a scarce and costly resource.

 

The telecommunications sector is subject to laws and regulations in different countries, and additionally, many of the services the Group provides require the granting of a license, concession or official approval, which usually requires certain obligations and investments to be made, such as those relating to spectrum availability. Among the main risks of this nature are those related to spectrum regulation and licenses/concessions, rates, Universal Service regulation, regulated wholesale services over fiber networks, privacy, functional separation of businesses and network neutrality.

 

Thus, as the Group provides most of its services under licenses, authorizations or concessions, it is vulnerable to administrative bodies’ decisions, such as economic fines for serious breaches in the provision of services and, potentially, revocation or failure to renew these licenses, authorizations or concessions, or the granting of new licenses to competitors for the provisions of services in a specific market.

 

In this regard, the Telefónica Group pursues its license renewals in the terms referred in their respective contractual conditions, though it cannot guarantee that it will always complete this process successfully or under the most beneficial terms for the Group. In many cases complying with certain obligations is required, including, among others, minimum specified quality, service and coverage standards and capital investment. Failure to comply with these obligations could result in the imposition of fines, revision of the contractual terms, or even the revocation of the license, authorization or concession. Additionally, the Telefónica Group could be affected by regulatory actions carried out by the antitrust authorities. These authorities could prohibit certain actions, such as new acquisitions or specific practices, create obligations or lead to heavy fines. Any such measures implemented by the competition authorities could result in economic and/or reputational loss for the Group, in addition to a loss of market share and/or harm to the future growth of certain businesses.

 

Moreover, the fact that the Group’s business is highly regulated both affects its revenues and imposes costs on its operations. For example, regulations fix the rates that Telefónica charges for calls received from other companies’ networks, and regulators have progressively lowered these rates in recent years. In addition, and particularly in Spain, regulators have promoted competition in recent years by, for example, adopting policies which allow alternative operators access to Telefónica’s networks. This intense competition has exerted downward pressure on Telefónica’s tariff structure, adversely affecting revenues, and led to increased commercial expenses, adversely affecting margins.

 

Regulation of spectrum and government licenses

 

Further to the European Commission’s new “Digital Single Market” (DSM) Strategy, Europe is expected to undergo an important review of its regulatory framework. The new European DSM Strategy comprises a series of policy initiatives to promote the development of the single market of digital services and networks. As a result, the European Commission will initiate legislative processes, which could have significant implications on access to network, spectrum use, auction conditions, duration and renewal of licenses, audiovisual services and platforms, among other various matters.

 

18

 

On May 8, 2015, the European Commission approved a Decision on the harmonization of the 1452 - 1492 MHz frequency band (1500 MHz band), which encourages Member States to designate and to make available this band frequency from November 2015, on a non-exclusive basis. As a result, new spectrum award processes are expected in the short and mid-term all across the EU. Germany and the United Kingdom have already auctioned the band frequency and therefore the Decision will not have a material impact on Telefónica’s cash flow in those markets. In Spain, the Government launched a consultation which ended on June 21, 2015 to evaluate demand for spectrum in the 1500 MHz band. The tender of the 1500 MHz band in Spain may take place during 2016.

 

Additionally, the main terms of the allocation and use of the 700 MHz band in Europe is expected to be decided in the coming months. This could require new cash outflows from Telefónica between 2018 and 2021 (the period over which it is expected that the spectrum will be available), except in Germany which was the first country in Europe to award spectrum in the 700 MHz band, together with the 1800 MHz, 900 MH and 1500 MHz bands.

 

Further, in Germany, on July 4, 2014 and September 25, 2015, the German Federal Network Agency (BnetzA) adopted decisions concerning the impact of Telefónica Deutschland Holding AG merger with E-Plus Mobilfunk GmbH & Co. KG (E-Plus) on the spectrum held by Telefónica Deutschland (the surviving entity after the merger). BnetzA has required Telefónica Deutschland to terminate by June 30, 2016 (rather than December 31, 2016) some rights of use with respect to spectrum in the 1800 MHz band that was not reacquired by Telefónica Deutschland at the abovementioned auction proceeding. The remaining 1800 MHz spectrum band that was not reacquired in such auction was returned at the end of 2015. The German regulator also announced that it will perform a frequency distribution analysis, and determine whether any additional action is needed, particularly in the area of the 2 GHz spectrum band granted to Telefónica Deutschland.

 

United Internet and the regional cable operator Airdata have filed complaints against the EU General Court decision allowing the merger between Telefónica Deutschland Holding AG and E-Plus Mobilfunk GmbH & Co. Telefónica Deutschland has been accepted as an interested party in these proceedings.

 

In the United Kingdom, licenses were amended in January 2015 to introduce a 90% geographic coverage obligation for voice and text services. Separately, on September 24, 2015, the telecommunication regulator (Ofcom) issued a decision to increase the annual fees which mobile operators must pay for the use of 900 MHz and 1800 MHz spectrum. Accordingly, from October 31, 2015, the annual charge that Telefónica UK must pay is 32.2 million pounds sterling (increased from 15.6 million pounds sterling), rising to 48.7 million pounds sterling plus CPI from October 31, 2016. Finally, following consultation, on December 3, 2015 Ofcom published an update stating that it has decided to initiate an auction procedure to award 2.3 GHz and 3.4 GHz spectrum once decisions have been made by the relevant competition authorities, in relation to the proposed merger between Telefónica UK Limited and Hutchison 3G UK Limited.

 

In Latin America, spectrum auctions are expected to take place implying potential cash outflows to obtain additional spectrum or to meet the coverage requirements associated with these licenses. Specifically, the procedures expected to take place in 2016 are:

 

·Peru: In August 2015, the government published the conditions for granting licenses in the 700 MHz spectrum band (three blocks of 2x15 MHz have been defined). On November 4, 2015 Telefónica was declared as a prequalified bidder.

 

·Costa Rica: In December 2015, the Government communicated its intention to auction 40 MHz in the 1800 MHz band and 30 MHz in the 1900/2100 MHz band during 2016.

 

·Mexico: The Federal Telecommunications Institute (IFT) has proposed to auction spectrum in the 2500 MHz band in 2016. In addition, and in light of the constitutional reform resulting from the "Pact for Mexico" political initiative, a wholesale network offering services in the 700 MHz band will be created under a Public-Private Partnership (PPP). On January 29, 2016, the SCT (Secretaría de Comunicaciones y Transportes) published the rules for the International Competitive Tender. The rules state that the contract will be awarded in August 2016 and commercial operations must begin no later than March 31, 2018.

 

19

 

·Panama: On December 4, 2015, the process of reallocation of the AWS band (140 MHz, 1710-1780 / 2110-2180 MHz) was announced. It is expected to start by the end of 2016.

 

·Uruguay: The Government approved a resolution allowing for a spectrum auction for mobile services. The auction will contain 15 + 15 MHz in the “AWS Ext” spectrum band and 45 + 45 MHz in the 700 MHz spectrum band (20 + 20 MHz of the 45 + 45 MHz in 700 MHz were previously reserved for the National Telecommunications Administration, ANTEL). As of the date of this report, this process has been delayed and the bidding rules for spectrum have not yet been published.

 

·Colombia: The regulator has published a consultation document for comment which analyzes alternatives and other considerations regarding the structuring of the allocation process for radio spectrum in the 700 MHz bands (which is part of the “Digital dividend”, which is the set of frequencies that have been available to mobile communications services in the frequency bands traditionally used for television broadcast (700 MHz and 800 MHz) due to the migration from analogue TV to digital TV), 900 MHz, 1,900 MHz and 2,500 MHz for mobile services. The first auction is expected to take place in 2016. Colombia has established spectrum caps for lower bands, which are currently set at 30 MHz, and Telefónica has 25 MHz in lower bands.

 

·Venezuela: The regulator has indicated the possibility of awarding spectrum in the 2600 MHz band (20 + 20 MHz) for 4G services, in the 1900 MHz band (5 + 5 MHz) for 3G services and in the 900 MHz band during 2016.

 

In December 2015, the Brazilian regulatory authority (Agencia Nacional de Telecomunicações or ANATEL) auctioned the spectrum lots remaining in the 1800 MHz, 1900 MHz, 2500 MHz and 3500 MHz bands, where Telefónica acquired seven lots of 2.5 GHz frequency band. These lots are associated to six different States, five of them in the capital cities of the States of São Paulo, Rio de Janeiro, Porto Alegre, Florianápolis, and Palmas and one in an interior city of the State of Mato Grosso do Sul. Such frequencies will be used for provision of mobile broadband service on 4G.

 

Further to the above, certain administrations may not have announced their intention to release new spectrum and may do so during the year. The above does not include processes announced via general statements by administrations, which involve bands not key to Telefónica’s needs. Telefónica may also seek to acquire spectrum on the secondary market where opportunities might arise.

 

Risks relating to concessions and licenses previously granted

 

In the state of São Paulo, Telefónica Brazil provides local and national long-distance Commuted Fixed Telephony Service ("CFTS") under the public regime, through a concession agreement, which will be in force until 2025. In accordance with current regulations, Telefónica Brazil informed ANATEL that the net value as of December 31, 2015 of assets assigned to the provision of the CFTS (which include, among others, switching and transmission equipment and public use terminals, external network equipment, energy equipment and system and operation support equipment) were estimated to total 7,856 million Brazilian reais. In principle, the assets assigned to the provision of the CFTS are considered reversible assets; the scope of such reversibility is subject to a complex debate at different instances.

 

On June 27, 2014, as established in the concession agreement, ANATEL issued a public consultation for the revision of the concession agreement. Although definitive conditions (which might deal, among others, with the reversibility of assets, universalization goals and, in general, the obligational regime of the concessionaire) were to be published in 2015, such publication was postponed until April 2016. In addition, current reversibility regulations will be reviewed by ANATEL, which is expected to issue a public consultation in the near future. Definitive regulations might be issued in the second half of 2016. We cannot assure that changes made to the concession terms or to the reversibility regulations will not be detrimental to Telefónica’s interests.

 

20

 

In Colombia, the ICT Ministry issued Resolution 597 on March 27, 2014, to renew 850 MHz/1900 MHz licenses for 10 additional years. The reversion of assets (other than radio frequencies, which is clear that must be returned) and its scope, has been discussed in the context of the liquidation of the concession contract, taking into consideration the terms of the contract, and the Constitutional Court’s review of Law 422 of 1998, and Law 1341 of 2009. Discussions on the matter concluded on February 16, 2016. The ITC Ministry has announced that it is going to convene the Arbitral Tribunal, in accordance with what was agreed upon in the concession contract. To date, the content of the claim is unknown.

 

In Peru, the concessions for the provision of the fixed-line service will remain in force until November 2027. However, the Company filed a partial renewal request for five more years in December 2013. As of the date of this Annual Report, the decision of the Ministry of Transport and Communications (Ministerio de Transportes y Comunicaciones) is still pending.

 

Telefónica Móviles Chile, S.A. was awarded spectrum on the 700 MHz (2x10 MHz) band in March 2014. The claim brought by a consumer organization against 700 MHz assignments was rejected by the Court of Defense of Free Competition in a judgment of July 24, 2015 and the appeal before the Hon. Supreme Court submitted by the consumer organization is still awaiting resolution.

 

In El Salvador, the process of renewal of the Group’s licenses, which expires in 2018, has been postponed.

 

In Ecuador, once the Group’s concession for mobile services expires in 2023, the renewal of such concession or the granting of a new concession will be subject to negotiation with the Government. If the Group fails to renew such concession or obtain a new concession, assets assigned to the provision of mobile services will revert to the State in exchange for a fee.

 

The Group’s consolidated investment in spectrum acquisitions and renewals in 2015 amounted to 1,585 million euros.

 

The Group’s failure to obtain sufficient or appropriate spectrum capacity in the jurisdictions discussed above or any others in which it operates or its inability to assume the related costs, could have an adverse impact on its ability to launch and provide new services and on Telefónica's ability to maintain the quality of existing services, which may adversely affect the Group’s business, financial condition, results of operations and cash flows.

 

Regulation of wholesale and retail charges

 

The European Regulation 2015/2120 on Net Neutrality and Roaming was adopted on November 25, 2015. Under this regulation, from April 30, 2016, when its implementation becomes effective, until June 15, 2017 operators may charge users roaming within the EU an additional fee on their domestic prices for roaming calls, SMS and data services, subject to certain regulated limits. In particular, the surcharges allowed during this period are 0.05 euro/minute for calls, 0.02 euro per SMS sent and 0.05 euro per megabits data (excluding VAT). During this period, the sum of the domestic retail price and any such surcharge shall not exceed 0.19 euro/minute for calls, 0.06 euro per SMS sent and 0.20 euro per megabits data. However, surcharges will not be permitted from June 15, 2017 onwards. The impact of this measure is very difficult to quantify because it will depend on the elasticity of traffic to decreases in the rates charged.

 

The decreases in wholesale mobile network termination rates (MTR) in Europe are also noteworthy. In the United Kingdom, wholesale MTRs have been reduced to 0.680 ppm (pence/minute) from May 1, 2015 (representing a 19.5% reduction compared to the previous rates). Further cuts of 26.3% and 3.1% (in real terms) will come into effect in April 1, 2016, and April 1, 2017, respectively. However, the impact of these decreases in the Group’s results will be diminished if the proposed sale of our operations in the United Kingdom to Hutchison is completed on a timely basis.

 

21

 

In Germany, on April 24, 2015, BNetzA adopted its final decisions to reduce MTRs. The new prices will gradually decrease from 0.0172 euro/minute to 0.0166 euro/minute from December 1, 2015 until the end of November 2016. The European Commission had beforehand requested that the German regulator withdraw or amend the proposal of such decision. Because BNetzA did not apply the “Pure LRIC (Long Run Incremental Cost Model)” approach recommended by the European Commission, there is a risk that the Commission will initiate infringement proceedings against Germany, and rates may be further reduced.

 

In Spain, the Spanish National Markets and Competition Commission (Comisión Nacional de los Mercados y la Competencia or CNMC) has initiated the process of reviewing the prices of mobile termination, with a final decision expected to be adopted in the second half of 2016. Additionally, in May 2015, the CNMC launched a public consultation on the analysis of the market for access and call origination on fixed networks. The CNMC proposes to maintain the obligation of Telefónica to provide a wholesale interconnection offer (RIO) and a wholesale offer of access to the fixed telephone line (WLR), both with cost-oriented prices. The final decision is expected to be issued during the first half of 2016.

 

In Latin America, it is likely that MTRs are also reduced in the short to medium term. For example, in Mexico, on October 1, 2015, the IFT adopted the MTR for 2016. The MTR was set at 0.1869 Mexican pesos per minute in consistency with the Pure LRIC model. The previous MTR was set at 0.2505 pesos per minute.

 

Telefónica has appealed this decision as well as other decisions concerning the MTR applicable from 2011 to 2015.

 

In Brazil, ANATEL has been issuing ex-ante regulations to ensure competition in the wholesale market which includes reductions of the MTR. In this regard, the “Plano Geral de Metas de Competição (PGMC), as amended by Resolution 649/2015, established that mobile termination fees are subject to successive yearly reductions from 2016 until 2019, when the definitive cost-oriented-model fees shall be in force (such Resolution has been challenged in courts without a definitive outcome).

 

In Argentina, the new legal framework "Argentina Digital" provides the new regulator the possibility to regulate the tariffs and prices of essential public services, wholesale services and those the regulator determines based on reasons of public interest, on which the law does not set parameters. As a result, there may be a negative impact, depending on how the new regulator exercises its powers. In addition, until the Secretary of Communications determines that there is effective competition for telecommunications services, the "dominant" providers in the relevant areas (which include Telefónica de Argentina) must respect the maximum tariffs established in the general tariff structure.

 

Regulation of Universal Services

 

In September 2015, as a part of the DSM Strategy, the European Commission issued a public consultation on the review of the regulatory framework for electronic communications, including certain aspects of the Universal Service obligations. Depending on the outcome of this public consultation, the European Commission could initiate a legislative process including both the potential inclusion of certain broadband speeds in its scope and a possible reduction of some of the current Universal Service obligations that are becoming obsolete. Depending on the terms that will be set forth in the new regulation, implementation at a local level could lead to higher costs for both the Universal Service provider and the operators forced to finance the Universal Service.

 

In Spain, the licenses of Telefónica de España and Telefónica Telecomunicaciones Públicas (which owns public terminals) for the provision of Universal Services will expire on December 31, 2016. As from this date, there will be a new tender for the award of the provision of the Universal Services.

 

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Regulation of fiber networks

 

On November 18, 2015 the Spanish CNMC adopted a Draft Resolution on the wholesale broadband market regulation, which foresees a geographical segmentation in competitive and non-competitive areas. This draft Resolution was approved by the European Commission on December 18, 2015. The new resulting regulation, which will apply to NGA (Next Generation Access Networks), could be approved in the first quarter of 2016 and will presumably last for at least three years. Its implementation is expected to result in an increase, of the current regulatory obligations of Telefónica in Spain, in terms of its granting of access to other operators to its fiber network and with respect to certain aspects relating specifically to the business segment.

 

Regulations on privacy

 

In Europe, a political agreement between the Council and the European Parliament was reached on December 15, 2015, on the new General Data Protection Regulation (GDPR) and the Data Protection Directive. Formal adoption of such regulation by both the Council and the Parliament is expected to take place in spring 2016. The GDPR would become effective two years thereafter, by spring 2018. Some of the critical provisions of this new Regulation will make tougher the launch of new services focused on the processing of personal data. In addition, the GDPR will introduce administrative fines of up to 4% of an undertaking’s annual global turnover for breaching the new data protection rules.

 

In October 2015, the Court of Justice of the European Union declared invalid the Decision of the European Commission of July 26, 2002, known as the “Safe Harbor Agreement”, relating to the transfer of personal data from the EU to the United States. Since November 2015, EU and US Authorities have been negotiating a new agreement that ensures a level of protection similar to that provided by the EU. Failure to reach this agreement would create difficulties in the provision of services which involve the flow of EU citizens’ personal data to the US.

 

In Brazil, it is expected, in the near future, that the Personal Data Protection Act will be adopted. This could lead to further obligations and restrictions for operators in relation to the collection of personal data and its treatment. In Peru, on May 8, 2015, the new Personal Data Protection Law came into force. The adoption of secondary legislation is still pending. In Ecuador, the Telecommunications Act (Ley Orgánica de Telecomunicaciones), adopted in February 2015, devotes a whole chapter to regulate the use of personal data.

 

Regulation of functional separation

 

The principles established in Europe's common regulatory framework, adopted in 2009 and transposed in the national legislation of each Member State in which Telefónica operates could result in greater regulatory pressure on the local competitive environment. Specifically, this framework supports the possibility of national regulators (in specific cases and under exceptional conditions) forcing operators with significant market power and vertically-integrated operators to separate their wholesale and retail businesses at a functional level. They would therefore be required to offer equal wholesale terms to third-party operators that acquire these products.

 

Regulation of network neutrality

 

As mentioned above, the European Regulation 2015/2120 on Net Neutrality and Roaming was adopted on November 25, 2015. The regulation will enter into force on April 30, 2016. The application of the Regulation could directly affect possible future business models of Telefónica and may affect the network management or differentiation of characteristics and quality of Internet access service.

 

Telefónica operates in Latin American countries where net neutrality has already been ruled, such as Chile, Colombia, Brazil, Argentina, Mexico and Peru, where Osiptel published on September 8, 2015 the Draft Regulation on Net Neutrality. In Brazil, the Secretariat of Legislative Matters of the Ministry of Justice is concluding a proposal on Net Neutrality Regulation.

 

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If changes to regulation such as those described above, or otherwise, occur in the various jurisdictions where the Telefónica Group operates, it could have a material adverse effect on its business, financial condition, results of operations and cash flows.

 

The Telefónica Group is exposed to risks in relation to compliance with anti-corruption laws and regulations and economic sanctions programs.

 

The Telefónica Group is required to comply with the laws and regulations of various jurisdictions where it conducts operations. In particular, the Group’s international operations are subject to various anti-corruption laws, including the U.S. Foreign Corrupt Practices Act of 1977 and the United Kingdom Bribery Act of 2010, and economic sanction programs, including those administered by the United Nations, the European Union and the United States, including the U.S. Treasury Department’s Office of Foreign Assets Control. The anti-corruption laws generally prohibit providing anything of value to government officials for the purposes of obtaining or retaining business or securing any improper business advantage. As part of the Telefónica Group’s business, it may deal with entities, the employees of which are considered government officials. In addition, economic sanctions programs restrict the Group’s business dealings with certain sanctioned countries, individuals and entities.

 

Although the Group has internal policies and procedures designed to ensure compliance with applicable anti-corruption laws and sanctions regulations, there can be no assurance that such policies and procedures will be sufficient or that the Group’s employees, directors, officers, partners, agents and service providers will not take actions in violation of the Group’s policies and procedures (or otherwise in violation of the relevant anti-corruption laws and sanctions regulations) for which the Group or they may be ultimately held responsible. Violations of anti-corruption laws and sanctions regulations could lead to financial penalties, exclusion from government contracts, damage to our reputation and other consequences that could have a material adverse effect on the Group’s business, results of operations and financial condition.

 

As at the date of this report, Telefónica is currently conducting an internal investigation regarding possible violations of applicable anti-corruption laws. Telefónica has been in contact with governmental authorities about this matter and intends to cooperate with those authorities as the investigation continues. It is not possible at this time to predict the scope or duration of this matter or its likely outcome.

 

Customers' perceptions of services offered by the Company may put it at a disadvantage compared to competitors' offerings.

 

Customers' perceptions of the assistance and services offered are critical to operating in highly-competitive markets. The ability to predict and respond to the changing needs and demands of customers affects the Company's competitive position relative to other technology sector companies, and its ability to extract the value generated during this process of transformation. Failure to do so adequately could have an adverse impact on the Group’s business, financial condition, results of operations and cash flows.

 

The Company may not be able to adequately foresee and respond to technological changes and sector trends.

 

In a sector characterized by rapid technological change, it is essential to be able to offer the products and services demanded by the market and consider the impacts of changes in the life cycle of technical assets, secure margins and select the right investments to make.

 

The Telefónica Group operates in markets that are highly competitive and subject to constant technological development. Therefore, as a consequence of both of these characteristics, it is subject to the effects of actions by competitors in these markets and to its ability to anticipate and adapt, in a timely manner, to constant technological changes, changes in customer preferences that are taking place in the industry, as well as economic, political and social circumstances.

 

Failure to do so adequately could have an adverse impact on the Group’s business, financial condition, results of operations and cash flows.

 

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New products and technologies arise constantly, and their development can render obsolete the products and services the Telefónica Group offers and the technology it uses. This means that Telefónica must invest in the development of new products, technology and services so it can continue to compete effectively with current or future competitors, which may result in the decrease of the Group’s profits and revenue margins. In this respect, margins from traditional voice and data business are shrinking, while new sources of revenues are deriving from mobile Internet and connectivity services that are being launched. Research and development costs amounted to 1,012 million euros in 2015, representing a decrease of 0.9% from 1,021 million euros in 2014 (959 million euros in 2013). These expenses represented 2.1%, 2.3% and 1.9% of the Group’s consolidated revenues in 2015, 2014 and 2013, respectively. These figures have been calculated using the guidelines established in the Organization for Economic Cooperation and Development (OECD) manual. One technology that telecommunications operators, including Telefónica (in Spain and Latin America), are focused on is the new FTTx-type network, which offers broadband access using optical fiber with superior services, such as Internet speed of up to 100MB or HD television services. However, substantial investment is required to deploy these networks, which entails fully or partially substituting copper loop access with optic fiber. While an increasing demand for the capabilities offered by these new networks to end users exists, the high level of the investments requires a continuous analysis of the return on investment.

 

The explosion of the digital market and entry of new players in the communications market, such as MVNOs, Internet companies or device manufacturers, may cause the loss of value of certain assets, and affect the Group’s ability to generate income. Therefore, it is necessary to update the business model, encouraging the pursuit of incomes and additional efficiencies to those followed traditionally. Failure to do so adequately could have an adverse impact on the Group’s business, financial condition, results of operations and cash flows.

 

In addition, the ability of the Telefónica Group’s IT systems (operational and backup) to respond the Company's operating requirements is a key factor to be taken into account with respect to the commercial development, customer satisfaction and business efficiency.

 

The Company depends on its suppliers.

 

The existence of critical suppliers in the supply chain, especially in areas such as network infrastructure, information systems or handsets, with a high concentration in a small number of suppliers, poses risks that may affect the Company’s operations, and may cause legal contingencies or damages to the Company's image in the event that inappropriate practices are produced by a participant in the supply chain.

 

As of December 31, 2015, the Telefónica Group depended on five handset suppliers and 13 network infrastructure suppliers, which together accounted for 80% of the awarded contracts for the year then ended. These suppliers may, among other things, extend delivery times, raise prices and limit supply due to their own stock shortfalls and business requirements.

 

If these suppliers fail to deliver products and services to the Telefónica Group on a timely basis, it could jeopardize network deployment and expansion plans, which in some cases could adversely affect the Telefónica Group’s ability to satisfy its license terms and requirements, or otherwise have an adverse impact on the Group’s business, financial condition, results of operations and cash flows.

 

Unanticipated network interruptions can lead to quality loss or the interruption of the service.

 

Unanticipated network interruptions as a result of system failures, including those due to network, hardware or software, stealing of infrastructure elements or cyber-attacks, which affect the quality of or cause an interruption in the Telefónica Group’s service, could lead to customer dissatisfaction, reduced revenues and traffic, costly repairs, penalties or other measures imposed by regulatory authorities and could harm the Telefónica Group’s image and reputation.

 

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Telecommunications companies worldwide face increasing cybersecurity threats as businesses become increasingly dependent on telecommunications and computer networks and adopt cloud computing technologies. Cybersecurity threats include gaining unauthorized access to our systems or inserting computer viruses or malicious software in our systems to misappropriate consumer data and other sensitive information, corrupt our data or disrupt our operations. Unauthorized access may also be gained through traditional means such as the theft of laptop computers, portable data devices and mobile phones and intelligence gathering on employees with access.

 

Telefónica attempts to mitigate these risks through a number of measures, including backup systems and protective systems such as firewalls, virus scanners and other physical and logical security. However, these measures are not always effective. Although the Telefónica Group has insurance policies to cover these types of incidents, and the claims and loss in revenue caused by service interruptions to date have been covered by these policies, these policies may not be sufficient to cover all possible monetary losses.

 

The telecommunications industry may be affected by the possible effects that electromagnetic fields, emitted by mobile devices and base stations, may have on human health.

 

In some countries, there is a concern regarding potential effects of electromagnetic fields, emitted by mobile devices and base stations, on human health. This public concern has caused certain governments and administrations to take measures that have hindered the deployment of the infrastructures necessary to ensure quality of service, and affected the deployment criteria of new networks and digital services such as smart meters development.

 

There is a consensus between certain expert groups and public health agencies, including the World Health Organization (WHO), that states that currently there are no established risks associated with exposure to low frequency signals in mobile communications. However, the scientific community is still investigating this issue especially with respect to mobile devices. Exposure limits for radio frequency suggested in the guidelines of the Protection of Non-Ionizing Radiation Protection Committee (ICNIRP) have been internationally recognized. The mobile industry has adopted these exposure limits and works to request authorities worldwide to adopt these standards.

 

Worries about radio frequency emissions may discourage the use of mobile devices and new digital services, which could cause the public authorities to implement measures restricting where transmitters and cell sites can be located, how they operate, the use of mobile telephones and the massive deployment of smart meters and other products using mobile technology. This could lead to the Company being unable to expand or improve its mobile network.

 

The adoption of new measures by governments or administrations or other regulatory interventions in this respect, and any future assessment on the adverse impact of electromagnetic fields on health, may negatively affect the business, financial conditions, results of operations and cash flows of the Telefónica Group.

 

Possible regulatory, business, economic or political changes could lead to asset impairment.

 

The Telefónica Group reviews on an annual basis, or more frequently when the circumstances require it, the value of assets and cash-generating units, to assess whether their carrying values can be supported by the future expected cash flows, including, in some cases synergies allowed for in acquisition costs. Potential changes in the regulatory, business, economic or political environment may result in the need to introduce changes to estimates made and to recognize impairment in goodwill, intangible assets or fixed assets. Although the recognition of impairments of property, plant and equipment, intangible assets and financial assets results in a non-cash charge on the income statement, it could adversely affect the results of the Telefónica Group’s operations. In this respect, the Telefónica Group has experienced impairments on certain of its investments, affecting its results of operations in the year in which they were experienced. For example, with respect to the investment in Telco, S.p.A. (Telco), value adjustments were made in 2014 with a negative impact of 464 million euros.

 

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The Telefónica Group’s networks carry and store large volumes of confidential, personal and corporate data, and its Internet access and hosting services may lead to claims for illegal or illicit use of the Internet.

 

The Telefónica Group’s networks carry and store large volumes of confidential, personal and business data, through both voice and data traffic. The Telefónica Group stores increasing quantities and types of customer data in both business and consumer segments. Despite its best efforts to prevent it, the Telefónica Group may be found liable for any loss, transfer, or inappropriate modification of the customer data or general public data stored on its servers or transmitted through its networks, any of which could involve many people and have an impact on the Group’s reputation, or lead to legal claims and liabilities that are difficult to measure in advance.

 

In addition, the Telefónica Group’s Internet access and hosting servers could lead to claims for illegal or unlawful use of the Internet. Telefónica, like other telecommunications providers, may be held liable for any loss, transfer or inappropriate modification of the customer data stored on its servers or carried by its networks.

 

In most countries in which the Telefónica Group operates, the provision of its Internet access and hosting services (including the operation of websites with shelf-generated content) are regulated under a limited liability regime applicable to the content that it makes available to the public as a technical service provider, particularly content protected by copyright or similar laws. However, regulatory changes have been introduced imposing additional obligations on access providers (such as blocking access to a website) as part of the struggle against some illegal or illicit uses of the Internet, notably in Europe.

 

Any of the foregoing could have an adverse impact on the business, financial position, results of operations and cash flows of the Group.

 

Telefónica and Telefónica Group companies are party to lawsuits, tax claims and other legal proceedings.

 

Telefónica and Telefónica Group companies are party to lawsuits, tax claims and other legal proceedings in the ordinary course of their businesses, the financial outcome of which is unpredictable. An adverse outcome or settlement in these or other proceedings could result in significant costs and may have a material adverse effect on the Group’s business, financial condition, results of operations, reputation and cash flows. In particular, the Telefónica Group is party to certain judicial tax proceedings in Peru concerning the clearance of certain previous years' income tax, in respect of which a contentious-administrative appeal is currently pending, and to certain tax proceedings in Brazil, primarily relating to the CIMS (a Brazilian tax on telecommunication services). Further details on these matters are provided in Notes 17 and 21 of the Consolidated Financial Statements.

 

Item 4. Information on the Company

 

A. History and Development of the Company

 

Overview

 

Telefónica, S.A., is a corporation duly organized and existing under the laws of the Kingdom of Spain, incorporated on April 19, 1924. We are:

 

·a diversified telecommunications group which provides a comprehensive range of services through one of the world’s largest and most modern telecommunications networks;

 

·focused on providing telecommunications services; and

 

·present principally in Europe and Latin America.

 

The following significant events occurred in 2015:

 

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·On March 24, 2015, Telefónica signed an agreement with Hutchison for the acquisition by the latter of Telefónica's operations in the UK (O2 UK) for a price (firm value) of 10,250 million pounds sterling in cash (approximately 14,000 million euros at the exchange rate as of the date of the agreement), composed of (i) an initial amount of 9,250 million pounds sterling (approximately 12,640 million euros as of the date of the agreement) which would be paid at closing and (ii) an additional deferred payment of 1,000 million pounds sterling (approximately 1,360 million euros as of the date of the agreement) to be paid once the cumulative cash flow of the combined company in the United Kingdom has reached an agreed threshold. According to the sale agreement, the price will be adjusted by the debt, the working capital and other defined circumstances that may ultimately arise upon closing of the O2 UK divestiture.

 

Completion of the transaction is subject to, among other conditions, the approval of the European Commission and the obtainment of waivers to some contractual provisions affected by the sale, including those related to network alliances, as well as change of control provisions under certain contractual arrangements with third parties. As of the date of this Annual Report, such conditions had not been met. The European Commission authorization process is ongoing.

 

These conditions must be satisfied by no later than June 30, 2016 however, this date may be extended until September 30, 2016 in specified circumstances.

 

·On March 25, 2015, pursuant to the authorization granted by the General Shareholders’ Meeting held on May 18, 2011, it was agreed to increase the share capital of Telefónica by a nominal amount of 281,213,184 euros, by means of issuing and circulating 281,213,184 new ordinary shares, with a nominal value of one (1) euro each, of the same class and series as those already existing, duly represented by book entries (the “New Shares” and the “Share Capital Increase”, respectively).

 

The subscription price of the New Shares was 10.84 euros per share, 1 euro corresponding to the nominal value and 9.84 euros to the issue premium, with the Share Capital Increase amounting to 3,048,350,914.56 euros.

 

The shareholders of Telefónica held pre-emptive subscription rights over the New Shares.

 

On April 17, 2015, Telefónica declared that the share capital increase had been fully subscribed and granted the public deed evidencing the Share Capital Increase, which was registered with the Commercial Registry of Madrid on April 20, 2015.

 

·On March 25, 2015, the Brazilian antitrust authority, Conselho Administrativo de Defensa Economica (“CADE”), approved both the GVT Acquisition (as defined below) and the demerger of Telco, S.p.A. (described below), subject to restrictions similar to those imposed by ANATEL. These restrictions required, among other things, that Telefônica Brasil, S.A. (“Telefônica Brasil”) commits to provide certain service coverage in certain geographical areas and cities in Brazil, to maintain certain products, contract requirements and services and to maintain a minimum quality with respect to certain other services. Moreover, as part of this authorization, Telefónica undertook, among other obligations, to not exercise its voting rights and ultimately to divest its entire stock participation in Telecom Italia, S.p.A. In addition, Telefónica and Telefônica Brasil have undertaken to comply with certain other restrictions agreed between CADE and the Vivendi, S.A. group.

 

·On April 30, 2015, after obtaining the relevant regulatory authorization, the acquisition by Telefónica de Contenidos, S.A.U. of 56% of the capital stock of Distribuidora de Televisión Digital, S.A. (“DTS”) owned by Promotora de Informaciones, S.A. (PRISA) was completed.

 

·On May 12, 2015, Telefónica paid a dividend of 0.40 euros per share in cash corresponding to the second tranche of the 2014 dividend.

 

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·On May 28, 2015 after obtaining the relevant regulatory authorizations, the Extraordinary General Shareholders’ Meeting of Telefônica Brasil held on that date approved the acquisition of Global Village Telecom, S.A. and its holding company, GVT Participações, S.A. (collectively “GVT”) from Vivendi, S.A. (the “GVT Acquisition”) and the issuance of shares of Telefônica Brasil to Vivendi, S.A. as partial payment of the purchase price of the shares of GVT. Consequently, the closing of such acquisition (for an amount of 4,663 million euros and the delivery of 12% of the share capital of the new Telefônica Brasil resulting from the integration) was completed.

 

·On June 12, 2015, Telefónica’s Annual General Shareholders’ Meeting took place on second call with the attendance of holders, present or represented, of 58.40% of the share capital. In this meeting, all the resolutions submitted by the Board of Directors for deliberation and approval were approved by the majority of votes.

 

·On June 17, 2015, having obtained all the required anti-trust and telecommunications approvals (including in Brazil and Argentina), Telco, S.p.A. carried out its demerger, which became effective on June 18, 2015. As a consequence of the demerger, the Telecom Italia, S.p.A. (“Telecom Italia”) ordinary shares held by Telco, S.p.A. – which represented 22.3% of the company’s ordinary share capital - were allocated as follows: 14.72% of Telecom Italia’s share capital was allocated to Telco TE, S.p.A., a newly created company owned by Telefónica, S.A.; 4.31% to a newly created company owned by the Generali group; and 1.64% to each of the newly created companies owned by Intesa Sanpaolo and Mediobanca respectively.

 

Moreover, the shareholders’ agreement in force between the shareholders in Telco, S.p.A. ceased to have effect on June 18, 2015.

 

·On June 24, 2015, in compliance with the undertakings assumed in the agreement entered into on September 19, 2014 for the GVT Acquisition, Telefónica, through its 100%-subsidiary Telco TE S.p.A., delivered 1,110 million ordinary shares of Telecom Italia (representing 8.2% of its ordinary shares) to Vivendi, S.A. and received from Vivendi, S.A. all the ordinary shares and part of the preferred shares of Telefônica Brasil that Vivendi S.A. had received as consideration for the sale of GVT, which together represented 4.5% of the total share capital of Telefônica Brasil.

 

Moreover, Telefónica (through its 100% subsidiary Telco TE S.p.A.), entered into a purchase agreement with a financing institution for the sale of 872 million ordinary shares of Telecom Italia, representing 6.5% of the ordinary shares of this company, for an amount of approximately 1,025 million euros. Consequently, Telefónica completed the divestment of its entire stake in Telecom Italia, in accordance with the regulatory and competition commitments assumed.

 

Likewise, Telefónica has arranged several hedging instruments which will allow Telefónica to repurchase the shares of Telecom Italia that are necessary to meet its exchange obligations under the mandatory exchangeable bonds for shares of Telecom Italia, issued by Telefónica, S.A. in July 2014.

 

·On July 10, 2015, DTS reached an agreement, for an amount of 600 million euros, with the Spanish Professional Soccer League (“LFP”) for the exploitation of audiovisual content rights of pay per view soccer events in the domestic market, for the 2015/2016 season.

 

·On July 27, 2015, the Company announced that, pursuant to the resolution adopted by the Annual General Shareholders’ Meeting of Telefónica held on June 12, 2015 which approved a share capital reduction, through the cancellation of own shares, and following the execution agreement adopted by the Board of Directors of the Company, the public deed of this share capital reduction was registered in the Madrid Mercantile Registry (Registro Mercantil).

 

As a result, 74,076,263 shares of Telefónica were cancelled, reducing the company’s share capital in the same amount. The Company’s share capital after the reduction, at such date, stood at 4,864,341,251 euros made up of an equal number of ordinary shares, all of a single series and with a nominal value of one (1) euro per share.

 

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·On July 29, 2015, Telefónica entered into an agreement with Vivendi, S.A. pursuant to which Telefónica committed to deliver 46.0 million of its treasury shares, representing 0.95% of its share capital, to Vivendi, S.A. in exchange for 58.4 million preferred shares of Telefônica Brasil (which had been received by Vivendi, S.A. as partial consideration for GVT in the GVT Acquisition), representing 3.5% of the share capital of Telefônica Brasil, from Vivendi, S.A.

 

The execution of this agreement was approved by the CADE.

 

·On August 4, 2015, in relation to the long-term incentive plan consisting in the granting of shares of Telefónica –known as the Performance & Investment Plan (“PIP”)-, the Company announced the number of shares to be delivered under such Plan’s Second Phase (2012-2015) to each of the beneficiaries of the Plan in their positions as Executive Directors or Executives of the Company, and which amounts to 77% of the shares they were assigned originally.

 

·On September 30, 2015, the Executive Commission of Telefónica’s Board of Directors agreed that the corporate resolutions required to carry out the free-of-charge capital increase related to the scrip dividend shareholder compensation scheme (“Telefónica’s Flexible Dividend”) approved by the Annual General Shareholder’s Meeting held on June 12, 2015, should be adopted on the Executive Commission meeting scheduled for November 13, 2015. On November 13, 2014, the Executive Commission agreed the implementation of the aforementioned capital increase.

 

·On October 28, 2015, following a report of the Nominating, Compensation and Corporate Governance Committee, the Board of Directors of Telefónica approved, with regard to the second cycle (2015-2018) of the long-term incentive plan (which consists in the granting of shares of Telefónica to Telefónica Group Executives (including Executive Directors of Telefónica)) as approved by the Annual General Shareholders’ Meeting held on May 30, 2014, the amount of theoretical shares to be assigned to the other Executives, and the maximum possible number of shares to be received by them, in the event of fulfilment of the co-investment requirement set forth in the plan, and of the maximum achievement of the Total Shareholder Return (TSR) established in such plan.

 

·On December 11, 2015, Telefónica announced that, on December 2, 2015, the free-of-charge allotment rights trading period for the free-of-charge capital increase related to Telefónica’s Flexible Dividend had ended. The holders of 20.01% of the free-of-charge allotment rights accepted the purchase commitment assumed by Telefónica. The gross amount paid by Telefónica for these rights amounted to 335,775,673.59 euros. The Company waived the rights thus acquired, which were amortized.

 

The holders of 79.99% of the free-of-charge allotment rights were entitled, therefore, to receive new shares of Telefónica. Nevertheless, Telefónica waived the free-of-charge allotment rights that corresponded to its treasury shares at the record date (November 17, 2015). Therefore, the final number of ordinary shares with a nominal value of one (1) euro issued in the capital increase was 110,857,946 (2.3% of Telefónica’s share capital as of that date), totaling 110,857,946 euros. As a result, the share capital of Telefónica after the capital increase, as registered on December 11, 2015 with the Commercial Registry of Madrid, was 4,975,199,197 euros (4,975,199,197 shares).

 

The new shares were admitted to listing on the Madrid, Barcelona, Bilbao and Valencia stock exchanges (the “Spanish Stock Exchanges”) on December 15, 2015 and the ordinary trading of the new shares in Spain begun on December 16, 2015. The admission to listing on the stock exchanges of London, Buenos Aires, New York and Lima was also requested.

 

Business areas

 

The organizational structure approved by the Board of Directors of Telefónica, S.A. on February 26, 2014 was made up of the following segments: Telefónica Spain, Telefónica Brazil, Telefónica Germany, Telefónica United Kingdom and Telefónica Hispanoamérica (formed by the Group’s operators in Argentina, Chile, Peru, Colombia, Mexico, Venezuela and Central America, Ecuador and Uruguay).

 

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Following our signing of an agreement on March 24, 2015 with Hutchison for the sale and purchase of the entire issued share capital of Telefónica Europe plc, and the reclassification of the results attributable to our operations in the United Kingdom as discontinued operations, our segments were revised as follows: Telefónica Spain, Telefónica Brazil, Telefónica Germany and Telefónica Hispanoamérica (comprised of our consolidated subsidiaries in Argentina, Chile, Peru, Colombia, Mexico, Venezuela and Central America, Ecuador and Uruguay). The companies that are not specifically included in these new segments are part of “Other companies and eliminations”.

 

As a result, 2014 and 2013 financial information by operating segment presented in this report has been revised to reflect the elimination of the Telefónica United Kingdom segment.

 

Our segments include the information relating to wireline, wireless, cable, data, internet and television businesses and other digital services in accordance with each location. “Other companies and eliminations” includes the companies belonging to cross-segment areas as well as other Group companies and eliminations in the consolidation process.

 

Segment reporting takes into account the impact of the purchase price allocation to assets acquired and the liabilities assumed from the companies included in each segment. The assets and liabilities presented in each segment are those managed by the heads of each segment, irrespective of their legal structure.

 

The Group manages borrowing activities and taxes centrally. Therefore, it does not disclose the related assets, liabilities, revenue and expenses by reportable segments. In addition, revenue and expenses arising from intra-group invoicing for the use of the trademark and management services have been eliminated from the operating results of each Group segment. These adjustments have no impact on the Group’s consolidated results.

 

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The following chart shows the organizational structure of the principal subsidiaries of the Telefónica Group at December 31, 2015, including their jurisdictions of incorporation and our ownership interest. For further detail, see Exhibit 8.1 to this Annual Report.

 

 

(1) Ownership in Telefónica Móviles España, S.A.U. is held directly by Telefónica, S.A.

(2) 94.85% in terms of voting rights.

(3) Ownership in Telefónica International Wholesale Services, S.L. is held by Telefónica, S.A. (92.51%) and by Telefónica Datacorp, S.A.U. (7.49%).

(4) Companies held indirectly.

(5) Ownership in this companies is held directly by Telefónica, S.A.

(6) In process of divestment. The completion of the sale is subject to various conditions.

 

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Telefónica, S.A., the parent company of the Telefónica Group, also operates as a holding company with the following objectives:

 

·coordinate the Group’s activities;

 

·allocate resources efficiently among the Group;

 

·provide managerial guidelines for the Group;

 

·manage the Group’s portfolio of businesses;

 

·foster cohesion within the Group; and

 

·foster synergies among the Group’s subsidiaries.

 

Our principal executive offices are located at Distrito Telefónica, Ronda de la Comunicación, s/n, 28050 Madrid, Spain, and our registered offices are located at Gran Vía, 28, 28013 Madrid, Spain. Our telephone number is +34 900 111 004.

 

Capital Expenditures and Divestitures

 

Our principal capital expenditures during the three years ended December 31, 2015, consisted of additions to property, plant and equipment and additions to intangible assets, including spectrum. In 2015, 2014 and 2013, we made capital expenditures of 9,578 million euros, 8,681 million euros and 8,005 million euros, respectively.

 

Year ended December 31, 2015

 

Capital expenditures in 2015 increased 10.3% compared to 2014. Capital expenditures in 2015 included the cost of spectrum mainly in Germany, Argentina, Ecuador and Spain, amounting to 1,585 million euros.

 

Investment by Telefónica Spain in 2015 amounted to 1,827 million euros and was primarily focused on fiber networks, 3G, 4G and fiber as well as improvement of the quality of broad-band services and Pay TV. Investment by Telefónica Germany in 2015 amounted to 2,230 million euros, focusing on its LTE roll-out strategy. Investment by Telefónica Brazil in 2015 amounted to 2,105 million euros, and related mainly to the continuation of the 3G and LTE roll-outs and the expansion of the roll-out of fiber optic. Investment by Telefónica Hispanoamérica in 2015 amounted to 3,060 million euros and was mainly focused on LTE roll-outs, densification of the 3G network, the continuation of ultra-broad band (UBB) roll-out for fixed broadband by speed upgrades and network digitalization as well as improving the Pay TV network.

  

Year ended December 31, 2014

 

Capital expenditures in 2014 increased 8.4% compared to 2013. Capital expenditures in 2014 included the cost of spectrum mainly in Brazil, Argentina, Venezuela, Colombia and Panama, amounting to 1,294 million euros.

 

Investment by Telefónica Spain in 2014 amounted to 1,732 million euros. Fiber optic was rolled out rapidly, and by year-end 2014 Telefónica Spain had created more than 10 million “fiber-to-the-house” (“FTTH”) facilities in Spain, increasing its investments in LTE networks. Investment by Telefónica Germany in 2014 amounted to 849 million euros, focusing on its LTE roll-out strategy, securing 61% coverage in 2014. Investment by Telefónica Brazil in 2014 amounted to 2,933 million euros, mainly due to the fact that the mobile segment featured a continuation of LTE roll-outs in 2014, improving network capacity, systems and applications. Investment in the fixed-line network was used to expand roll-out of fiber optic, larger volumes of IPTV customers and corporate projects. Investment by Telefónica Hispanoamérica in 2014 amounted to 2,842 million euros mainly focused on LTE roll-outs in practically all operations in the region. Investment was also allocated to the densification of the 3G network, optimization of fixed-mobile convergence systems, the continuation of ultra-broad band (UBB) roll-out for fixed broadband by speed upgrades and network digitalization, television and digital initiatives.

 

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Year ended December 31, 2013

 

Capital expenditures in 2013 declined 8.1% compared to 2012. Capital expenditures in 2013 included the cost of spectrum mainly in Brazil, Peru, Colombia and Spain, amounting to 505 million euros.

 

Investment by Telefónica Spain in 2013 amounted to 1,529 million euros, reflecting a high level of investment efficiency, as a result of the improvements in quality indexes, the reduction of complaints and enhanced efficiency in IT. At the end of the year, there was an acceleration in the rollout of fiber optic, and a boost of LTE deployment. Investment by Telefónica Germany amounted to 666 million euros, focusing its efforts on network quality while accelerating investment in LTE network deployment. Investment by Telefónica Brazil amounted to 2,127 million euros mainly due to the expansion and improvement of the mobile networks, both 3G and 4G, as well as the rollout of its fiber network. Investment by Telefónica Hispanoamérica in 2013 amounted to 3,118 million euros, mainly in the mobile business and centered primarily on overlay projects and expansion of the coverage, quality and density of 3G networks, as well as the minimum roll-out of LTE (Colombia and Chile), the development of platforms to underpin new VASs, and the optimization of infrastructure and systems developments focusing on self-management. In the fixed line business, funds continued to be earmarked for rolling out UBB through speed upgrades in ADSL, fiber (FTTx) and VDSL in Argentina and Chile, as well as the installation of fixed-mobile convergence systems (Colombia, Chile and Peru).

 

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Financial Investments and Divestitures

 

Our principal financial investment in 2015 was the acquisition of GVT, which was completed on May 28, 2015, through our subsidiary Telefônica Brasil for a total purchase price of 4,663 million euros (through payment in cash and debt assumption) as well as the delivery of shares representing 12% of the share capital of Telefônica Brasil (following its integration with GVT) and the acquisition on April 30, 2015 of 56% of DTS for an initial consideration of 707 million euros, subject to the finalization of the working capital and net debt adjustments. Our principal divesture in 2015 was the sale of our stake in Telecom Italia (we disposed of 1,110 million ordinary shares in Telecom Italia in exchange for 4.5% of the share capital in Telefônica Brasil and 872 million ordinary shares in Telecom Italia in exchange for approximately 1,025 million euros). In addition, on March 24, 2015, Telefónica and Hutchison signed an agreement for the acquisition by the latter of Telefónica’s operations in the UK. Completion of the transaction is subject to, among other conditions, the approval of the European Commission and the obtainment of waivers to some contractual provisions affected by the sale, including those related to network alliances, as well as change of control provisions under certain contractual arrangements with third parties.

 

Our principal financial investment in 2014 was the acquisition of E-Plus, which was completed on October 1, 2014, through our subsidiary Telefónica Deutschland for a total purchase price of 7,463 million euros. Our principal divestures in 2014 were the completion of the sales of Telefónica Czech Republic, a.s. on January 28, 2014, Telefónica Ireland, Ltd on July 2, 2014, and the sale of shares representing approximately 2.5% of the share capital of China Unicom (Hong Kong) Limited (“China Unicom”) for approximately 687 million euros.

 

There were no significant financial investments in 2013. Our principal divestures in 2013 were the sale of 40.00% of our investment, through Telefónica Centroamérica de Inversiones, S.L., in Guatemala, Salvador, Nicaragua and Panama for 500 million U.S. dollars (equivalent to 377 million euros on the date of execution of the sale) with no impact in the results of the Group given our continued control over the company after the transaction; the agreement to sell 65.9% of our investment in Telefónica Czech Republic, a.s. for 306 Czech crown per share (approximately 2,467 million euros at the date of the agreement), resulting in a capital loss of 176 million euros and the agreement to sell our stake in Telefónica Ireland, Ltd for 850 million euros.

 

Public Takeover Offers

 

Not applicable

 

Recent Developments

 

The principal events that have occurred since December 31, 2015, are set forth below:

 

·In January 2016, Distribuidora de Television Digital, S.A.U. (DTS) and Mediaproducción, S.L.U. (Mediapro) have reached an agreement for the broadcasting of the thematic pay TV channel called “beIN Sports LaLiga” with contents of the Spanish National League Championship First Division and the Copa del S.M. el Rey, corresponding to the three seasons 2016/17, 2017/18 and 2018/19.

 

Also, DTS and Mediapro reached an agreement for the broadcasting of the thematic pay TV channel called “beIN Sports” containing, among others, matches of the “UEFA Champions League” and “UEFA Europa League” competitions corresponding to the three seasons 2015/16 (from January 12, 2016), 2016/17 and 2017/18.

 

The total value of the agreements relating to those channels amounts to a maximum of 2,400 million euros.

 

With this agreement, mOVISTAR+ fulfills its commitment to provide to its entire customer base a comprehensive offer with all the best sports contents.

 

·On February 10, 2016, Telefónica announced the creation of Telxius, a company which will bring together certain infrastructure assets of the Group, which will enable the management of the Telefónica Group’s infrastructure on a global scale with a more specialized and focused approach, with the aim of increasing the services provided to other operators, improving the return on capital

 

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invested and allowing Telxius to participate more actively in the growth opportunities that exist in the industry, including the possibility of incorporating third party assets.

 

For information related to our significant financing transactions completed in 2015 and through the date of this Annual Report, see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Anticipated Sources of Liquidity”.

 

B. Business Overview

 

Telefónica is one of the world’s leading communications services providers, offering mobile and fixed communication services with a strategy focused on the possibilities that the new digital world offers and becoming one of its principal leaders.

 

Telefónica’s aim is to reinforce its position as an active player in the digital world by seizing all the opportunities afforded by its global scale and its industrial and strategic alliances.

 

Telefónica’s current organizational structure is composed of the following segments: Telefónica Spain, Telefónica Brazil, Telefónica Germany and Telefónica Hispanoamérica (comprised of our consolidated subsidiaries in Argentina, Chile, Peru, Colombia, Mexico, Venezuela and Central America, Ecuador and Uruguay). These segments include the information related to wireline, wireless, DSL, TV, and other digital services provided in each country or countries. Any services not specifically included in these new segments are part of “Other companies and eliminations”.

 

On March 24, 2015, Telefónica signed an agreement with Hutchison on the sale of Telefónica’s operations in the United Kingdom. Therefore, Telefónica’s operations in the United Kingdom are reported as discontinued operations, and its assets and liabilities are classified as “held for sale” in compliance with IFRS. 2014 and 2013 results have been retrospectively revised and are reported following these same criteria.

 

The Telefónica Group’s strategy aims to:

 

·Enhance value through:

 

Offering excellent connectivity

 

Providing a bundled offer with video and digital services

 

Providing increased customer value and customer experience

 

·With the following enablers:

 

End-to-end Digitalization: reducing our legacy investments to increase virtualization, reduce physical servers, data centers and applications

 

Big Data and Innovation to add value to our customers

 

Continued focus on capital allocation in our legacy investments and simplification processes

 

In addition, Telefónica maintains an industrial alliance with China Unicom. Furthermore, in order to potentially unlock the value of Telefónica’s scale, the “Partners” program was created in 2011, and now includes five operators (Bouygues, Etisalat, Sunrise, Megafon and O2 Czech Republic). The Telefónica Partners Program is an initiative that makes available to selected operators and under commercial terms a host of services that allows partners to leverage on Telefónica’s scale and to cooperate on key business topics (digital services, roaming, services to multinationals, procurement that allows us to deliver our financial commitments, devices, etc.).

 

Moreover, Telefónica has increased its presence in key markets. In 2014 Telefónica acquired E-Plus (through Telefónica Germany) and in 2015 Telefónica acquired DTS (through Telefónica Spain) and GVT (through Telefónica Brazil).

 

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On February 10, 2016, Telefónica announced the creation of “Telxius,” a company which will bring together certain infrastructure assets of the Group in several countries, which will enable the management of the Telefónica Group’s infrastructure on a global scale with a more specialized and focused approach, with the aim of increasing the services provided to other operators, improving the return on capital invested and allowing Telxius to participate more actively in the growth opportunities that exist in the industry, including the possibility of incorporating third party assets.

 

Financial Results

 

2015 highlights

 

In 2015 Telefónica has taken further steps aimed at achieving profitable and sustainable long-term growth and has also improved its competitive position in key markets. Commercial activity in fiber, smartphones, LTE and Pay-TV has intensified, leading to revenue growth acceleration (+8.7% year-on-year in reported terms).

 

In 2015, revenues totaled 47,219 million euros, 8.7% higher than 2014.

 

OIBDA totaled 11,414 million euros in 2015, down 17.2% in reported terms, and was adversely affected by a restructuring costs provision of 3,212 million euros in 2015. In organic terms (which term and calculation is explained further below), OIBDA was up 3.6%, due mainly to the positive evolution of Telefónica Germany (+20.9% year-on-year), reflecting increased synergies, as well as the positive results from Telefónica Hispanoamérica (+7.2% year-on-year).

 

The evolution of foreign exchange rates impacted negatively in the 2015 consolidated financial results, in particular the depreciation of several Latin American currencies against the euro, such as the Brazilian real and to a lesser extent the implicit depreciation of the Venezuelan bolívar.

 

In the 2015 consolidated financial statements, the Company used the exchange rate of the Venezuelan bolívar set at the denominated SIMADI, which at December 31, 2015 was set at 199 Venezuelan bolívar fuerte per U.S. dollar, for the purpose of translating the transactions, cash flows and balances related to the investments in Venezuela. In the 2014 consolidated financial statements, Telefónica used the exchange rate of the Venezuelan bolívar set at the denominated SICAD II (set at 49.988 Venezuelan bolívar fuerte per U.S. dollar).

 

Telefónica’s total accesses totaled 322.3 million as of December 31, 2015. Telefónica United Kingdom customers have been excluded from our 2014 and 2015 customer base, since we have classified Telefónica United Kingdom as a disposal group held for sale and its operations have been classified as discontinued operations. Group accesses increased 1.9% year-on-year, as a result mainly of the additional accesses gained following the purchase of GVT by Telefónica Brazil and DTS in Spain and the growth in accesses in Telefónica Hispanoamérica and Telefónica Germany. If we consider the accesses from GVT and DTS as of December 31, 2014 to make both years comparable, accesses would have decreased by 1.1% affected, in part, by prepaid disconnections in Telefónica Brazil (which resulted in the disconnection of 11.5 million accesses in 2015 and 1.6 million accesses in 2014). In 2015, commercial activity increased based on high value customers, resulting in a sustained growth of the contract mobile segment (smartphones and LTE), fiber and Pay TV. Accesses in Telefónica Hispanoamérica (41.8% of the Group’s total as of December 31, 2015) increased by 2.3% year-on-year, while accesses in Telefónica Germany (15.0% of the Group’s total) increased by 1.5% year-on-year.

 

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The below table shows the evolution of accesses over the past two years:

 

ACCESSES    
Thousands of accesses 2014    2015    %Reported
YoY
%Organic
YoY(1)
Fixed telephony accesses (2)          36,602.0             39,487.7    7.9% (3.1%)
Internet and data accesses           18,132.5             21,344.3    17.7% 1.3%
Broadband (3)          17,649.3             20,950.3    18.7% 1.7%
Fiber (4)             1,755.0               6,100.3    n.m. 29.9%
Mobile accesses        249,978.9           247,085.1    (1.2%) (1.2%)
Prepay        164,959.2           157,283.7    (4.7%) (4.7%)
Contract          85,019.6             89,801.4    5.6% 5.6%
M2M             7,595.5               9,142.4    20.4% 20.4%
Pay TV (5)             5,087.2                8,271.6    62.6% 12.0%
Unbundled loops            4,087.3                3,647.3    (10.8%) (10.8%)
Shared ULL                  94.1                      77.9    (17.2%) (17.2%)
Full ULL             3,993.3                3,569.4    (10.6%) (10.6%)
Wholesale ADSL                750.1                   868.2    15.7% 15.7%
Other             1,684.1                1,547.3    (8.1%) (8.1%)
Final Clients Accesses      309,800.5         316,188.7    2.1% (0.9%)
Wholesale Accesses           6,521.6              6,062.8    (7.0%) (7.0%)
Total Accesses      316,322.1         322,251.5    1.9% (1.1%)
Notes:  
- T. Ireland customers are excluded since third quarter 2014. Accesses include E-Plus customers since fourth quarter 2014 and GVT and DTS customers since May 1, 2015.
- O2 UK customers are excluded from accesses since first quarter 2014 due to the discontinuation of operations in the UK.
(1) In order to calculate organic changes, we have added the accesses of DTS and GVT as of December 31, 2014 to our accesses as of such date.
(2) Includes “fixed wireless” and Voice over IP accesses.
(3) Includes DSL, satellite, optic fiber, cable modem and broadband circuits.  
(4) Includes 3.25 million GVT fiber (FTTx) customers since May 1, 2015.  

(5) Includes 1.1 million DTS customers since May 1, 2015.

 

 

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The below table shows the contribution of each item for which we have adjusted to our reported growth. With respect to each line item, the contribution to reported growth of such line item, expressed in percentage points, is the result of dividing the impact of each item for which we have adjusted by the amount of such line item, on a reported basis, for the prior year.

 

         
TELEFÓNICA
2015
%Reported
YoY
%Organic
YoY (1)
DTS GVT
Fixed telephony accesses 7.9% (3.1%) 0.0 p.p. 11.3 p.p.
Internet and data accesses 17.7% 1.3% 0.0 p.p. 16.2 p.p.
Broadband 18.7% 1.7% 0.0 p.p. 16.7 p.p.
Fiber n.m. 29.9% 0.0 p.p. 167.6 p.p.
Pay TV 62.6% 12.0% 28.3 p.p. 16.9 p.p.
Final Clients Accesses 2.1% (0.9%) 0.5 p.p. 2.6 p.p.
Total Accesses 1.9% (1.1%) 0.5 p.p. 2.5 p.p.
(1) In order to calculate organic changes, we have added the accesses of DTS and GVT as of December 31, 2014 to our accesses as of such date.  

 

The table below shows the evolution of accesses by segment:

 

  YoY variation   % Over Total Accesses
Accesses 2015 %Reported
YoY
%Organic
YoY (1)
  2014 2015
Spain 1.9% (1.6%)   13.0% 13.0%
Germany 1.5% --   15.1% 15.0%
Brazil 1.4% (6.4%)   30.2% 30.1%
Hispanoamérica 2.3% --   41.6% 41.8%
Others 16.6% --   0.1% 0.1%
(1) In order to calculate organic changes, we have added the accesses of DTS and GVT as of December 31, 2014 to our accesses as of such date.

 

The Group’s strategy is based on capturing growth in its markets, especially on attracting high-value customers.

 

Mobile accesses totaled 247.1 million at December 31, 2015, down 1.2% compared to December 31, 2014, affected mainly by the decrease in prepay accesses due to the disconnection of prepay accesses in Brazil (11.5 million accesses in 2015 and 1.6 million accesses in 2014). Contract accesses, however, were up 5.6% year-on-year, continuing to increase their weight over total mobile accesses up to 36.3% (+2.3 p.p. year-on-year).

 

Smartphone accesses maintained a strong growth rate (up 42.9% year-on-year), totaling 112.9 million accesses and reaching a penetration rate over total accesses of 48.5% (+14.8 p.p. year-on-year), reflecting the Company’s strategic focus on the growth of its data services.

 

Fixed broadband accesses stood at 21.0 million at December 31, 2015, up 18.7% year-on-year (of which 16.7 p.p. was due to the inclusion of accesses from GVT in the 2015). Fiber accesses stood at 6.1 million at December 31, 2015.

 

TV accesses totaled 8.3 million at December 31, 2015, up 63% year-on-year (of which 28 p.p. was due to the inclusion of accesses from DTS and 17 p.p. was due to the inclusion of accesses from GVT in the 2015 access base).

 

Telefónica’s customer base includes the consumer and business segments, and therefore is not affected by customer concentration risk.

 

The table below shows the evolution of our estimated access market share for mobile and DSL for the past two years.

 

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Competitive Position Evolution    
      Mobile Market Share (1)
Telefónica     2014 2015
Spain     31.2% 30.8%
Germany     36.9% 38.1%
Brazil     28.4% 28.4%
Argentina     31.3% 32.3%
Chile     39.4% 36.7%
Peru     55.2% 49.7%
Colombia     23.5% 22.4%
Venezuela     33.7% 34.2%
Mexico     20.8% 22.7%
Central America   31.5% 33.2%
Ecuador     27.9% 29.7%
Uruguay     34.4% 34.9%
(1) Internal estimation in both years      

 

Competitive Position Evolution    
      DSL Market Share (1)
Telefónica     2014 2015
Spain     45.1% 43.5%
Brazil (2)     16.4% 28.1%
Argentina     30.3% 29.4%
Chile     39.8% 39.4%
Colombia     18.8% 18.1%
(1) Internal estimation in both years      
(2) Includes GVT in 2015      

 

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2015/2014 Consolidated results

 

In this section, we discuss changes in the Group’s consolidated income statements for 2015 and 2014. Changes in the Group’s consolidated income statements for 2014 and 2013 are discussed in a separate section further below. The consolidated income statement data for the years ended December 31, 2014 and 2013 set forth in both sections has been retrospectively revised to show the reclassification of the results attributable to our operations in the United Kingdom as discontinued operations and are not derived from Telefónica, S.A.’s consolidated financial statements originally published for such years, which are not included herein.

 

   Year ended December 31  Percent change
   2014  2015  2015 vs 2014
Millions of euros  Total  % of revenues  Total  % of revenues  Total  %
Revenues   43,458    100.0%   47,219    100.0%   3,761    8.7%
Other income   1,521    3.5%   1,841    3.9%   320    21.1%
Supplies   (11,750)   (27.0%)   (12,910)   (27.3%)   (1,160)   9.9%
Personnel expenses   (6,621)   (15.2%)   (9,800)   (20.8%)   (3,179)   48.0%
Other expenses   (12,827)   (29.5%)   (14,936)   (31.6%)   (2,109)   16.4%
Operating income before depreciation and amortization (OIBDA)   13,781    31.7%   11,414    24.2%   (2,367)   (17.2%)
Depreciation and amortization   (7,431)   (17.1%)   (8,517)   (18.0%)   (1,086)   14.6%
Operating income   6,350    14.6%   2,897    6.1%   (3,453)   (54.4%)
Share of loss of investments accounted for by the equity method   (498)   (1.1%)   (5)   (0.0%)   493    (99.0%)
Net financial expense   (2,779)   (6.4%)   (2,581)   (5.5%)   198    (7.1%)
Profit before tax   3,073    7.1%   311    0.7%   (2,762)   (89.9%)
Corporate income tax   (260)   (0.6%)   (13)   (0.0%)   247    (95.0%)
Profit after tax from continuing operations   2,813    6.5%   298    0.6%   (2,515)   (89.4%)
Profit after tax from discontinued operations   439    1.0%   2,582    5.5%   2,143    n.m. 
Profit for the year   3,252    7.5%   2,880    6.1%   (372)   (11.4%)
Non-controlling interests   (251)   (0.6%)   (135)   (0.3%)   116    (46.2%)
Profit for the year attributable to equity holders of the parent   3,001    6.9%   2,745    5.8%   (256)   (8.5%)

 

 

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Adjustments made to calculate organic variations

 

Year-on-year changes referred to in this document as “organic” or presented in “organic terms” intend to present year-on-year variations on a comparable basis, by considering a constant perimeter of consolidation and constant exchange rates and by making certain other adjustments which are described herein. See “Item 5. Operating and Financial Review and Prospects—Operating Results—Presentation of Financial Information—Non-GAAP financial information—Organic variations.” We believe that “organic” variations, while not a substitute for reported variations, provide useful information for investors and other interested parties because:

 

·they give additional information on the underlying performance of the operating business, removing the impact of certain items we believe are less relevant when considering the performance of Telefónica’s underlying business;

 

·Telefónica uses this data internally to assess its profitability; and

 

·we believe this data facilitates the comparison between Telefónica’s performance with that of other operators, although “organic” is not a term defined in IFRS, and “organic” measures included herein may not be comparable to similar measures presented by other companies.

 

For purposes of this report, “organic” variation is defined as the reported variation as adjusted to exclude the impact of certain items which we believe are less relevant when considering the performance of Telefónica’s underlying business.

 

The adjustments made to calculate 2015/2014 organic variations are the following:

 

·Foreign exchange effects and the impact of hyperinflationary adjustments in Venezuela:

 

We have excluded the impact of changes in exchange rates by assuming constant average foreign exchange rates in 2015 and 2014. In particular, we have used the average foreign exchange rates of 2014 for both years.

 

Foreign exchange rates had a negative impact on our reported 2015 results, mainly due to the depreciation of various Latin American currencies versus the euro, in particular the Brazilian real and, to a lesser extent, the Venezuelan bolívar.

 

We have also excluded the impact of hyperinflationary adjustments in Venezuela by reversing such adjustments.

 

·Changes in the scope of consolidation:

 

We have excluded the impact of changes in our consolidation perimeter in 2015 and 2014. The main changes in our consolidation perimeter in such years related to the consolidation of GVT in Telefónica Brazil since May 2015, the consolidation of DTS in Telefónica Spain since May 2015, the consolidation of E-Plus in Telefónica Germany since October 2014 and the sale of Telefónica Ireland in July 2014.

 

In order to exclude the impact of these changes in our perimeter, we have:

 

consolidated GVT’s results from May 1 to December 31, 2014 in our 2014 results;

 

consolidated DTS’s results from May 1 to December 31, 2014 in our 2014 results;

 

consolidated E-Plus’s results from January 1 to September 30, 2014 in our 2014 results; and

 

excluded Telefónica Ireland’s results from January 1 to June 30, 2014 from our 2014 results.

 

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·Restructuring costs:

 

We have excluded the impact of certain restructuring costs, mainly those related to the 1st Collective Agreement of Related Companies in Spain, restructuring processes relating to Germany and Brazil and the Group’s simplification program.

 

In 2015 these restructuring costs totaled 3,212 million euros and were aimed at increasing future efficiency, representing a further step towards the transformation and simplification initiatives carried out by Telefónica. These costs were distributed by segment as follows (impacts on OIBDA): Telefónica Spain (2,896 million euros), Telefónica Germany (74 million euros), Telefónica Hispanoamérica (38 million euros), Telefónica Brazil (7 million euros) and other companies (197 million euros).

 

In 2014 these restructuring costs totaled 658 million euros and were attributable to the simplification initiatives that the Group has implemented to meet its targets. These costs were mainly distributed by segment as follows (impacts on OIBDA): Telefónica Germany (414 million euros), Telefónica Brazil (68 million euros), Telefónica Hispanoamérica (99 million euros, mainly in Peru) and other companies (77 million euros).

 

·Results of tower sales:

 

The results attributable to the sale of towers in 2015 and 2014 have been excluded in both years.

 

In 2015 the results from the sale of towers totaled 65 million euros, distributed as follows: Telefónica Spain (38 million euros), Telefónica Brazil (10 million euros) and Telefónica Hispanoamérica (18 million euros, mainly in Chile). In 2014 the results from the sale of towers totaled 196 million euros in OIBDA, mainly in Telefónica Spain (191 million euros).

 

·Irrevocable commitment with Fundación Telefónica:

 

In 2015 we have excluded the expense (325 million euros) resulting from Telefónica, S.A.’s irrevocable commitment to make a donation to Fundación Telefónica in order to provide this entity with the financing required so that it can carry out its existing or new social programs and non-profit activities in the short and medium term.

 

·Adjustments to the final purchase price of E-Plus:

 

In 2015 we have excluded the result from the difference between the preliminary purchase price of E-Plus (as estimated at the end of the valuation period) and the final purchase price agreed with KPN, totaling 104 million euros (which had a 102 million euros positive impact on OIBDA, net of costs related to the acquisition).

 

·Spectrum acquisition:

 

We have excluded the impact of spectrum acquisitions in 2015 and 2014.

 

In 2015, these acquisitions totaled 1,585 million euros, 1,198 million euros corresponding to Telefónica Germany, 49 million euros corresponding to Telefónica Spain and 338 million euros corresponding to Telefónica Hispanoamérica (mainly Argentina and Ecuador).

 

In 2014 these acquisitions totaled 1,294 million euros, 889 million euros corresponding to Telefónica Brazil and 405 million euros corresponding to Telefónica Hispanoamérica with the following distribution by country or region:

 

Telefónica Argentina (168 million euros);

 

Telefónica Colombia (111 million euros); and

 

Telefónica Venezuela and Central America (126 million euros).

 

 

43

·Real Estate Efficiency Plan:

 

In 2014 we have excluded the impact of certain urban assets qualification changes in Telefónica Spain and also the investment in Telefónica’s Barcelona head office, which had an impact on capital expenditures (Capex) of 78 million euros.

 

·Other adjustments:

 

We have excluded the impact of the impairment resulting from the deterioration in certain minority participations, totaling 23 million euros in 2015. We have also excluded the impact of the 30 million euros provision recorded in 2015 in Telefónica Spain to optimize the distribution network.

 

The table below shows 2015/2014 variations in reported and organic terms (the latter, calculated in accordance with the adjustments referred to above) of certain income statement and other measures:

 

  YoY variation
TELEFÓNICA
2015
% Reported YoY

% Organic

YoY

 

Revenues 8.7% 4.0%
Other income 21.1% 19.5%
Supplies 9.9% 1.6%
Personnel expenses 48.0% 4.1%
Other expenses 16.4% 8.1%
OIBDA (17.2%) 3.6%
Operating income (OI) (54.4%) 3.7%
CapEx 10.3% 5.0%
OpCF (OIBDA-CapEx) (64.0%) 1.9%

 

The below table shows the contribution of each item for which we have adjusted to our reported growth. With respect to each line item, the contribution to reported growth of such line item, expressed in percentage points, is the result of dividing the impact of each item for which we have adjusted by the amount of such line item, on a reported basis, for the prior year.

 

  Contribution to reported growth (percentage points)
                   
TELEFÓNICA
2015

Exchange rate

effect and

hyperinflation

Perimeter change

Restructuring costs

Towers sales

Commitment with

Fundación

Adjustment to the final purchase price of E-Plus Spectrum acquisition Real Estate Efficiency Plan Other adjustments
Revenues (4.4) 8.8
Other income (4.2) 8.4 - (8.7)  - 6.9 -
Supplies (3.2) 11.3  -  -  -  -
Personnel expenses (2.5) 7.6 38.8  -  -  -
Other expenses (6.2) 11.0 (0.1)  - 2.5  - 0.4
OIBDA (5.0) 5.4 (18.5) (0.9) (2.4) 0.7  - (0.4)
Operating income (OI) (6.9) (4.6) (40.2) (2.0) (5.1) 1.6 - - (0.8)
CapEx (5.1) 8.6  - - - 3.0 (0.9)
OpCF (OIBDA-CapEx) (4.9) (0.0) (50.1) (2.5) (6.4) 2.0 (5.2) 1.5 (1.0)

 

44

 

Results Discussion

 

Revenues totaled 47,219 million euros in 2015, increasing 8.7% compared to 2014 in reported terms. This increase was mainly attributable to the consolidation of E-Plus, GVT and DTS (which accounted for 8.8 p.p. of the year-on-year increase), which was partially offset by the impact of changes in foreign exchange rates and hyperinflation in Venezuela (-4.4 p.p.). In organic terms, revenues increased 4.0% due to higher connectivity revenues, mainly in the mobile business as a consequence of the strong data revenue growth. The growing focus on our key markets was reflected in the revenue mix with Telefónica Spain, Telefónica Brazil and Telefónica Germany accounting for 66.0% of the revenues, increasing local scale and keeping at the same time the Group’s differential diversification and global scale.

 

The structure of revenues reflects Telefónica’s business diversification. Despite the adverse impact of exchange rates and hyperinflation in Venezuela, the segment with the largest contribution to our revenues in 2015 was Telefónica Hispanoamérica, representing 30.5% (+0.2 p.p. compared to 2014), followed by Telefónica Spain, representing 26.3% (-1.4 p.p. compared to 2014), Telefónica Brazil, representing 23.4% (-2.4 p.p. compared to 2014) and Telefónica Germany, which increased its contribution with respect to 2014 to 16.7% (+4 p.p. year-on-year).

 

·Mobile business revenues totaled 27,936 million euros in 2015 (of which 24,510 million euros corresponded to service revenues and 3,505 million euros corresponded to handset revenues) up 7.7% year-on-year in reported terms. This increase was mainly attributable to the consolidation of E-Plus (which accounted for 7.8 p.p. of the year-on-year increase), which was partially offset by the impact of changes in foreign exchange rates and hyperinflation in Venezuela (-5.0 p.p.). Excluding these impacts, year-on-year growth was 4.6% due to higher mobile revenues in Telefónica Hispanoamérica and Telefónica Brazil as a result mainly of the increase in the customer base and data adoption.

 

Mobile service revenues totaled 24,510 million euros in 2015, up 6.5% year-on-year in reported terms. This increase was mainly attributable to the consolidation of E-Plus (which accounted for 7.4 p.p. of the year-on-year increase), which was partially offset by the impact of changes in foreign exchange rates and hyperinflation in Venezuela (-5.2 p.p.). Excluding these impacts, year-on-year growth was 4.0% due mainly to the higher customer base and higher data consumption.

 

Mobile data revenues totaled 10,501 million euros in 2015, up 22.5% in reported terms. This increase was mainly attributable to the consolidation of E-Plus (which accounted for 10.8 p.p. of the year-on-year increase) and the higher consumption of data of our customers, which was partially offset by the impact of changes in foreign exchange rates and hyperinflation in Venezuela (-6.9 p.p.). Excluding these impacts, mobile data revenues increased by 16.9% due mainly to the increased revenues of non-SMS data (up 25.3%) and higher use of data per customer. Mobile data revenues accounted for 42.5% of mobile service revenues in 2015, up 5.7 percentage points compared to 2014 in reported terms.

 

·Fixed revenues totaled 17,634 million euros in 2015, up 9.3% year-on-year in reported terms. This increase was mainly attributable to the consolidation of GVT and DTS (which accounted for +11.1 p.p. of the year-on-year increase), which was partially offset by the impact of changes in foreign exchange rates and hyperinflation in Venezuela (-4.1 p.p.). Excluding these impacts, fixed revenues increased 2.2%. This increase was mainly due to higher broad band connection revenues and Pay-TV revenues as a result of the commercial actions carried out by the Company in order to increase our value proposition and the higher customer base in Pay-TV.

 

Other income in 2015 mainly included own work capitalized in our fixed assets, profit from the sale of other assets, and the sale of towers by Telefónica Spain, Telefónica Brazil and Telefónica Hispanoamérica.

 

45

 

In 2015, other income totaled 1,841 million euros, up 21.1% year-on-year in reported terms. In 2015, other income was positively affected by the consolidation of E-Plus, GVT and DTS, the positive result from the E-Plus price adjustment (104 million euros), the positive impact from the expired payment obligation (98 million euros) in Telefónica Brazil, the spectrum swap with AT&T in Telefónica Mexico carried out in December 2015 (79 million euros), the sale of real estate in Telefónica Spain (78 million euros) and the results from the sale of towers amounting to 65 million euros.

 

In 2014, the sale of towers had a positive impact of 196 million euros. Other income also included an extraordinary sale of real estate in Telefónica Spain (63 million euros).

 

Total expenses (which include supply costs, personnel costs and other expenses (principally external services and taxes) but do not include amortization and depreciation expenses), were 37,646 million euros in 2015, up year-on-year 20.7% in reported terms. This increase was mainly attributable to the consolidation of E-Plus, GVT and DTS (which accounted for 10.2 p.p. of the year-on-year increase) and higher restructuring costs amounting to 3,212 million euros (which accounted for 8.2 p.p. of the year-on-year increase), which was partially offset by the impact of changes in foreign exchange rates and hyperinflation in Venezuela (-4.2 p.p.). The costs are explained in detail below:

 

·Supplies amounted to 12,910 million euros in 2015, up 9.9% year-on-year in reported terms mainly as a result of the consolidation of E-Plus, GVT and DTS (which accounted for 11.3 p.p. of the year-on-year increase), and was partially offset by the impact of changes in foreign exchange rates and hyperinflation in Venezuela (-3.2 p.p.). In organic terms, supplies expenses grew by 1.6% year-on-year, due to increased commercial activity in high-end devices and higher TV content costs, which more than offset the decrease in mobile interconnection costs.

 

·Personnel expenses amounted to 9,800 million euros in 2015, up 48.0% in reported terms year-on-year compared to 2014. This increase was mainly attributable to higher restructuring costs of 3,143 million euros (which accounted for +38.8 p.p. of the year-on-year increase), the consolidation of E-Plus, GVT and DTS (which accounted for 7.6 p.p. of the year-on-year increase), and was partially offset by the impact of changes in foreign exchange rates and hyperinflation in Venezuela (-2.5 p.p.). In organic terms, personnel costs increased 4.1% year-on-year mainly affected by inflationary pressures in some Latin American countries.

 

The average headcount was 125,892 employees in 2015, up 11.5% compared to 2014 (-2.3% excluding the impact of changes in the scope of consolidation). Including Telefónica United Kingdom, the average headcount 2015 was 133,569 employees, up 10.8% compared to 2014 (-2.1% excluding the impact of changes in the scope of consolidation).

 

·Other expenses amounted to 14,936 million euros in 2015, up 16.4% in reported terms. This increase was mainly attributable to the consolidation of E-Plus, GVT and DTS (which accounted for 11.0 p.p. of the year-on-year increase), the provision of 325 million euros related to the irrevocable agreement between Telefónica, S.A. and Fundación Telefónica for its short-and mid-term financing (+2.5 p.p.) and to a lesser extent, the impairment resulting from the deterioration in certain minority participations (+0.2 p.p.) and the increase in other expenses related to restructuring processes (+0.1 p.p.), which was partially offset by the impact of changes in foreign exchange rates and hyperinflation in Venezuela (-6.2 p.p.). In organic terms, other expenses increased by 8.1% compared to 2014, mainly as a result of increased network costs, higher IT costs and a higher commercial activity. Increased inflation in some Latin American countries offset in part the savings resulting from the simplification measures carried out by the Company.

 

46

 

OIBDA was 11,414 million euros in 2015, down 17.2% in reported terms. This decrease was mainly attributable to the higher restructuring costs (which accounted for 18.5 p.p. of the year-on-year decrease and included a restructuring costs provision of 3,212 million euros), the impact of changes in foreign exchange rates and hyperinflation in Venezuela (-5.0 p.p.), the provision of 325 million euros related to the agreement between Telefónica, S.A. and Fundación Telefónica for its short and mid term financing (-2.4 p.p.) and, to a lesser extent, the decreased results from the sale of towers (-0.9 p.p.), the provision recorded in connection with the optimization of the distribution channel in Spain of 30 million euros (-0.2 p.p.) and the impairment resulting from the deterioration in certain minority participations (-0.2 p.p.), which was partially offset by the impact of the consolidation of E-Plus, GVT and DTS (+5.4 p.p.) and the adjustments made to the final acquisition price of E-Plus (+0.7 p.p.).

 

In organic terms, OIBDA grew 3.6% due to the positive evolution of Telefónica Germany (+20.9% year-on-year), reflecting increased synergies, the better performance of Telefónica Brazil (+2.9% year-on-year) and the results from Telefónica Hispanoamérica (+7.2% year-on-year).

 

OIBDA margin stood at 24.2% in 2015, down 7.5 percentage points compared to 2014 in reported terms due mainly to the restructuring costs provision of 3,212 million euros in 2015.

 

By segments, Telefónica Hispanoamérica was the main contributor to Group OIBDA with 38.2% (+8.6 p.p. compared to 2014), Telefónica Brazil contributed 31.3% (+5.6 p.p. compared to 2014) and Telefónica Germany contributed 16.3% (+11 p.p. compared to 2014). Telefónica Spain contributed 20.5% to Group OIBDA, down 20.7 percentage points compared to 2014, mainly as a result of the restructuring cost provision of 2,896 million euros in 2015.

 

Depreciation and amortization amounted to 8,517 million euros in 2015, up 14.6% year-on-year in reported terms, mainly due to the consolidation of E-Plus, GVT and DTS. The total depreciation and amortization charges arising from purchase price allocation processes amounted to 745 million euros in 2015, up 29.9% year-on-year.

 

Operating income (OI) in 2015 totaled 2,897 million euros, down 54.4% compared to 2014 for the reasons set forth above (see OIBDA explanation). In organic terms, operating income grew 3.7% year-on-year as a result of higher revenues and costs savings.

 

The share of loss of investments accounted for by the equity method for 2015 was a loss of 5 million euros (compared to a loss of 498 million euros in 2014). The loss recorded in 2014 was mainly due to the valuation adjustment of Telco, S.p.A. at Telecom Italia, S.p.A. amounting to 464 million euros.

 

Net financial expense amounted to 2,581 million euros in 2015, 7.1% lower than the previous year. Excluding exchange gains and losses, costs improved by 21.2% (528 million euros) to 1,961 million euros. Net exchange losses amounted to 620 million euros (excluding monetary correction), primarily due to adoption of the SIMADI exchange rate for the Venezuelan bolivar. The lower cost of debt in euros explains 146 million euros of this improvement, due to lower fixed rate debt and capture of the reduction in short-term rates. The divestment of the entire holding in Telecom Italia, S.p.A. generated a positive variation of 404 million euros. Other effects resulted in losses of 22 million euros. These included the monetary correction for inflation in Venezuela, net of higher expenses in Latin America currencies, costs for updating contingencies, and other gains and losses on equities. The effective cost of debt over the last twelve months, excluding exchange rate differences and the positive impact of the divestment of Telecom Italia, S.p.A., stood at 4.69%, down 57 basis points year-on-year.

 

Corporate income tax totaled 13 million euros in 2015 (compared to 260 million euros in 2014) mainly due to the temporary difference recorded related to the restructuring provision and a higher activation of tax credits in Spain. Considering a pre-tax income of 311 million euros, the effective tax rate was 4.2%, 4.3 percentage points lower year-on-year.

 

47

 

Profit after tax from discontinued operations totaled 2,582 million euros (compared to 439 million euros in 2014), mainly due to deferred tax assets resulting from the estimated difference in Telefónica, S.A. between the tax value and the agreed sale value of Telefónica’s operations in the United Kingdom, amounting to 1,789 million euros (which are expected to materialize in a foreseeable future when the sale is completed). This effect has been reduced by the amount corresponding to the tax amortization of goodwill generated in 2006 in connection with the acquisition of the companies to be sold under the sale agreement and deducted until December 31, 2015, amounting to 377 million euros. Additionally, the non-current assets ceased to be amortized and depreciated for accounting purposes once they were reclassified as assets held for sale.

 

The following table provides additional information on our discontinued operations:

 

Millions of euros 2015 2014 %
Revenues 7,697 6,919 11.2%
Other income 170 187 (9.1%)
Supplies (3,636) (3,431) 6.0%
Personnel expenses (549) (477) 15.1%
Other expenses (1,857) (1,463) 26.9%
OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION (OIBDA) 1,825 1,735 5.2%
Depreciation and amortization (300) (1,118) 73.2%.
OPERATING INCOME 1,525 617 n.m.
Share of loss of investments accounted for by the equity method (5) (12) (58.3%)
Net financial expense (28) (43) (34.9%)
PROFIT BEFORE TAX FROM DISCONTINUED OPERATIONS 1,492 562 n.m.
Corporate income tax 1,090 (123) n.m.
PROFIT AFTER TAX FROM DISCONTINUED OPERATIONS 2,582 439 n.m.

 

Profit attributable to non-controlling interest reduced profit for the year attributable to equity holders of the parent by 135 million euros, 116 million euros less than in 2014, mainly due to the lower profit attributable to minority interests in Telefónica Brazil and Colombia Telecom.

 

As a result of the foregoing, profit for the year attributable to equity holders of the parent for 2015 was 2,745 million euros, down by 8.5% year on year.

 

48

 

Segment results

 

TELEFÓNICA SPAIN

 

The below table shows the evolution of accesses in Telefónica Spain over the past two years:

 

ACCESSES    
Thousands of accesses 2014 2015 %Reported
YoY
%Organic
YoY (1)
Fixed telephony accesses (2) 10,447.8 10,005.6 (4.2%) (4.2%)
Internet and data accesses 5,928.7 6,000.0 1.2% 1.2%
Broadband (3) 5,885.9 5,962.0 1.3% 1.3%
Fiber 1,316.8 2,223.0 68.8% 68.8%
Mobile accesses 17,575.4 17,258.5 (1.8%) (1.8%)
Prepay 3,328.1 2,777.1 (16.6%) (16.6%)
Contract 14,247.3 14,481.4 1.6% 1.6%
M2M 1,612.4 1,778.8 10.3% 10.3%
Pay TV 1,884.7 3,671.5 94.8% 10.5%
Unbundled loops 4,087.3 3,647.3 (10.8%) (9.1%)
Wholesale ADSL & Circuits 707.8 815.1 15.2% 15.2%
Final Clients Accesses 35,836.7 36,935.6 3.1% (0.9%)
Wholesale Accesses 5,366.0 5,037.7 (6.1%) (6.1%)
Total Accesses 41,202.7 41,973.3 1.9% (1.6%)
Notes:  
(1) In order to calculate organic changes, we have added the accesses of DTS as of December 31, 2014 to our accesses as of such date.
(2) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access; 2/6 Digital Access x30. Company’s accesses for internal use included. Includes VoIP and Naked ADSL.
(3) Includes ADSL, satellite, optical fiber, cable modem and broadband circuits.

 

The below table shows the contribution of each item for which we have adjusted to our reported growth. With respect to each line item, the contribution to reported growth of such line item, expressed in percentage points, is the result of dividing the impact of each item for which we have adjusted by the amount of such line item, on a reported basis, for the prior year.

 

 

TELEFÓNICA
SPAIN
2015
%Reported
YoY
%Organic
YoY (1)
DTS
Pay TV 94.8% 10.5% 76.3 p.p.
Final Clients Accesses 3.1% (0.9%) 4.0 p.p.
Total Accesses 1.9% (1.6%) 3.5 p.p.
(1) In order to calculate organic changes, we have added the accesses of DTS as of December 31, 2014 to our accesses as of such date.

 

In 2015 the commercial activity was leveraged on the differentiated assets of the Company and, in the second half of 2015 was strengthened by the convergent offer “Movistar Fusión+” launched in July 2015 as well as the promotion that included all “TV Premium Extra” content from 9.90 euros/month, launched in August 2015. This promotion was subscribed by almost 700 thousand customers, reflecting the attractiveness of the offer (new TV contents and ultra-speed fiber) in an economic environment where private consumption continues to improve.

 

Churn evolution has been positive in 2015, especially taking into account the elimination of “Fusión” long-term contracts on August 1, 2015. This fact, together with the good evolution in adds since the launching of “Movistar Fusión+” has resulted in a positive performance of commercial activity. In 2015, broadband net adds duplicated year-on-year, fiber net adds grew by 25.3%, mobile contract net adds resumed growth (+0.2 million customers) and in fixed telephony the net loss of accesses decreased by 31.1% year-on-year.

 

49

 

The results of Telefónica Spain in 2015 showed a lower decrease in revenues compared to the year-on-year results of 2014-2013, as a result of the transformation strategy implemented in recent years which relies on a high value offer based on the differentiated assets of Telefónica Spain, a more rational market in competition terms and a more favorable macroeconomic context, with improvement in private consumption.

 

Telefónica Spain had 42.0 million accesses at the end of December 2015, up 1.9% year-on-year, after the consolidation of the DTS satellite TV accesses (0.9 million accesses at December 2015). The organic variation was down by 1.6%, explained by the decrease in mobile accesses and fixed telephony accesses, although it is important to highlight that retail accesses grew by 3.1% year-on-year.

 

“Movistar Fusión”, with a customer base of 4.2 million with 1.5 million additional wireless lines to the base offer as of December 31, 2015, maintained a solid year-on-year growth (+13% and +8% respectively compared to December 2014) and contributed 81% of the fixed retail broadband customer base and 63% of the wireless contract customer base. There was significant growth in the penetration of the high value services of “Movistar Fusión”, with 31.8% of the customer base already using 100 Mb or 300 Mb ultra-fast broadband (+10.9 p.p. year-on-year) and 62.4% of the customer base with Pay-TV as of December 31, 2015 (+17.7 p.p. year-on-year).

 

Fixed accesses decreased 4.2% year-on-year, with a net loss of 442 thousand accesses in the year 2015. This decrease was mainly due to a lower fixed access market growth.

 

Retail broadband accesses totaled 6.0 million and grew 1.3% year-on-year, with net adds of 76 thousand accesses, due to the good evolution of fiber adds (+37.1% year-on-year) and lower churn (1.4% in 2015, -0.1 p.p. year-on-year).

 

Fiber accesses posted a new record in terms of net adds (0.9 million new accesses in 2015), reaching 2.2 million customers (1.7 times compared to December 31, 2014), representing 37.3% of total broadband customers (+14.9 p.p. year-on-year). Two thirds of fiber accesses are benefiting from the new speeds (30 and 300 Mb) launched in May 2015.

 

Ultra speed fiber accesses, with 100 or 300 Mb (with additional ARPU of 12 euros, including VAT) reached 1.5 million accesses (68.6% of total fiber accesses), after the new record of 0.5 million accesses in 2015, triggered by the higher level of adds (+25.9% year-on-year) and contained churn (0.9%, +0.1 p.p. year-on-year).

 

At December 31, 2015 our fiber deployment reached 14.3 million premises, 4 million more than at December 31, 2014.

 

Total mobile accesses stood at 17.3 million, down 1.8% compared with year-end 2014 as a result of the decrease in prepay accesses. The contract access base accelerated its growth during 2015, growing by 1.6% year-on-year. The positive evolution of contract portability (-162 thousand customers at December 31, 2015, compared to -508 thousand customers at December 31, 2014), resulted in a positive contract net adds base (excluding M2M) (+68 thousand customers at December 31, 2015, compared to -113 thousand customers at December 31, 2014). Smartphone penetration stood at 66.3% of the mobile voice base (+5.7 p.p. compared to year-end 2014) and significantly boosted data traffic growth to 86.8% year-on-year in 2015 due to the higher number of customers with the renewed portfolio containing superior data packages.

 

LTE network rollout continued to progress well and coverage reached (based on our estimates) approximately 75% of the population at the end of 2015, up 17 percentage points compared to December 31, 2014, due to the deployment of the 800 MHz. As a result, the LTE customer base reached 3.3 million customers at December 31, 2015, doubling the customer base at December 31, 2014, while the penetration reached 21% (+10 p.p. year-on-year).

 

Pay-TV accesses reached 3.7 million, up by 94.8% in reported terms compared to December 31, 2014 as a result of the acquisition of DTS (+10.5% in organic terms), including 926 thousand satellite TV accesses from DTS.

 

2015/2014 Results

 

The table below shows the evolution of Telefónica Spain’s results over the past two years:

 

50

 

Millions of euros        
TELEFÓNICA SPAIN 2014 2015 %Reported
YoY
%Organic
YoY (1)
Revenues 12,023 12,402 3.2% (2.1%)
Mobile Business 4,556 4,337 (4.8%) (4.8%)
Mobile service revenues 3,888 3,677 (5.4%) (5.4%)
Fixed Business 8,543 9,359 9.6% 1.9%
Other income 635 516 (18.7%) 7.0%
Supplies (2,592) (2,996) 15.6% (2.7%)
Personnel expenses (2,139) (5,173) 141.8% 4.0%
Other expenses (2,256) (2,413) 7.0% (0.2%)
OIBDA 5,671 2,336 (58.8%) (4.3%)
OIBDA Margin 47.2% 18.8% (28.3 p.p.) (1.0 p.p.)
Depreciation and amortization (1,805) (1,898) 5.2% 2.4%
Operating income (OI) 3,866 438 (88.7%) (7.8%)
CapEx 1,732 1,827 5.5% 4.5%
OpCF (OIBDA-CapEx) 3,939 509 (87.1%) (8.3%)
(1) See adjustments made to calculate organic variation below.  

 

Adjustments made to calculate organic variations

 

As explained above, year-on-year changes referred to in this document as “organic” or presented in “organic terms” intend to present year-on-year variations on a comparable basis.

 

With respect to Telefónica Spain, we have made the following adjustments in order to calculate 2015/2014 variations in organic terms:

 

·Changes in the scope of consolidation:

 

We have excluded the impact of changes in our consolidation perimeter in 2015 and 2014. The only change to our Telefónica Spain consolidation perimeter in such years related to the consolidation of DTS in Telefónica Spain since May 1, 2015. In order to exclude the impact of such change in our perimeter, we have consolidated DTS’s results from May 1 to December 31, 2014 in our 2014 results.

 

51

 

·Restructuring costs:

 

We have excluded the impact of the 2,896 million euros of restructuring costs in 2015, mainly those related to the Voluntary Suspension Plan in Spain. The restructuring process is aimed at increasing future efficiency, representing a further step towards the transformation and simplification initiatives carried out by Telefónica.

 

No restructuring costs were excluded from our 2014 results to calculate organic variations.

 

·Results of tower sales:

 

The results attributable to the sale of towers in 2015 and 2014 have been excluded in both years. In 2015, the results from the sale of towers totaled 38 million euros. In 2014, the results from the sale of towers totaled 191 million euros.

 

·Spectrum acquisition:

 

We have excluded the impact of spectrum acquisitions in 2015, that totaled 49 million euros.

 

·Real Estate Efficiency Plan:

 

We have excluded the impact of certain urban assets qualification changes in Telefónica Spain in 2014, totaling 49 million euros.

 

·Spain distribution channel:

 

We have excluded the impact of the 30 million euros provision recorded in 2015 in Telefónica Spain to optimize the distribution network.

 

The table below shows 2015/2014 variations in reported and organic terms (the latter, calculated in accordance with the adjustments referred to above) of certain income statement and other measures, and the contribution of each item for which we have adjusted to our reported growth:

 

  YoY variation Contribution to reported growth (percentage points)
                 
TELEFÓNICA
SPAIN
2015
%Reported
YoY
%Organic
YoY
Perimeter change (DTS) Restructuring costs Towers sales Spectrum acquisition Real Estate Efficiency Plan Spain distribution channel
Revenues 3.2% (2.1%) 5.4 -- -- -- -- --
Other income (18.7%) 7.0% 0.9 -- (24.5) -- -- --
Supplies 15.6% (2.7%) 18.7 -- -- -- -- --
Personnel expenses 141.8% 4.0% 2.4 135.4 -- -- -- --
Other expenses 7.0% (0.2%) 5.9 -- (0.1) -- -- 1.3
OIBDA (58.8%) (4.3%) (0.4) (51.1) (2.7) -- -- (0.5)
CapEx 5.5% 4.5% 1.1 -- -- 2.8 (2.8) --
OpCF (OIBDA-CapEx) (87.1%) (8.3%) (1.0) (73.5) (3.9) (1.2) 1.3 (0.8)

 

Results Discussion

 

Revenues in Telefónica Spain in 2015 were 12,402 million euros, up 3.2% year-on-year in reported terms mainly as a result of the consolidation of DTS since May 1, 2015 (which accounted for +5.4 p.p. of the year-on-year increase). In organic terms, revenues were down by 2.1% due to lower mobile service revenues in the mobile business and lower access and voice revenues in the fixed business.

 

52

 

We consider revenue breakdown to be increasingly less relevant given the high penetration level of our convergent offer, by which we mean the offer of more than a single service for a single price. However, we continue to report revenue separately for information purposes. Fixed business revenues were up by 9.6% year-on-year in 2015, due to the consolidation of DTS, the repositioning of tariffs, higher retail broadband revenues and new services, mainly related to TV and IT services. Excluding the impact of DTS, fixed revenues increased by 1.9%. Mobile business revenues fell 4.8% year-on-year in 2015 due to the decline in mobile accesses and the 3.6% drop in ARPU.

 

Mobile ARPU was 15.3 euros in 2015, down by 3.6% year-on-year. Mobile ARPU is becoming less representative of the Group’s business performance, owing to its high dependence on the allocation of revenue in convergent offers.

 

TELEFÓNICA SPAIN 2014 2015 %YoY
Voice Traffic (millions of minutes)             35,600              36,368 2.2%
ARPU (EUR) 15.9 15.3 (3.6%)
Prepay 6.2 5.7 (8.2%)
Contract (1) 20.6 19.5 (5.3%)
Data ARPU (EUR) 7.0 7.8 11.0%
% non-SMS over data revenues 95.0% 95.5% 0.5 p.p.
Notes:
(1) Excludes M2M.      

 

OIBDA amounted to 2,336 million euros in 2015, down 58.8% year-on-year in reported terms, mainly due to provisions recorded in 2015 totaling 2,926 million euros (relating to restructuring costs accounted for 51.1 p.p. of the year-on-year decrease and 0.5 p.p. of the year-on-year decrease in distribution channel restructuring) and, to a lesser extent, the lower proceeds (38 million euros in 2015 compared to 191 million euros in 2014) from the sale of towers (-2.7 p.p.). This decrease was partially offset by the sale of real estate assets amounting to 73 million euros (net of costs).

 

In organic terms OIBDA decreased 4.3% year-on-year, mainly due to the lower revenues, higher personnel costs and higher content costs. The higher personnel costs, up by 4.0% year-on-year in organic terms, were primarily due to the resumption of the Company’s contribution to its pension plan in July 2014, and to a lesser extent, the acquisition of DTS. Telefónica Spain had 32,171 employees at the end of December 2015, up 7.2% year-on-year, due mainly to the acquisition of DTS.

 

OIBDA margin was 18.8% in 2015, down 28.3 percentage points year-on-year.

 

53

 

TELEFÓNICA GERMANY

 

The below table shows the evolution of accesses in Telefónica Germany over the past two years:

 

ACCESSES  
Thousands of accesses 2014 2015 %YoY
Fixed telephony accesses (1)            2,036.4             1,997.8 (1.9%)
Internet and data accesses            2,387.0            2,330.6 (2.4%)
Broadband            2,143.8            2,098.0 (2.1%)
Mobile accesses          42,124.9          43,062.8 2.2%
Prepay          23,350.7          23,979.4 2.7%
Contract (2)          18,774.1          19,083.4 1.6%
M2M               414.0                632.0 52.7%
Final Clients Accesses         46,548.3        47,391.2 1.8%
Wholesale Accesses           1,113.3               972.0 (12.7%)
Total Accesses        47,661.5        48,363.2 1.5%
Notes:
(1) Includes "fixed wireless" and Voice over IP accesses.    
(2) In the fourth quarter of 2014, 428 thousand E-Plus accesses were excluded before integration, due to the criteria harmonization.

 

In 2015, Telefónica Germany maintained market momentum, increasing slightly its estimated mobile service revenue market share.

 

The total access base grew 1.5% year-on-year and stood at 48.4 million at December 31, 2015, mainly driven by a 2.2% increase in the mobile base (which reached 43.1 million).

 

The contract mobile customer base grew 1.6% year-on-year and reached 19.1 million accesses, with a broadly stable 44.3% share over the total mobile base. Net adds reached 309 thousand accesses due to the solid contribution of partners (second brands). Smartphone penetration reached 54.2% of the total mobile access base, up 5.5 percentage points year-on-year driven by the continued growth of LTE customers (+154.5% year-on-year reaching 7.9 million at December 31, 2015). LTE penetration reached 18.6% of the total mobile access base.

 

The prepay access base increased 2.7% year-on-year to 24.0 million. Prepay posted 629 thousand net additions in 2015, 32.5% more than in 2014 due to the strong contribution from wholesale agreements (second brands). The retail broadband access loss trend continued to improve, with 46 thousand net loss in 2015, more than halving the number of 2014. VDSL was once again the main growth engine of fixed performance with 260 thousand net additions (+55% year-on-year) in 2015.

 

54

 

2015/2014 Results

 

The table below shows the evolution of Telefónica Germany’s results over the past two years:

 

Millions of euros        
TELEFÓNICA GERMANY 2014 2015 %Reported
YoY
%Organic
YoY (1)
Revenues 5,522 7,888 42.9% 1.2%
Mobile Business 4,375 6,832 56.2% 2.8%
Mobile service revenues 3,580 5,532 54.5% 0.1%
Fixed Business 1,138 1,043 (8.3%) (8.3%)
Other income 106 265 150.4% 14.7%
Supplies (2,144) (2,712) 26.5% (3.4%)
Personnel expenses (828) (655) (20.9%) (10.1%)
Other expenses (1,923) (2,928) 52.2% (1.1%)
OIBDA 733 1,858 153.7% 20.9%
OIBDA Margin 13.3% 23.6% 10.3 p.p. 3.8 p.p.
Depreciation and amortization (1,426) (2,128) 49.3% (3.8%)
Operating income (OI) (693) (270) (61.0%) (57.2%)
CapEx 849 2,230 162.8%. (11.1%)
OpCF (OIBDA-CapEx) (116) (372) n.m. 126.2%
(1) See adjustments made to calculate organic variation below.  

 

Adjustments made to calculate organic variations

 

As explained above, year-on-year changes referred to in this document as “organic” or presented in “organic terms” intend to present year-on-year variations on a comparable basis.

 

With respect to Telefónica Germany, we have made the following adjustments in order to calculate 2015/2014 variations in organic terms:

 

·Changes in the scope of consolidation:

 

We have excluded the impact of changes in our consolidation perimeter in 2015 and 2014. The only change to our Telefónica Germany consolidation perimeter in such years related to the consolidation of E-Plus in Telefónica Germany since October 1, 2014. In order to exclude the impact of this change in our perimeter, we have consolidated E-Plus’s results from January 1 to September 30, 2014 in our 2014 results.

 

·Restructuring costs:

 

We have excluded the impact of restructuring costs associated with certain simplification processes implemented in Germany. In 2015, restructuring costs had a 74 million euros impact on OIBDA. In 2014, restructuring costs had a 414 million euros impact on OIBDA.

 

·Spectrum acquisition:

 

We have excluded the impact of spectrum acquisitions in 2015, amounting to 1,198 million euros. There were no spectrum acquisitions in 2014.

 

·Adjustments to the final purchase price of E-Plus:

 

55

 

In 2015 we have excluded the result from the difference between the preliminary purchase price of E-Plus (as estimated at the end of the valuation period) and the final purchase price agreed with KPN, totaling 104 million euros (which had a 102 million euros positive impact on OIBDA net of costs related to the acquisition).

 

The table below shows 2015/2014 variations in reported and organic terms (the latter, calculated in accordance with the adjustments referred to above) of certain income statement and other measures, and the contribution of each item for which we have adjusted to our reported growth:

 

  YoY variation Contribution to reported growth (percentage points)
             
TELEFÓNICA GERMANY
2015
%Reported
YoY
%Organic
YoY

Perimeter

change

(E-Plus)

Restructuring costs Spectrum acquisition

Adjustment

to purchase

price of

E-Plus

Revenues 42.9% 1.2% 41.1 -- -- --
Other income 150.4% 14.7% 32.3 -- -- 98.6
Supplies 26.5% (3.4%) 30.9 -- -- --
Personnel expenses (20.9%) (10.1%) 26.9 (39.0) -- --
Other expenses 52.2% (1.1%) 54.7 (0.9) -- 0.1
OIBDA 153.7% 20.9% 50.2 46.5 -- 13.9
CapEx 162.8% (11.1%) 36.8 -- 141.2 --
OpCF (OIBDA-CapEx) n.m. 126.2% (47.1) (293.2) 1031.3 (87.7)

 

Results Discussion

 

Total revenues were 7,888 million euros in 2015, up 42.9% year-on-year in reported terms due mainly to the consolidation of E-Plus since October 1, 2014 (which accounted for 41.1 p.p. of the year-on-year increase). In organic terms, revenues increased by 1.2% due mainly to higher handset sales arising from Christmas campaigns.

 

Mobile service revenues totaled 5,532 million euros in 2015, up 54.5% year-on-year in reported terms, due mainly to the consolidation of E-Plus since October 1, 2014 and to a lesser extent, the increasing share of the partner segment (second brands) within the customer base. Telefónica Germany continued to focus on data revenues, which increased by 58.4% and accounted for 51.3% of mobile service revenues in 2015. Non-P2P SMS data revenues amounted to 2,034 million euros (increasing 4.9% year-on-year), accounting for 71.6% of the total data revenues (+0.4 p.p. year-on-year).

 

Fixed revenues were 1,043 million euros in 2015, down 8.3% year-on-year, due to continued decrease in accesses.

 

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Mobile ARPU was 10.7 euros in 2015, down 8.9% year-on-year, while contract ARPU stood at 17.2 euros down 6.5% year-on-year, as a result of the higher share of wholesale customers in the customer base. Data ARPU was 5.5 euros, down 6.8% year-on-year, mainly as a result of the continued decline of SMS volumes.

 

TELEFÓNICA GERMANY 2014 2015 %YoY
Voice Traffic (millions of minutes)             41,186              62,696 52.2%
ARPU (EUR)                 11.8                 10.7 (8.9%)
Prepay                    5.4                     5.8 8.2%
Contract (1)                  18.4                  17.2 (6.5%)
Data ARPU (EUR)                    5.9                    5.5 (6.8%)
% non-SMS over data revenues 71.2% 71.6% 0.4 p.p.
Notes:
(1) Excludes M2M.      

 

OIBDA totaled 1,858 million euros in 2015, up 153.7% year-on-year in reported terms, as a result mainly of the consolidation of E-Plus (which accounted for 50.2 p.p. of the increase), the lower restructuring costs recorded in 2015 (+46.5 p.p.) and the positive result from the E-Plus preliminary acquisition price and the final acquisition price agreed on with KPN (+13.9 p.p.). In organic terms, OIBDA increased by 20.9% year-on-year, driven by the increased synergies, which mainly affected personnel expenses and supplies.

 

The OIBDA margin stood at 23.6% in reported terms for 2015, up 10.3 percentage points compared to 2014.

 

TELEFÓNICA BRAZIL

 

The below table shows the evolution of accesses in Telefónica Brazil over the past two years:

 

ACCESSES    
Thousands of accesses 2014 2015 %Reported
YoY
%Organic
YoY (1)
Fixed telephony accesses (2)         10,743.4          14,654.5 36.4% (1.6%)
Internet and data accesses            4,082.6             7,195.5 76.2% 2.5%
Broadband             3,939.8             7,129.5 81.0% 3.6%
Fiber                374.6             3,779.9 n.m. 14.0%
Mobile accesses          79,932.1          73,261.3 (8.3%) (8.3%)
Prepay          51,582.4         42,194.4 (18.2%) (18.2%)
Contract          28,349.7          31,066.9 9.6% 9.6%
M2M            3,506.9            4,234.7 20.8% 20.8%
Pay TV                770.6             1,787.9 132.0% 9.7%
Final Clients Accesses        95,528.6        96,899.3 1.4% (6.4%)
Wholesale Accesses                 25.9                 22.3 (14.0%) (14.0%)
Total Accesses        95,554.5        96,921.5 1.4% (6.4%)
Notes:        
(1) In order to calculate organic changes, we have added the accesses of GVT as of December 31, 2014 to our accesses as of such date.
(2) Includes "fixed wireless" and Voice over IP accesses.

 

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The below table shows the contribution of each item for which we have adjusted to our reported growth. With respect to each line item, the contribution to reported growth of such line item, expressed in percentage points, is the result of dividing the impact of each item for which we have adjusted by the amount of such line item, on a reported basis, for the prior year.

 

TELEFÓNICA
BRAZIL
2015
%Reported
YoY
%Organic
YoY (1)
GVT
Fixed telephony accesses 36.4% (1.6%) 38.6 p.p.
Internet and data accesses 76.2% 2.5% 72.0 p.p.
Broadband 81.0% 3.6% 74.6 p.p.
Fiber n.m. 14.0% 785.0 p.p.
Pay TV 132.0% 9.7% 111.5 p.p.
Final Clients Accesses 1.4% (6.4%) 8.3 p.p.
Total Accesses 1.4% (6.4%) 8.3 p.p.
(1) In order to calculate organic changes, we have added the accesses of GVT as of December 31, 2014 to our accesses as of such date.

 

Telefónica Brazil closed the year 2015 improving its competitive position in the mobile as well as in the fixed market. In the mobile business, Telefónica Brazil kept its leadership in the higher value segments, which permitted the operator to capture mobile market revenue growth in 2015. In the fixed business, the transformation towards fiber and Pay-TV was strengthened by the GVT consolidation in May 2015, adding as of December 31, 2015, 8.5 million customers to the Group.

 

Revenues and OIBDA evolution was positively supported by the acceleration of mobile data and the good evolution of fixed broadband and Pay-TV. Additionally, Telefónica Brazil carried out costs control measures aimed at offsetting the adverse macroeconomic situation.

 

However, results in 2015 were adversely affected by the interconnection tariff reduction in the mobile business (-33.0%) and in the retail fixed-mobile tariff (-23.3%) since February 24, 2015.

 

Telefónica Brazil reached 96.9 million accesses at December 31, 2015, up 1.4% due mainly to the consolidation of GVT. Excluding the impact of such consolidation, accesses were down 6.4%, due to the disconnection of prepay accesses.

 

In the mobile business, the strategic focus remained on gaining and retaining high value customers, reaching a market share of 42.4% in the contract segment as of December 31, 2015 (Source: ANATEL). Telefónica Brazil maintained its market leadership in terms of total accesses with a market share of 29.5% as of December 2015 (source: ANATEL). The commercial offer in the contract segment included a higher data volume, more minutes of voice traffic and innovative products such as “Vivo Bis” (pursuant to which the data not consumed in a month is automatically added to data available for the following month). The contract growth was partially offset by the disconnection of 11.5 million prepay accesses.

 

In the fixed business, Telefónica Brazil maintained its strategic focus on fiber deployment, with 16.6 million premises passed with FTTx at December 31, 2015 and 3.8 million homes connected, and also on increasing Pay-TV accesses (up 10% year-on-year). Fixed telephony accesses stood at 14.7 million in 2015, up 36.4% in reported terms due mainly to the consolidation of GVT. In organic terms, these accesses were down by 1.6% year-on-year. Retail broadband customers totaled 7.1 million customers as of December 31, 2015, up 81.0% year-on-year due mainly to the consolidation of GVT (up 3.6% year-on-year in organic terms due to the increase of fiber accesses). Of the 7.1 million customers at the end of 2015, 53.0% were connected with FTTC. Pay TV customers stood at 1.8 million as of December 31, 2015, up 132.0% in reported terms due mainly to the consolidation of GVT, increasing by 9.7% year-on-year in organic terms due to a higher penetration of high value and IPTV clients. IPTV accesses increased their relevance, representing 9.6% of total Pay-TV accesses.

 

58

 

2015/2014 Results

 

The table below shows the evolution of Telefónica Brazil’s results over the past two years:

 

Millions of euros        
TELEFÓNICA BRAZIL 2014 2015 %Reported
YoY
%Organic
YoY (1)
Revenues 11,231 11,060 (1.5%) 4.5%
Mobile Business 7,618 6,906 (9.3%) 6.2%
Mobile service revenues 7,228 6,495 (10.1%) 5.3%
Fixed Business 3,613 4,154 15.0% 1.9%
Other income 261 416 59.3% 35.4%
Supplies (2,680) (2,568) (4.2%) 4.4%
Personnel expenses (976) (1,042) 6.8% 3.5%
Other expenses (4,293) (4,293) (0.0%) 8.6%
OIBDA 3,543 3,573 0.9% 2.9%
OIBDA Margin 31.5% 32.3% 0.8 p.p. (0.5 p.p.)
Depreciation and amortization (1,762) (1,916) 8.7% 12.9%
Operating income (OI) 1,781 1,657 (6.9%) (6.7%)
CapEx 2,933 2,105 (28.2%) (1.1%)
OpCF (OIBDA-CapEx) 610 1,468 140.8% 9.3%

Notes:

 (1) See adjustments made to calculate organic variation below.

 

 

Adjustments made to calculate organic variations

 

As explained above, year-on-year changes referred to in this document as “organic” or presented in “organic terms” intend to present year-on-year variations on a comparable basis.

 

With respect to Telefónica Brazil, we have made the following adjustments in order to calculate 2015/2014 variations in organic terms:

 

·Foreign exchange effects:

 

We have excluded the impact of changes in exchange rates by assuming constant average foreign exchange rates in 2015 and 2014. In particular, we have used the average foreign exchange rate of 2014 for both years. Foreign exchange rates had a negative impact on our reported 2015 Telefónica Brazil results as a result of the depreciation of the Brazilian real.

 

59

 

·Changes in the scope of consolidation:

 

We have excluded the impact of changes in our consolidation perimeter in 2015 and 2014. The only change to our Telefónica Brazil consolidation perimeter in such years related to the consolidation of GVT since May 1, 2015. In order to exclude the impact of this change in our perimeter, we have consolidated GVT’s results from May 1 to December 31, 2014 in our 2014 results.

 

·Restructuring costs:

 

We have excluded the impact of certain restructuring costs associated with certain simplification processes implemented in Telefónica Brazil. In 2015, these restructuring costs totaled 7 million euros. In 2014, these restructuring costs totaled 68 million euros.

 

·Spectrum acquisition:

 

We have excluded the impact of spectrum acquisitions in 2014 amounting to 889 million euros (related to a LTE block in the 700 MHz band) while there were no spectrum acquisitions in 2015.

 

·Results of tower sales:

 

The results attributable to the sale of towers in 2015 and 2014 have been excluded in both years. The results from the sale of towers totaled 10 million euros and 1 million euros in 2015 and 2014, respectively.

 

The table below shows 2015/2014 variations in reported and organic terms (the latter, calculated in accordance with the adjustments referred to above) of certain income statement and other measures, and the contribution of each item for which we have adjusted to our reported growth:

 

  YoY variation Contribution to reported growth (percentage points)
               
TELEFÓNICA BRAZIL
2015
%Reported
YoY
%Organic
YoY
Exchange rate effect Perimeter change (GVT) Restructuring Costs Spectrum acquisition Towers sales
Revenues (1.5%) 4.5% (16.6) 10.1 -- -- --
Other income 59.3% 35.4% (26.9) 34.5 -- -- 4.1
Supplies (4.2%) 4.4% (16.2) 7.2 -- -- --
Personnel expenses 6.8% 3.5% (18.1) 26.8 (6.2) -- --
Other expenses (0.0%) 8.6% (16.9) 7.6 -- -- --
OIBDA 0.9% 2.9% (17.0) 12.5 1.7 -- 0.3
CapEx (28.2%) (1.1%) (12.1) 15.1 -- (30.3) --
OpCF (OIBDA-CapEx) 140.8% 9.3% 40.7 0.2 9.9 145.8 1.7

 

Results Discussion

 

Revenues totaled 11,060 million euros in 2015, down 1.5% in reported terms, mainly due to the depreciation of the Brazilian real (which accounted for -16.6 p.p. of the evolution) and partially offset by the impact of the consolidation of GVT (+10.1 p.p.). In organic terms, the year-on-year variation was 4.5%, principally due to the good evolution in the mobile business (+6.2% year-on-year) as well as the fixed business (+1.9% year-on-year), which was partially offset by the impact of the regulatory interconnection tariff reduction (-2.7 p.p. of the year-on-year variation).

 

·Revenues from the mobile business totaled 6,906 million euros in 2015, down 9.3% in reported terms due mainly to the depreciation of the Brazilian real (which accounted for -15.3 p.p. of the evolution). Excluding this impact, revenues from the mobile business increased by 6.2% due to the positive evolution of service revenues (+5.3% year-on-year) as a result of the good performance of outbound revenues, which increased as a result of an increase in the contract customer base and the higher data penetration. This trend was partially offset by lower inbound revenues affected by lower interconnection tariffs. Handset revenues were up by 5.1% in reported terms, due to higher proportion of contract adds and higher smartphones and LTE handset sales.

 

60

 

·Fixed telephony revenues totaled 4,154 million euros, up by 15.0% in reported terms due mainly to the consolidation of GVT (+31.9 p.p.) and were partially offset by the impact of depreciation of the Brazilian real (which accounted for -19.4 p.p. of the evolution). Excluding these effects, revenues were up by 1.9%, mainly due to the increase in fixed broadband revenues, which were up by 9.3% supported by the increase of fiber and the growth of Pay TV accesses with higher ARPU, in spite of the lower retail fixed-mobile tariff (-2.5 p.p.).

 

The mobile ARPU decreased 13.2% year-on-year in reported terms due mainly to depreciation of the Brazilian real. In organic terms, it increased 1.6% year-on-year as a consequence of the higher data ARPU which more than offset the negative impact of the reduction in the mobile termination rates. We believe the high quality of the customer base is reflected in an increase in the outbound ARPU and the 31.5% growth in the data ARPU.

 

TELEFÓNICA BRAZIL 2014 2015 %YoY %Local Currency
YoY
Voice Traffic (millions of minutes)           127,412           131,029 2.8% 2.8%
ARPU (EUR)                    7.3                    6.3 (13.2%) 1.6%
Prepay                     3.9                     3.2 (18.5%) (4.7%)
Contract (1)                  15.7                  13.3 (15.0%) (0.7%)
Data ARPU (EUR)                    2.6                    2.9 12.5% 31.5%
% non-SMS over data revenues 77.4% 82.9% 5.5 p.p. 5.5 p.p.
Notes:  
(1) Excludes M2M.        

 

OIBDA stood at 3,573 million euros in 2015, up 0.9% in reported terms due mainly to the consolidation of GVT (which accounted for +12.5 p.p. of the evolution) and, to a lesser extent, the lower restructuring costs incurred in 2015 compared to 2014 (+1.7 p.p.), and the higher results from the sale of towers compared to 2014 (+0.3 p.p.), all of which was partially offset by the negative impact of the depreciation of the Brazilian real (-17.0 p.p.). In organic terms, the year-on-year increase was 2.9% due to revenue growth and cost efficiency offsetting a worse macro scenario with higher inflation, high devaluation and a higher rate of bad debt. Personnel expenses totaled 1,042 million euros in 2015, up 6.8% in reported terms as result mainly of the consolidation of GVT, which was partially offset by the depreciation of the Brazilian real. In organic terms, personnel expenses increased by 3.5% year-on-year due to higher social benefits and the internalization of the work of certain network contractors which more than offset the savings resulting from restructuring plans in 2014. In addition, network costs grew due to higher energy costs and the deployment and improvement of fixed- and mobile networks, legal contingencies and higher content costs. OIBDA was also positively impacted by the expiration of a payment obligation (98 million euros).

 

The OIBDA margin stood at 32.3% in reported terms for 2015, up 0.8 percentage points compared to 2014.

 

TELEFÓNICA HISPANOAMÉRICA

 

The below table shows the evolution of accesses in Telefónica Hispanoamérica over the past two years:

 

ACCESSES  
Thousands of accesses 2014 2015 %YoY
Fixed telephony accesses (1) (2)          13,374.4          12,829.8 (4.1%)
Internet and data accesses            5,433.8             5,667.8 4.3%
Broadband            5,379.4            5,610.4 4.3%
Mobile accesses       110,346.5        113,302.7 2.7%
Prepay (3)          86,698.0          88,332.8 1.9%
Contract          23,648.5          24,969.8 5.6%
M2M            2,062.2             2,296.9 11.4%
Pay TV            2,431.9             2,812.2 15.6%
Final Clients Accesses     131,586.6      134,612.4 2.3%
Wholesale Accesses                  16.4                 30.9 87.8%
Total Accesses T. Hispanoamérica     131,603.0      134,643.3 2.3%
Notes:      
(1) Includes "fixed wireless" and Voice over IP accesses.    
(2) Includes 50 thousand "fixed wireless" additional customers in Peru, in the second quarter of 2014.
(3) In the fourth quarter of 2014, 1.8 millions of inactive customers were disconnected in Central America.

 

61

 

Total accesses in Telefónica Hispanoamérica reached 134.6 million accesses at December 31, 2015 (+2.3% year-on-year).

 

Mobile accesses totaled 113.3 million (+2.7% year-on-year) due to positive net adds of 3.0 million accesses.

 

·There was strong contract segment growth, which expanded by 5.6% year-on-year. Growth was particularly strong in Peru (+12.9% year-on-year), Mexico (+22.3% year-on-year) and Chile (+4.2% year-on-year). Annual net adds reached 1.3 million accesses, primarily due to Peru (+659 thousand net adds) which benefitted from a successful migration strategy (from prepay to contract). Mexico also showed positive net adds (+327 thousand accesses) due to higher commercial activity.

 

·In the prepay segment (+1.9% year-on-year), with net adds of 1.6 million customers, growth was driven mainly by Mexico (+2.9 million customers) while Venezuela and Central America closed with 1.2 million net adds, partially compensating the net loss in Chile (-0.9 million customers) and Peru (-0.7 million customers) where we have faced a fierce competition and we have concentrated on high value customers migrating the best prepaid customers to contract and not following competition offers that would damage the quality of our networks due to intense traffic.

 

·There was growth in smartphones (+43.7% year-on-year) to 40.2 million accesses as of December 31, 2015, with a penetration over mobile accesses of 36.7% (+10.4 p.p. year-on-year), related mainly to Mexico, Argentina, Peru and Colombia. 4G handsets also continued to grow, reaching 8.3 million accesses as of December 31, 2015 (corresponding to a penetration of 7.4%).

 

Traditional fixed business accesses stood at 12.8 million at December 31, 2015 (-4.1% year-on-year), with negative net adds of 545 thousand customers, affected by the erosion of traditional fixed business in the region, including Chile (-5.9% year-on-year), Peru (-4.4% year-on-year), Colombia (-2.1% year-on-year) and Argentina (-1.9% year-on-year).

 

Broadband accesses totaled 5.6 million at December 31, 2015 (+4.3% year-on-year), after reaching net adds of 0.2 million accesses during 2015 due mainly to access growth in Peru (+8.0%), Chile (+5.8%) and Colombia (+4.0%). The penetration of fixed broadband accesses over traditional fixed business accesses was 43.7% at December 31, 2015 (+3.5 p.p. year-on-year). There was progressive migration towards data plans with higher speeds, with 53.4% of broadband accesses having a speed over 4Mb at December 31, 2015 (+4 p.p. year-on-year).

 

Pay TV accesses totaled 2.8 million (+15.6% year-on-year), with net adds of 0.4 million accesses as a result of an improvement in all countries in the region that offer the service. Growth was particularly positive in Peru (+26.7% year-on-year), Colombia (+17.5%) and Chile (+7.2%).

 

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2015/2014 Results

 

The table below shows the evolution of Telefónica Hispanoamérica’s results over the past two years:

 

Millions of euros        
TELEFÓNICA HISPANOAMÉRICA 2014 2015 %Reported
YoY
%Organic
YoY (1)
Revenues 13,155 14,387 9.4% 10.1%
Mobile Business 9,578 10,347 8.0% 10.2%
Mobile service revenues 8,454 9,160 8.4% 10.6%
Fixed Business 3,604 4,070 12.9% 10.0%
Other income 254 347 36.5% 29.6%
Supplies (3,841) (4,176) 8.7% 7.2%
Personnel expenses (1,525) (1,686) 10.6% 16.0%
Other expenses (3,975) (4,516) 13.6% 15.1%
OIBDA 4,068 4,356 7.1% 7.2%
OIBDA Margin 30.9% 30.3% (0.6 p.p.) (0.8 p.p.)
Depreciation and amortization (2,034) (2,241) 10.2% 7.8%
Operating income (OI) 2,034 2,115 4.0% 6.7%
CapEx 2,842 3,060 7.7% 17.2%
OpCF (OIBDA-CapEx) 1,226 1,296 5.7% (7.0%)
(1) See adjustments made to calculate organic variation below.  

 

Adjustments made to calculate organic variations

 

As explained above, year-on-year changes referred to in this document as “organic” or presented in “organic terms” intend to present year-on-year variations on a comparable basis.

 

With respect to Telefónica Hispanoamérica, we have made the following adjustments in order to calculate 2015/2014 variations in organic terms:

 

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·Foreign exchange effects and the impact of hyperinflationary adjustments in Venezuela:

 

We have excluded the impact of changes in exchange rates by assuming constant average foreign exchange rates in 2015 and 2014. In particular, we have used the average foreign exchange rates in 2015 and 2014. In particular, we have used the average foreign exchange rates for 2014 in both years. We have also excluded the impact of hyperinflationary adjustments in Venezuela.

 

·Restructuring costs:

 

We have excluded the impact of certain restructuring costs associated with certain simplification processes implemented in Telefónica Hispanoamérica. In 2015, restructuring costs totaled 38 million euros. In 2014, restructuring costs totaled 99 million euros.

 

·Results of tower sales:

 

The results attributable to the sale of towers in 2015 and 2014 have been excluded, which totaled 18 million euros (mainly in Chile) in 2015 and 4 million euros in 2014.

 

·Spectrum acquisition:

 

We have excluded the impact of spectrum acquisitions in 2015 and 2014.

 

In 2015, these acquisitions totaled 338 million euros and related to Telefónica Argentina (196 million euros), Telefónica Ecuador (127 million euros), Telefónica Chile (6 million euros) and Telefónica México (8 million euros). In 2014, these acquisitions totaled 405 million euros and related to Telefónica Argentina (168 million euros), Telefónica Colombia (111 million euros) and Telefónica Venezuela and Central America (126 million euros).

 

The table below shows 2015/2014 variations in reported and organic terms (the latter, calculated in accordance with the adjustments referred to above) of certain income statement and other measures, and the contribution of each item for which we have adjusted to our reported growth:

 

  YoY variation Contribution to reported growth (percentage points)
             
TELEFÓNICA HISPANOAMÉRICA
2015
%Reported
YoY
%Organic
YoY
Exchange rate effect and Hyperinflation Towers sales Restructuring Costs Spectrum acquisition
Revenues 9.4% 10.1% (0.6) -- -- --
Other income 36.5% 29.6% 2.1 5.1 -- --
Supplies 8.7% 7.2% 1.5 -- -- --
Personnel expenses 10.6% 16.0% -- -- (4.1) --
Other expenses 13.6% 15.1% (1.4) -- -- --
OIBDA 7.1% 7.2% (2.0) 0.3 1.5 --
CapEx 7.7% 17.2% (3.6) -- -- (3.3)
OpCF (OIBDA-CapEx) 5.7% (7.0%) 1.5 1.0 5.1 7.7

 

Results Discussion

 

Revenues amounted to 14,387 million euros in 2015, increasing 9.4% year-on-year in reported terms mainly due to the good results of data revenues (fixed as well as mobile) and voice revenues, in both cases due to a higher customer base, increased consumption and higher data penetration. This increase was partially offset by foreign exchange effects and hyperinflation in Venezuela and the decrease in mobile termination rates. In organic terms, revenues increased 10.1% year-on-year.

 

·Mobile service revenues reached 9,160 million euros in 2015, up 8.4% in reported terms mainly due to increased revenues in Argentina, Peru, Mexico and Chile, as explained in greater a detail below, which was partially offset by the foreign exchange effects and the hyperinflation in Venezuela (which accounted for -2.2 p.p. of the year-on-year variation). Mobile service revenues performance by country was as follows:

 

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·In Argentina, mobile service revenues reached 2,194 million euros in 2015 and grew by 29.2% year-on-year in reported terms mainly due to the good performance of consumption and data penetration and, to a lesser extent, the growth of the voice business and the foreign exchange effect (which increased growth by 6.4 p.p.). In local currency, these revenues grew by 22.9%.

 

·In Mexico, mobile service revenues reached 1,539 million euros in 2015, increasing by 8.9% in reported terms mainly due to a higher customer base and the positive performance of the data business. In local currency these revenues grew by 8.4%, accounting the foreign exchange effect for 0.5 percentage points of the year-on-year reported increase.

 

·In Chile, mobile service revenues reached 1,177 million euros in 2015, up 5.8% in reported terms year-on-year mainly due to the foreign exchange effect (which accounted for 4.6 p.p. of the increase) and the increase in data revenues that more than compensated the fall in the traditional voice business and the lower mobile termination rates. In local currency these revenues grew by 1.2%.

 

·In Peru, mobile service revenues reached 1,390 million euros in 2015, up 11.2% in reported terms mainly due to the foreign exchange effect (which accounted for 7.0 p.p. of the increase) and the higher contract customer base, the data boom and higher inbound revenues.

 

·In Venezuela and Central America, mobile service revenues reached 1,261 million euros in 2015, down 3.5% in reported terms mainly due to the foreign exchange effect and hyperinflation in Venezuela (which decreased growth in 35.1 p.p.). Excluding these effects, these revenues increased by 31.7% mainly due to the higher tariffs in all services in order to try to compensate the high inflation in Venezuela and the higher non-SMS data revenues (+83% in 2015), which represented 83.4% of total data revenues (+11.4 p.p. year-on-year).

 

·Data revenues in the segment were up by 19.5% in reported terms in 2015, reaching 3,198 million euros mainly due to the increase in penetration of data which increased from 31.7% to 34.9% in 2015 and higher data usage. This increase was partially offset by foreign exchange effects and hyperinflation in Venezuela (which decreased growth by 4.2 p.p.). Excluding these effects, these revenues grew by 23.6% as a result of the aforementioned increase in penetration of data.

 

·Fixed business revenues reached 4,070 million euros in 2015, up 12.9% in reported terms mainly due to the increase in broadband and new services revenues (+20.5%). Revenues from broadband and new services, accounted for 64.7% of fixed revenues (+4.9 p.p. year-on-year). The growth was mainly related to Argentina which experienced a substantial increase in voice and broadband revenues, as well as Chile and Peru, which had increased broad band revenues. Excluding the foreign exchange effect and hyperinflation in Venezuela (which decreased growth by 2.9 p.p.) these revenues grew by 10.0%.

 

ARPU was up by 6.1% in 2015, due to the data ARPU increase (+19.9% year-on-year) due to the increase of smartphone penetration and higher average consumption, which offset voice ARPU decrease. The lower ARPU was mainly due to lower interconnection costs and the devaluation of certain Latin American currencies against the U.S. dollar, which more than offset the increase in outgoing voice ARPU (up 7.0% year-on-year).

 

OIBDA reached 4,356 million euros in 2015, up 7.1% in reported terms (+7.2% in organic terms), being Telefónica Argentina, Telefónica Peru and Telefónica Chile the main contributors to this growth, as higher revenues offset higher costs. OIBDA was positively affected by a spectrum swap in Mexico with AT&T in December 2015 (which contributed 79 million euros). The higher costs were mainly attributable to:

 

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·higher commercial costs, due to higher handset costs as a result of higher high-end handset sales (which more than offset lower interconnection costs resulting from the mobile termination rates reductions in Chile, Colombia, Peru and Mexico);

 

·higher personnel costs driven by increases in inflation in some countries of the region;

 

·higher costs related to commercial campaigns, higher network costs due to higher voice and data traffic; and

 

·higher costs resulting from the devaluation of certain Latin American currencies against the U.S. dollar.

 

Additional information by country is provided below:

 

·Argentina: OIBDA reached 1,006 million euros, up by 25.4% in reported terms mainly due to the exchange rate effect and higher service revenues, more than offsetting the higher costs resulting from the overall prices increase, although Telefónica continued to carry out cost containment plans in order to offset the inflation effect. In local currency, the year-on-year variation was 19.2%.

 

·Chile: OIBDA reached 760 million euros, up 7.4% in reported terms mainly due to the exchange rate effect and higher service revenues, lower supply costs due to regulatory changes (lower interconnection costs resulting from the mobile termination rates reduction) and efficiency measures that helped to offset the commercial effort made to gain higher value customers.  In local currency, the year-on-year variation was 2.7%.

 

·Peru: OIBDA reached 943 million euros, up by 11.8% in reported terms mainly due to the exchange rate effect and higher service revenues, which more than offset higher commercial costs resulting from higher competitive pressure in the Peruvian market. In local currency OIBDA decreased by 4.7%.

 

·Venezuela and Central America: OIBDA reached 342 million euros, down by 26.1% in reported terms mainly due to the exchange rate effect and hyperinflation in Venezuela. Excluding these impacts, OIBDA grew 15.8% mainly driven by higher service revenues, which compensated the overall rise in prices, and higher purchases in dollars for services and equipment purchases, which were affected by the currency devaluation in Venezuela.

 

OIBDA margin reached 30.3% in 2015, with a year-on-year decrease of 0.6 percentage points in reported terms. This margin decrease was driven by lower margins in all countries in the segment except Mexico (which benefitted from higher commercial efforts focused on higher value segments), especially in Argentina and Colombia.

 

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2014/2013 Consolidated results

 

In this section, we discuss changes in the Group’s consolidated income statements for 2014 and 2013. The consolidated income statement data for the years ended December 31, 2014 and 2013 set forth below has been retrospectively revised to show the reclassification of the results attributable to our operations in the United Kingdom as discontinued operations and are not derived from Telefónica, S.A.’s consolidated financial statements originally published for such years, which are not included herein.

 

The Group’s total accesses rose 5.7% during 2014 to 316 million at December 31, 2014, including the additional accesses it gained following the purchase of the E-Plus Group in Telefónica Germany. Excluding the E-Plus Group accesses from 2014 results and accesses from Telefónica Czech Republic and Telefónica Ireland from 2013 results, the increase would have been 1.9%. There was high commercial activity focus on high value customers which resulted in the growth of the contract mobile segment (smartphones and LTE), fiber and Pay TV. The volume of fiber accesses also grew, reaching 1.8 million at December 31, 2014. Notably, accesses in Telefónica Hispanoamérica (42% of the Group’s total) increased by 2.5%, and accesses in Telefónica Brazil (30% of the Group’s total) increased by 3.0% in 2014.

 

The below table shows the evolution of accesses in 2013 and 2014:

 

ACCESSES    
Thousand of accesses 2013    2014    %Reported
YoY
%Organic
YoY(*)
Fixed telephony accesses (1) (2)          39,130.3             36,602.0    (6.5%) (3.0%)
Internet and data accesses          19,087.1              18,132.5    (5.0%) 0.4%
Narrowband                510.8                   373.1    (27.0%) (14.4%)
Broadband          18,432.9             17,649.3    (4.3%) 0.8%
Others                143.4                   110.1    (23.3%) (5.4%)
Mobile accesses        231,068.3           249,978.9    8.2% 2.1%
Prepay (3) (4)        154,792.2           164,959.2    6.6% (0.7%)
Contract          76,276.0             85,019.6    11.5% 7.8%
Pay TV (5)             3,602.2                5,087.2    41.2% 47.6%
Unbundled loops             3,833.4               4,087.3    6.6% 7.9%
Shared ULL                130.6                     94.1    (27.9%) (27.9%)
Full ULL             3,702.9                3,993.3    7.8% 9.2%
Wholesale ADSL                835.3                   750.1    (10.2%) 4.4%
Other             1,658.2                1,684.1    1.6% 2.0%
Final Clients Accesses      292,887.9         309,800.5    5.8% 1.8%
Wholesale Accesses           6,327.0              6,521.6    3.1% 5.9%
Total Accesses      299,214.9         316,322.1    5.7% 1.9%
Notes:    
Telefónica Spain mobile accesses includes since 2013 the accesses of Tuenti.
(*) Excludes the E-Plus Group accesses from 2014 accesses and accesses from Telefónica Czech Republic and Telefónica Ireland from 2013 accesses.
(1) In the first quarter of 2014, 45 thousands inactive “fixed wireless” accesses were disconnected in Mexico.
(2) In the second quarter of 2014, fixed clients includes 50 thousands additional fixed wireless clients in Peru.
(3) In the first quarter of 2014, 1.9 million inactive accesses were disconnected in Mexico.
(4) In the fourth quarter 2014, 1.8 million inactive accesses were disconnected in Central America
(5) In the second quarter of 2014, Pay TV accesses includes 131 thousand “TV Mini” clients in Spain

 

In 2014, the Group’s strategy was based on capturing growth in its markets, especially on attracting high-value customers.

 

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Mobile accesses totaled 250.0 million as of December 31, 2014, increasing 8.2% compared to 2013 (a 2.1% increase excluding accesses from the E-Plus Group in 2014 and from Telefónica Czech Republic and in Telefónica Ireland in 2013), driven by the E-Plus Group acquisition and strong growth in the contract segment (+11.5%), which represented 34% of total mobile accesses as of December 31, 2014 (+1 p.p. year-on-year). Notably, Telefónica Spain increased its contract segment in 2014 in 77 thousand new accesses (excluding the impact of the disconnection of 569 thousand inactive M2M accesses), a positive number for the first time since 2011.

 

Smartphone accesses maintained a strong growth rate (up 45.4% at December 31, 2014 compared to December 31, 2013), totaling 79.0 million accesses and reaching a penetration rate over total accesses of 34% (+9 p.p. year-on-year), reflecting the Company’s strategic focus on the growth of its data services.

 

Fixed broadband accesses stood at 17.6 million at December 31, 2014, a decrease of 4.3% year-on-year (+0.8% excluding accesses from Telefónica Czech Republic in 2013). Fiber accesses stood at 1.8 million at December 31, 2014 (a 111.8% increase compared to December 31, 2013).

 

TV accesses totaled 5.1 million at December 31, 2014, up 41.2% year-on-year in reported terms (47.6% excluding accesses from Telefónica Czech Republic in 2013). Net adds, excluding accesses from Telefónica Czech Republic, reached 1.6 million in the year.

 

  Year ended December 31   Percent change
  2013   2014   2014 vs 2013
Millions of euros Total % of revenues   Total % of revenues   Var. % Var.
Revenues 50,547  100.0%   43,458  100.0%   (7,089) (14.0%)
Other income 1,491  2.9%   1,521  3.5%   30  2.0%
Supplies (13,758) (27.2%)   (11,750) (27.0%)   2,008  (14.6%)
Personnel expenses (6,659) (13.2%)   (6,621) (15.2%)   38  (0.6%)
Other expenses (14,144) (28.0%)   (12,827) (29.5%)   1,317  (9.3%)
Operating income before depreciation and amortization (OIBDA) 17,477  34.6%   13,781  31.7%   (3,696) (21.1%)
Depreciation and amortization (8,616) (17.0%)   (7,431) (17.1%)   1,185  (13.8%)
Operating income 8,861  17.5%   6,350  14.6%   (2,511) (28.3%)
Share of loss of investments accounted for by the equity method (291) (0.6%)   (498) (1.1%)   (207)  70.9%
Net financial expense (2,842) (5.6%)   (2,779) (6.4%)   63  (2.2%)
Profit before tax 5,728  11.3%   3,073  7.1%   (2,655)  (46.3%)
Corporte income tax (1,201) (2.4%)   (260) (0.6%)   941  (78.3%)
Profit after tax from continuing operations 4,527  9.0%   2,813  6.5%   (1,714)  (37.9%)
Profit after tax from discontinued operations 442  0.9%   439  1.0%   (3)  (0.7%)
Profit for the year 4,969  9.8%   3,252  7.5%   (1,717)  (34.6%)
Non-controlling interests (376) (0.7%)   (251) (0.6%)   125  (33.2%)
Profit for the year attributable to equity holders of the parent 4,593  9.1%   3,001  6.9%   (1,592) (34.7%)

 

Adjustments made to calculate 2014/2013 organic variations

 

As stated above, year-on-year changes referred to in this document as “organic” or presented in “organic terms” intend to present year-on-year variations on a comparable basis. See “—2015/2014 consolidated results—Adjustments made to calculate organic variations”.

 

We have made the following adjustments in order to calculate 2014/2013 variations in organic terms:

 

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·Foreign exchange effects and the impact of hyperinflationary adjustments in Venezuela:

 

We have excluded the impact of changes in exchange rates by assuming constant average foreign exchange rates in 2014 and 2013. In particular, we have used the average foreign exchange rates of 2013 for both years.

 

Foreign exchange rates had a negative impact on our reported 2014 results, mainly due to the depreciation of various Latin American currencies versus the euro, in particular the Argentine peso, the Brazilian real and the Venezuelan bolívar.

 

We have also excluded the impact of hyperinflationary adjustments in Venezuela by reversing such adjustments.

 

·Changes in the scope of consolidation:

 

We have excluded the impact of changes in our consolidation perimeter in 2014 and 2013. The main changes in our consolidation perimeter in such years related to the consolidation of E-Plus in Telefónica Germany since October 2014, the sale of Telefónica Ireland in July 2014 and the sale of Telefónica Czech Republic in January 2014.

 

In order to exclude the impact of these changes in our perimeter, we have:

 

excluded E-Plus’s results from October 1 to December 31, 2014 from our 2014 results;

 

excluded Telefónica Ireland’s results from July 1 to December 31, 2013 from our 2013 results; and

 

excluded Telefónica Czech Republic’s results from January 1 to December 31, 2013 from our 2013 results.

 

·Restructuring costs:

 

We have excluded the impact of certain restructuring costs in 2014, mainly those related to the simplification initiatives carried out by the Group in order to reach its targets, mainly in Telefónica Germany, Telefónica Hispanoamérica and Telefónica Brazil. In 2014 these costs totaled 409 million euros in Telefónica Germany, 99 million euros in Telefónica Hispanoamérica and 68 million euros in Telefónica Brazil (all impact on OIBDA).

 

No restructuring costs were excluded from our 2013 results to calculate organic variations.

 

·Impact of sale of companies:

 

We have excluded the impact of the sale of certain companies in 2013. In particular we have excluded the results deriving from the sale of Telefónica Ireland (16 million euros loss), Telefónica Czech Republic (176 million euros loss) and Hispasat (21 million euros gain).

 

·Results of tower sales:

 

The results attributable to the sale of towers in 2014 and 2013 have been excluded in both years.

 

In 2014 the results from the sale of towers totaled 196 million euros, mainly in Telefónica Spain (191 million euros). In 2013 the results from the sale of towers totaled 111 million euros, mainly in Telefónica Spain (70 million euros), Telefónica Brazil (29 million euros) and Telefónica Hispanoamérica (11 million euros in Mexico, Chile and Colombia).

 

·Spectrum acquisition:

 

We have excluded the impact of spectrum acquisitions in 2014 and 2013.

 

In 2014, these acquisitions totaled 1,294 million euros, 889 million euros corresponding to Telefónica Brazil and 405 million euros corresponding to Telefónica Hispanoamérica, with the following distribution by country or region:

 

Telefónica Argentina (168 million euros);

 

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Telefónica Colombia (111 million euros); and

 

Telefónica Venezuela and Central America (126 million euros).

 

In 2013 these acquisitions totaled 505 million euros and related mainly to Telefónica Brazil (185 million euros), Telefónica Hispanoamérica (251 million euros, mainly in Peru and Colombia) and Telefónica Spain (69 million euros).

 

·Real Estate Efficiency Plan:

 

In 2014 we have excluded the impact of certain urban assets qualification changes in Telefónica Spain and the investment in Telefónica’s Barcelona head office, which had an impact on capital expenditures (Capex) of 78 million euros.

 

The table below shows 2014/2013 variations in reported and organic terms (the latter, calculated in accordance with the adjustments referred to above) of certain income statement and other measures:

 

  YoY variation
TELEFÓNICA
2014
% Reported YoY % Organic YoY
Revenues (14.0%) 2.9%
Other income 2.0% 7.0%
Supplies (14.6%) (0.4%)
Personnel expenses (0.6%) 7.1%
Other expenses (9.3%) 8.1%
OIBDA (21.1%) (0.1%)
Operating income (OI) (28.3%) 2.1%
CapEx 8.4% 17.7%
OpCF (OIBDA-CapEx) (46.2%) (13.9%)

 

The below table shows the contribution of each item for which we have adjusted to our reported growth. With respect to each line item, the contribution to reported growth of such line item, expressed in percentage points, is the result of dividing the impact of each item for which we have adjusted by the amount of such line item, on a reported basis, for the prior year.

 

  Contribution to reported growth (percentage points)
    Perimeter change          
TELEFÓNICA
2014
Exchange rate effect and hyperinflation E-Plus

Czech Rep., Ireland &

 Others

 

Restruc-turing costs Result on sale of companies Towers sales Spectrum acquisition Real estate efficiency plan
Revenues (14.4) 1.5 (3.9)
Other income (0.1) (0.1) 0.2
Supplies (11.9) 1.9 (4.3)
Personnel expenses (13.5) 1.0 (3.6) 8.7
Other expenses (15.7) 2.4 (3.0) 0.6 (1.4)
OIBDA (14.8) 0.7 (4.6) (3.8) 0.9 0.5
Operating income (OI) (20.4) (1.4) (3.8) (7.6) 1.8 1.0 - 
CapEx (23.2) 2.3 (3.1) 0.5  - 15.0 1.0
OpCF (OIBDA-CapEx) (7.6) (0.7) (5.8) (7.5) 1.7 0.9 (12.7) (0.8)

 

Results Discussion

 

Revenues totaled 43,458 million euros in 2014, down 14.0% compared to 2013 in reported terms due mainly to the adverse impact of changes in exchange rates and hyperinflation in Venezuela (which accounted for -14.4 p.p. of the decrease) and the sales of Telefónica Czech Republic and Telefónica Ireland (-3.9 p.p.), partially offset by the impact of the acquisition of E-Plus (+1.5 p.p.). In organic terms, revenues increased 2.9% due mainly to the good performance of Telefónica Hispanoamérica, where revenues from mobile data and digital services increased.

 

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The structure of revenues reflected Telefónica’s business diversification. Despite the impact of changes in exchange rates, Telefónica Hispanoamérica was the larger contributor to our revenues in 2014, representing 30.3% (-3.1 p.p. compared to 2013), followed by Telefónica Spain, representing 27.7% (+2.0 p.p. compared to 2013), Telefónica Brazil, representing 25.8% (+1.7 p.p. compared to 2013) and Telefónica Germany, representing 12.7% (+3.0 p.p. compared to 2013).

 

Mobile data revenues totaled 8,568 million euros in 2014 and decreased by 8.9% in reported terms affected mainly by exchange rate differences and hyperinflation in Venezuela and changes in the consolidation perimeter. Excluding these impacts, these revenues grew by 12.7%, due to the expansion of smartphones and data plans, mainly in Telefónica Hispanoamérica and Telefónica Brazil. These revenues accounted for 37% of mobile service revenues in 2014, up 2.4 percentage points compared to 2013 in reported terms. Revenues from non-SMS data were up 2.8% in reported terms (+25.4% excluding the impact of exchange rate differences, the effect of hyperinflation in Venezuela and changes in the consolidation perimeter), representing 78% of total data revenues in reported terms (+8.9 p.p. year-on-year).

 

Other income in 2014 mainly included own work capitalized in our fixed assets, profit from the sale of other assets, and the sale of towers of Telefónica Spain, Telefónica Brazil and Telefónica Hispanoamérica, and totaled 1,521 million euros, up 2.0% year-on-year, mainly due to increased sales of towers (which had an impact on OIBDA of 196 million euros, primarily in Telefónica Spain with 191 million euros), and an extraordinary sale of real estate in Telefónica Spain (41 million euros).

 

Other income in 2013 totaled 1,491 million euros and was attributable in part to the sale of towers of Telefónica Brazil, Telefónica Hispanoamérica and Telefónica Spain (which had an impact of 113 million euros in other income and 111 million euros in OIBDA) and capital gains on the assets sale of Telefónica Germany (76 million euros) and the sale of Hispasat (21 million euros).

 

Total expenses (which include supply costs, personnel costs and other expenses, (principally external services and taxes, but do not include amortization and depreciation expenses), amounted to 31,198 million euros in 2014, down by 9.7% in reported terms year-on-year as a result mainly of the impact of changes in exchange rates and hyperinflation in Venezuela and the sales of Telefónica Czech Republic and Telefónica Ireland. In organic terms, expenses grew by 4.5% year-on-year, mainly due to higher commercial expenditures and outlays on networks and systems. The breakdown of our expenses was as follows:

 

·Supplies amounted to 11,750 million euros in 2014, down 14.6% year-on-year in reported terms, as a result mainly of the impact of changes in exchange rates and hyperinflation in Venezuela and the sales of Telefónica Czech Republic and Telefónica Ireland. In organic terms, supplies fell by 0.4% due to lower mobile interconnection costs, which more than offset the higher equipment costs of handsets and TV content.

 

·Personnel expenses totaled 6,621 million euros in 2014, down 0.6% year-on-year in reported terms, as a result mainly of the impact of changes in exchange rates and hyperinflation in Venezuela and the sales of Telefónica Czech Republic and Telefónica Ireland, which was partially offset by the increased expenditures on the Company’s global restructuring program (including the integration costs in Telefónica Germany and costs resulting from the simplification initiatives that the Group is implementing to meet its targets) and, to a lesser extent, the impact of the acquisition of E-Plus. In organic terms, personnel costs rose by 7.1% in 2014 compared to 2013 due to higher prices in some countries.

 

The average headcount in 2014 was 112,921 employees, down 6.1% compared to 2013 due mainly to the changes in the scope of consolidation (-2.1% excluding changes to the scope of consolidation). Including Telefónica United Kingdom, the average headcount in 2014 would have been 120,497 employees, down 7.2% compared to 2013 due mainly to the changes in the scope of consolidation.

 

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·Other expenses amounted to 12,827 million euros in 2014, down 9.3% year-on-year in reported terms mainly due to exchange rate differences and the effect of hyperinflation in Venezuela, the impact of value adjustments in the sales of Telefónica Ireland and Telefónica Czech Republic, changes to the scope of consolidation and the recognition of integration costs in Telefónica Germany. In organic terms, other expenses increased by 8.1% due to higher commercial costs, higher network costs produced by larger volumes of data traffic and greater outlays on modernization of the network.

 

OIBDA reached 13,781 million euros, down 21.1% in reported terms, mainly due to exchange rate differences and the effect of hyperinflation in Venezuela, the sales of Telefónica Czech Republic and Telefónica Ireland and the impact of value adjustments relating to such sales and the increased expenditures on the Company’s global restructuring program (including the integration costs in Telefónica Germany and costs resulting from the simplification initiatives that the Group is implementing to meet its targets). In organic terms, OIBDA was practically stable (-0.1% year-on-year).

 

OIBDA margin was 31.7% in 2014, down 2.9 percentage points year-on-year in reported terms.

 

By segment, Telefónica Spain contributed most to the Group’s consolidated OIBDA, accounting for 41.2% of the total (+4.9 p.p. compared to 2013), Telefónica Hispanoamérica accounted for 29.5% (-2.1 p.p. compared to 2013), Telefónica Brazil accounted for 25.7% (+3.2 p.p. compared to 2013), and Telefónica Germany accounted for 5.3% (-2.2 p.p. compared to 2013).

 

Depreciation and amortization amounted to 7,431 million euros in 2014, a decline of 13.8% year-on-year in reported terms, due to lower depreciation of fixed assets, mainly in Telefónica Brazil. The total depreciation and amortization charges arising from purchase price allocation processes amounted to 574 million euros in 2014 (-21.2% year-on-year).

 

Operating income (OI) in 2014 totaled 6,350 million euros, down 28.3% compared to 2013, mainly affected by exchange rate differences and the effect of hyperinflation in Venezuela (-20.4 p.p.), recognition in 2014 of expenditure on integrations costs in Telefónica Germany and the global restructuring program, in accordance with the simplification initiatives the Group is implementing to meet its targets (-7.6 p.p.), changes to the scope of consolidation (-5.2 p.p.), due to the sale of Telefónica Czech Republic and Telefónica Ireland and the acquisition of the E-Plus Group, and additionally affected by higher tower sales in 2014 as compared to 2013 (+1.0 p.p.). In organic terms, operating income would have increased by 2.1% year-on-year.

 

The share of loss of investments accounted for by the equity method was a loss of 498 million euros (compared to a loss of 291 million euros in 2013), mainly due to valuation adjustments of Telco, S.p.A. at Telecom Italia, S.p.A. This, along with the contribution to the year’s results, had a negative impact of 464 million euros in 2014 (compared to a loss of 267 million euros in 2013).

 

Net financial expense amounted to 2,779 million euros in 2014 (-2.2% year-on-year in reported terms), and included 290 million euros due to net negative foreign exchange differences primarily as a result of the Company’s decision to adopt the SICAD II exchange rate of the Venezuelan bolivar. Excluding this effect, net financial expenses fell 9.0% year-on-year, mainly due to a 9.1% reduction in the average debt, placing the effective cost of debt in 2014 at 5.31%, one basis point higher than in 2013. The greater weight of debt in Latin America currencies and repayment and maturity of cheap debt in euros increased the average cost by 47 basis points, while the lower rates in Latin America and Europe reduced it by 41 basis points.

 

Corporate income tax totaled 260 million euros in 2014 on a pre-tax income of 3,073 million euros, implying an effective tax rate of 8.5%, 12.5 percentage points lower year-on-year. This was mainly due to the effect of a review of deferred taxes in Brazil following a change to legislation during the second quarter of 2014, and to a larger recognition of tax credits in Colombia.

 

Profit after tax from discontinued operations totaled 439 million euros, a decrease of 0.7% compared to 2013 and related exclusively to our operations in the United Kingdom.

 

72

 

The following table provides additional information on our discontinued operations:

 

  January-
December
January-
December
% YoY 14/13
Millions of euros 2014 2013  
Revenues 6,919 6,514 6.2%
Other income 187 202 (7.4%)
Supplies (3,431) (3,283) 4.5%
Personnel expenses (477) (549) (13.1%)
Other expenses (1,463) (1,284) 13.9%
OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION (OIBDA) 1,735 1,600 8.4%
Depreciation and amortization (1,118) (1,011) 10.6%
OPERATING INCOME 617 589 4.8%
Share of loss of investments accounted for by the equity method (12) (13) (7.7%)
Net financial expense (43) (24) 79.2%
PROFIT BEFORE TAX FROM DISCONTINUED OPERATIONS 562 552 1.8%
Corporate income tax (123) (110) 11.8%
PROFIT AFTER TAX FROM DISCONTINUED OPERATIONS 439 442 (0.7%)

 

Profit attributable to non-controlling interests reduced net profit by 251 million euros in 2014, 33.2% less than in 2013, mainly due to the losses attributed to minority shareholders of Telefónica Germany impacted by the recording of the restructuring expenses mentioned above, partially offset by the effect of the review of deferred taxes in Brazil following a change to legislation in 2014, and to a larger recognition of tax credits.

 

As a result of the foregoing, profit for the year attributable to equity holders of the parent for 2014 was 3,001 million euros (down 34.7% year-on-year).

 

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Segment results

 

TELEFÓNICA SPAIN

 

The below table shows the evolution of accesses in Telefónica Spain in 2013 and 2014:

 

ACCESSES  
Thousands of accesses 2013    2014    %YoY
Fixed telephony accesses (1)          11,089.8            10,447.8    (5.8%)
Naked ADSL                  22.8                     21.3    (6.6%)
Internet and data accesses            5,899.0                5,928.7    0.5%
Narrowband                  38.5                     30.9    (19.6%)
Broadband (2)            5,846.8                5,885.9    0.7%
Other                  13.7                     11.9    (13.7%)
Mobile accesses          19,002.1             17,575.4    (7.5%)
Prepay            4,262.7                3,328.1    (21.9%)
Contract (3)          14,739.3             14,247.3    (3.3%)
Pay TV (4)                672.7               1,884.7    180.2%
WLR                525.8                   570.6    8.5%
Unbundled loops             3,787.1               4,087.3    7.9%
Shared ULL                130.6                     94.1    (27.9%)
Full ULL             3,656.5                3,993.3    9.2%
Wholesale ADSL                676.8                   707.8    4.6%
Other                    0.4                       0.3    (28.5%)
Final Clients Accesses        36,663.6           35,836.7    (2.3%)
Wholesale Accesses           4,990.1              5,366.0    7.5%
Total Accesses        41,653.6           41,202.7    (1.1%)
Notes:      
(1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access; 2/6 Digital Access x30. Company’s accesses for internal use included. Includes VoIP and Naked ADSL.
(2) Includes ADSL, satellite, optical fiber, cable modem and broadband circuits.
(3) In the first quarter of 2014, 569 thousand M2M inactive accesses were disconnected.
(4) Since the second quarter of 2014, Pay TV accesses include 131 thousand “TV Mini” customers.

 

74

 

The table below shows the evolution of Telefónica Spain’s results in 2013 and 2014:

 

Millions of euros        
TELEFÓNICA SPAIN 2013 2014 %Reported
YoY
%Organic
YoY (1)
Revenues 12,959 12,023 (7.2%) (7.2%)
Mobile Business 5,121 4,556 (11.0%) (11.0%)
Mobile service revenues 4,580 3,888 (15.1%) (15.1%)
Fixed Business 8,861 8,543 (3.6%) (3.6%)
Other income 445 635 42.6% 17.7%
Supplies (2,486) (2,592) 4.2% 4.2%
Personnel expenses (2,113) (2,139) 1.2% 1.2%
Other expenses (2,465) (2,256) (8.5%) (8.6%)
OIBDA 6,340 5,671 (10.6%) (12.6%)
OIBDA Margin 48.9% 47.2% (1.8 p.p.) (2.8 p.p.)
Depreciation and amortization (1,903) (1,805) (5.1%) (5.1%)
Operating income (OI) 4,437 3,866 (12.9%) (15.8%)
CapEx 1,529 1,732 13.3% 15.2%
OpCF (OIBDA-CapEx) 4,811 3,939 (18.1%) (21.0%)
(1) See adjustments made to calculate organic variation below.  

 

Adjustments made to calculate organic variations

 

As explained above, year-on-year changes referred to in this document as “organic” or presented in “organic terms” intend to present year-on-year variations on a comparable basis.

 

With respect to Telefónica Spain, we have made the following adjustments in order to calculate 2014/2013 variations in organic terms:

 

·Results of tower sales:

 

The results attributable to the sale of towers in 2014 and 2013 have been excluded in both years. In 2014, the results from the sale of towers totaled 191 million euros. In 2013, the results from the sale of towers totaled 70 million euros.

 

·Spectrum acquisition:

 

We have excluded the impact of spectrum acquisitions in 2013 which totaled 69 million euros. There was no spectrum acquisition in 2014.

 

·Real Estate Efficiency Plan:

 

In 2014, we have excluded the impact of certain urban assets qualification changes in Telefónica Spain, totaling 49 million euros.

 

The table below shows 2014/2013 variations in reported and organic terms (the latter, calculated in accordance with the adjustments referred to above) of certain income statement and other measures, and the contribution of each item for which we have adjusted to our reported growth.

 

75

 

  YoY variation Contribution to reported growth (percentage points)
           
TELEFÓNICA
SPAIN
2014
%Reported
YoY
%Organic
YoY
Towers sale Spectrum acquisition Real Estate Efficiency Plan
Revenues (7.2%) (7.2%) -- -- --
Other income 42.6% 17.7% 27.7 -- --
Supplies 4.2% 4.2% -- -- --
Personnel expenses 1.2% 1.2% -- -- --
Other expenses (8.5%) (8.6%) 0.1 -- --
OIBDA (10.6%) (12.6%) 1.9 -- --
CapEx 13.3% 15.2% -- (4.5) 3.2
OpCF (OIBDA-CapEx) (18.1%) (21.0%) 2.5 1.4 (1.0)

 

Results Discussion

 

Revenues totaled 12,023 million euros in 2014 (-7.2% year-on-year) showing a softer decline than in previous years, due in part to a more favorable macroeconomic and competitive environment.

 

We consider revenue breakdown to be increasingly less relevant given the high penetration level of our convergent offer, by which we mean the offer of more than a single service for a single price. However, we continue to report revenue breakdown for information purposes. Fixed business revenues fell 3.6% year-on-year in 2014, due to lower access and voice revenues, partially offset by higher broadband and new services revenues, mainly TV and IT. Mobile business revenues fell 11.0% year-on-year in 2014 due to the decline in mobile accesses and the 10.1% drop in ARPU, impacted by lower prices in the new tariff portfolio.

 

Mobile ARPU is becoming less representative of the Group’s business performance, owing to its significant dependence on the allocation of revenue in convergent offers. In 2014 mobile ARPU declined by 10.1% year-on-year, impacted by lower prices in the new tariff portfolio.

 

TELEFÓNICA SPAIN 2013 2014 %YoY
Voice Traffic (millions of minutes)             34,428             35,600 3.4%
ARPU (EUR) (1) 17.7 15.9 (10.1%)
Prepay 7.3 6.2 (14.5%)
Contract (2) 24.0 20.6 (14.2%)
Data ARPU (EUR) (1) 6.8 7.0 3.6%
% non-SMS over data revenues 92.1% 95.0% 2.8 p.p.
Notes:      
(1) Impacted by the disconnection of 569 thousand inactive M2M accesses in the first quarter of 2014.
(2) Excludes M2M.

 

OIBDA amounted to 5,671 million euros in 2014, down 10.6% year-on-year in reported terms, due mainly to lower revenues and higher supplies expense. In organic terms, OIBDA fell 12.6% year-on-year in 2014, affected by the drop in revenues despite the higher commercial effort by Telefónica Spain to capture the growth and value opportunities in the market and the decrease in total expenses. Total expenses decreased 1.1% year-on-year, reflecting the control of costs and the transformation efficiency initiatives implemented in recent years. However, personnel expenses increased 1.2% year-on-year, primarily due to the end of the redundancy program in 2013 and the Company’s contribution to its pension plan in July 2014, following its temporary freeze from April 2013 to July 2014. This decrease was partially offset by the sale of real estate assets (63 million euros).

 

76

 

OIBDA margin stood at 47.2% in 2014, down 1.8 percentage points year-on-year.

 

TELEFÓNICA GERMANY

 

The below table shows the evolution of accesses in Telefónica Germany in 2013 and 2014:

 

ACCESSES    
Thousands of accesses 2013    2014    %Reported
YoY
%Organic
YoY (1)
Fixed telephony accesses (2)            2,124.9               2,036.4    (4.2%) (4.2%)
Internet and data accesses             2,516.1               2,387.0    (5.1%) (5.1%)
Narrowband                271.7                   243.2    (10.5%) (10.5%)
Broadband            2,244.3               2,143.8    (4.5%) (4.5%)
Mobile accesses         19,401.0             42,124.9    117.1% 1.4%
Prepay            9,114.9             23,350.7    156.2% (2.8%)
Contract          10,286.1             18,774.1    82.5% 5.1%
Final Clients Accesses         24,042.0            46,548.3    93.6% 0.2%
Wholesale Accesses           1,125.0              1,113.3    (1.0%) (1.0%)
Total Accesses        25,166.9           47,661.5    89.4% 0.2%
Notes:        
(1) In order to calculate organic changes, we have excluded the accesses of E-Plus as of December 31, 2014 to our accesses as of such date.
(2) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access; 2/6 Digital Access x30. Company’s accesses for internal use included. Includes VoIP and Naked ADSL.

 

The below table shows the contribution of each item for which we have adjusted to our reported growth. With respect to each line item, the contribution to reported growth of such line item, expressed in percentage points, is the result of dividing the impact of each item for which we have adjusted by the amount of such line item, on a reported basis, for the prior year.

  

TELEFÓNICA GERMANY
2014
%Reported
YoY
%Organic
YoY(1)
E-Plus
Mobile accesses 117.1% 1.4% 115.7 p.p.
Prepay 156.2% (2.8%) 159.0 p.p.
Contract 82.5% 5.1% 77.4 p.p.
Final Clients Accesses 93.6% 0.2% 93.4 p.p.
Total Accesses 89.4% 0.2% 89.2 p.p.
(1) In order to calculate organic changes, we have excluded the accesses of E-Plus as of December 31, 2014 to our accesses as of such date.

 

77

 

The table below shows the evolution of Telefónica Germany’s results in 2013 and 2014:

 

Millions of euros        
TELEFÓNICA GERMANY 2013 2014 %Reported
YoY
%Organic
YoY (1)
Revenues 4,914 5,522 12.4% (3.5%)
        Mobile Business 3,673 4,375 19.1% (2.2%)
Mobile service revenues 2,989 3,580 19.8% (2.3%)
        Fixed Business 1,235 1,138 (7.8%) (7.8%)
Other income 169 106 (37.4%) (44.8%)
Supplies (1,958) (2,144) 9.5% (3.9%)
Personnel expenses (419) (828) 97.7% 5.6%
Other expenses (1,398) (1,923) 37.5% 6.6%
OIBDA 1,308 733 (44.0%) (22.1%)
OIBDA Margin 26.6% 13.3% (13.4 p.p.) (5.1 p.p.)
Depreciation and amortization (1,231) (1,426) 15.7% (4.9%)
Operating income (OI) 77 (693) n.m. n.m.
CapEx 666 849 27.5% (6.4%)
OpCF (OIBDA-CapEx) 642 (116) n.m. (38.3%)
(1) See adjustments made to calculate organic variation below.  

 

Adjustments made to calculate organic variations

 

As explained above, year-on-year changes referred to in this document as “organic” or presented in “organic terms” intend to present year-on-year variations on a comparable basis.

 

With respect to Telefónica Germany, we have made the following adjustments in order to calculate 2014/2013 variations in organic terms:

 

·Changes in the scope of consolidation:

 

We have excluded the impact of changes in our consolidation perimeter in 2014 and 2013. The main change to our Telefónica Germany consolidation perimeter in such years related to the consolidation of E-Plus in Telefónica Germany since October 2014. In order to exclude the impact of this change in our perimeter, we have excluded E-Plus’s results from October 1 to December 31, 2014 from our 2014 results.

 

·Restructuring costs:

 

We have excluded the impact of certain restructuring costs associated with certain simplification processes implemented in Telefónica Germany. In 2014, these restructuring costs totaled 409 million euros. In 2013 there were no restructuring costs.

 

78

 

The table below shows 2014/2013 variations in reported and organic terms (the latter, calculated in accordance with the adjustments referred to above) of certain income statement and other measures, and the contribution of each item for which we have adjusted to our reported growth:

 

  YoY variation Contribution to reported growth (percentage points)
TELEFÓNICA GERMANY
2014
%Reported
YoY
%Organic
YoY
E-Plus Restructuring
Costs
Revenues 12.4% (3.5%) 15.9 --
Other income (37.4%) (44.8%) 7.5 --
Supplies 9.5% (3.9%) 13.4 --
Personnel expenses 97.7% 5.6% 15.3 76.8
Other expenses 37.5% 6.6% 24.7 6.2
OIBDA (44.0%) (22.1%) 9.3 (31.2)
CapEx 27.5% (6.4%) 27.9 6.0
OpCF (OIBDA-CapEx) n.m. (38.3%) (9.9) (69.9)

 

Results Discussion

 

Total revenues amounted to 5,522 million euros in 2014, up by 12.4% due mainly to the consolidation of the E-Plus Group since October 1, 2014, and offset in part by the lower service revenues during the rest of the year.

 

·Mobile service revenues totaled 3,580 million euros in 2014, up by 19.8% year-on-year in reported terms, due mainly to the consolidation of the E-Plus Group since October 1, 2014 and offset in part by the lower voice and SMS revenues during the rest of the year. Telefónica Germany continued to focus on data revenues, which increased 24.3% and accounted for 50.1% of mobile service revenues. Non P2P SMS data revenues accounted for 71.2% of the total data revenues (+4.7 p.p. year-on-year), increasing 32.8% year-on-year.

 

·Fixed telephony revenues fell by 7.8% year-on-year in 2014 to stand at 1,138 million euros. The main reason for this was a decline in fixed broadband customers (partially mitigated by VDSL growth) and transit business revenues, impacting slightly on the margin.

 

ARPU was negatively affected by the consolidation of the E-Plus Group and decreased by 7.1% year-on-year in 2014, reducing its year-on-year decline compared to 2013, due to the smaller proportional impact of migration to new tariffs, and the various actions undertaken with respect to the Telefónica Germany’s customer base in order to boost income and data leverage.

 

TELEFÓNICA GERMANY 2013    2014    %YoY
Voice Traffic (millions of minutes)             30,152                41,186    36.6%
ARPU (EUR)                 12.7                    11.8    (7.1%)
Prepay                     5.1                       5.4    4.5%
Contract (1)                  19.6                     18.4    (5.9%)
Data ARPU (EUR)                    6.2                       5.9    (3.9%)
% non-SMS over data revenues 66.5% 71.2% 4.7 p.p.
Notes:
(1) Excludes M2M.

 

79

 

OIBDA was 733 million euros in 2014, falling by 44.0% year-on-year in reported terms, mainly due to the 409 million euros provision relating to the restructuring process resulting from integration of the E-Plus Group, which impact was partially offset by the consolidation of E-Plus. In organic terms, OIBDA decreased 22.1% year-on-year, as a result of higher handset costs of sale, partially offset by lower interconnection costs resulting from less SMS and lower interconnection tariffs.

 

OIBDA margin stood at 13.3% in 2014, down 13.4 percentage points year-on-year in reported terms, mainly due to the provision relating to the restructuring process resulting from the integration of the E-Plus Group, which impact was partially offset by the consolidation of E-Plus.

 

TELEFÓNICA BRAZIL

 

The below table shows the evolution of accesses in Telefónica Brazil in 2013 and 2014:

 

ACCESSES  
Thousands of accesses 2013    2014    %YoY
Fixed telephony accesses (1)          10,747.8            10,743.4    (0.0%)
Internet and data accesses            4,102.0               4,082.6    (0.5%)
Narrowband                  92.1                     73.7    (19.9%)
Broadband (2)             3,936.7                3,939.8    0.1%
Other                  73.2                     69.0    (5.8%)
Mobile accesses          77,240.2             79,932.1    3.5%
Prepay          53,551.9             51,582.4    (3.7%)
Contract          23,688.3             28,349.7    19.7%
Pay TV               640.1                   770.6    20.4%
Final Clients Accesses        92,730.0           95,528.6    3.0%
Wholesale Accesses                 18.8                    25.9    37.5%
Total Accesses        92,748.9           95,554.5    3.0%
Notes:      
(1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access; 2/6 Digital Access x30. Company’s accesses for internal use included. Voice fixed wireless accesses included.
(2) Includes ADSL, optical fiber, cable modem and broadband circuits.

 

80

 

The table below shows the evolution of Telefónica Brazil’s results in 2013 and 2014:

 

Millions of euros        
TELEFÓNICA BRAZIL 2013 2014 %Reported
YoY
%Organic
YoY (1)
Revenues 12,217 11,231 (8.1%) 0.5%
Mobile Business 8,092 7,618 (5.9%) 2.9%
Mobile service revenues 7,608 7,228 (5.0%) 3.8%
Fixed Business 4,125 3,613 (12.4%) (4.2%)
Other income 299 261 (12.6%) 5.5%
Supplies (3,128) (2,680) (14.3%) (6.3%)
Personnel expenses (1,036) (976) (5.8%) (4.2%)
Other expenses (4,412) (4,293) (2.7%) 6.4%
OIBDA 3,940 3,543 (10.1%) 0.9%
OIBDA Margin 32.3% 31.5%          (0.7 p.p.)         0.1 p.p.
Depreciation and amortization (2,109) (1,762) (16.5%) (8.7%)
Operating income (OI) 1,831 1,781 (2.7%) 12.1%
CapEx 2,127 2,933 37.9% 15.0%
OpCF (OIBDA-CapEx) 1,813 610 (66.4%) (13.0%)
(1) See adjustments made to calculate organic variation below.  

 

Adjustments made to calculate organic variations

 

As explained above, year-on-year changes referred to in this document as “organic” or presented in “organic terms” intend to present year-on-year variations on a comparable basis.

 

With respect to Telefónica Brazil, we have made the following adjustments in order to calculate 2014/2013 variations in organic terms:

 

·Foreign exchange effects:

 

We have excluded the impact of changes in exchange rates by assuming constant average foreign exchange rates in 2014 and 2013. In particular, we have used the average foreign exchange rate of 2013 for both years. Foreign exchange rates had a negative impact on our reported 2014 Telefónica Brazil results as a result of the depreciation of the Brazilian real.

 

·Restructuring costs:

 

We have excluded the impact of certain restructuring costs associated with certain simplification processes implemented in Brazil. In 2014, these restructuring costs totaled 68 million euros. No restructuring costs were excluded from our 2013 results to calculate organic variations.

 

·Results of tower sales:

 

The results attributable to the sale of towers in 2014 and 2013 have been excluded in both years. The results from the sale of towers totaled 1 million euros and 29 million euros in 2014 and 2013, respectively.

 

·Spectrum acquisition:

 

We have excluded the impact of spectrum acquisitions in 2014 and 2013. In 2014, these acquisitions totaled 889 million euros (and related to a LTE block in the 700 MHz band). In 2013 these acquisitions amounted to 185 million euros.

 

81

 

The table below shows 2014/2013 variations in reported and organic terms (the latter, calculated in accordance with the adjustments referred to above) of certain income statement and other measures, and the contribution of each item for which we have adjusted to our reported growth:

 

  YoY variation Contribution to reported growth (percentage points)
             
TELEFÓNICA BRAZIL
2014
%Reported
YoY
%Organic
YoY
Exchange rate effect Restructuring Costs Towers sale Spectrum acquisition
Revenues (8.1%) 0.5% (8.6) -- -- --
Other income (12.6%) 5.5% (8.1) -- (9.5) --
Supplies (14.3%) (6.3%) (8.0) -- -- --
Personnel expenses (5.8%) (4.2%) (8.8) 7.2 -- --
Other expenses (2.7%) 6.4% (9.1) -- -- --
OIBDA (10.1%) 0.9% (8.4) (1.9) (0.7) --
CapEx 37.9% 15.0% (12.8) -- -- 37.0
OpCF (OIBDA-CapEx) (66.4%) (13.0%) (3.1) (4.1) (1.6) (43.4)

 

Results Discussion

 

Revenues totaled 11,231 million euros in 2014, down 8.1% in reported terms as a result mainly of the depreciation of the Brazilian real. In local currency, revenues increased by 0.5%, principally due to the good evolution in the mobile business (+2.9% year-on-year in local currency).

 

·Revenues from the mobile business totaled 7,618 million euros in 2014, falling by 5.9% in reported terms as a result mainly of the depreciation of the Brazilian real. In local currency, revenues from the mobile business increased by 2.9% due to the positive evolution of service revenues (up 3.8% year-on-year in local currency) as a result of the good performance of outbound revenues, which in turn increased as a result of an increase in the customer base and the increased proportion of data revenues. This evolution was partially offset by the decrease in handset revenues (down 11.9% year-on-year in local currency), and the lower inbound revenues affected by lower interconnection tariffs.

 

·Fixed telephony revenues totaled 3,613 million euros, down by 12.4% in reported terms, as a result mainly of the depreciation of the Brazilian real. In local currency, revenues were down by 4.2%. This decrease was attributable in part to the lower retail fixed-mobile tariff, which reduced fixed revenues despite the stable client base and higher minute bundling plans. This was partially offset by the increase of the broadband and new services revenues (up by 4.0% in local currency) helped by the increase of accesses connected with fiber, with a higher ARPU, and the growth of the Pay TV accesses.

 

The mobile ARPU accounted to 7.3 euros in 2014, down 9.1% in reported terms and 0.6% year-on-year in organic terms, mainly as a consequence of the reduction of the mobile termination rates. We believe that the better quality of the clients’ base is reflected in an increase of the outbound ARPU and a 16.0% growth of the data ARPU.

 

82

 

TELEFÓNICA BRAZIL 2013    2014    %YoY %Local Currency
YoY
Voice Traffic (millions of minutes)           115,698              127,412    10.1% 10.1%
ARPU (EUR)                    8.0                       7.3    (9.1%) (0.6%)
Prepay                    4.5                        3.9    (12.4%) (4.3%)
Contract (1)                  18.8                     15.7    (16.5%) (8.7%)
Data ARPU (EUR)                    2.5                       2.6    6.1% 16.0%
% non-SMS over data revenues 67.0% 77.4% 10.4 p.p. 10.4 p.p.
Notes:
(1) Excludes M2M.

 

OIBDA was 3,543 million euros in 2014, a fall of 10.1% in reported terms as a result mainly of the depreciation of the Brazilian real and, to a lesser extent, restructuring costs incurred in 2014 and lower proceeds from the sale of towers. In organic terms, OIBDA grew by 0.9%. This growth was attributable in part to the decrease in personnel expenses (-4.2% year-on-year in organic terms) as a result of the various restructuring plans and voluntary redundancy programs carried out in 2013 and the decrease in supplies (-6.3% year-on-year in organic terms). In addition, in 2014 there were lower interconnection costs due to regulatory changes and lower handset consumption.

 

The OIBDA margin stood at 31.5% in 2014 in reported terms, down 0.7 percentage points compared to 2013.

 

TELEFÓNICA HISPANOAMÉRICA

 

The below table shows the evolution of accesses in Telefónica Hispanoamérica in 2013 and 2014.

 

ACCESSES  
Thousands of accesses 2013    2014    %YoY
Fixed telephony accesses (1) (2)          13,778.5             13,374.4    (2.9%)
Internet and data accesses             5,137.7               5,433.8    5.8%
Narrowband                  33.4                     25.2    (24.5%)
Broadband            5,074.9               5,379.4    6.0%
Other                  29.4                     29.2    (0.6%)
Mobile accesses        107,266.9          110,346.5    2.9%
Prepay (3) (4)          84,524.1             86,698.0    2.6%
Contract          22,742.7             23,648.5    4.0%
Pay TV             2,133.5               2,431.9    14.0%
Final Clients Accesses     128,316.6        131,586.6    2.5%
Wholesale Accesses                 22.7                     16.4    (27.6%)
Total Accesses T. Hispanoamérica     128,339.3        131,603.0    2.5%
Notes:
(1) In the first quarter of 2014, 45 thousand fixed wireless inactive accesses were disconnected in Mexico.
(2) In 2014, fixed telephony accesses include 50 thousand “fixed wireless” additional customers in Peru.
(3) In the first quarter of 2014, 1.9 million inactive accesses were disconnected in Mexico.
(4) In the fourth quarter of 2014, 1.8 million inactive accesses were disconnected in Central America

 

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The table below shows the evolution of Telefónica Hispanoamérica’s results in 2013 and 2014:

 

Millions of euros        
TELEFÓNICA HISPANOAMÉRICA 2013 2014 %Reported
YoY
%Organic
YoY (1)
Revenues 16,855 13,155 (22.0%) 14.6%
        Mobile Business 13,020 9,578 (25.7%) 16.5%
Mobile service revenues 11,510 8,454 (25.7%) 17.5%
        Fixed Business 4,272 3,604 (10.1%) 8.4%
Other income 238 254 6.8% 32.6%
Supplies (4,983) (3,841) (22.9%) 4.9%
Personnel expenses (1,746) (1,525) (12.7%) 21.1%
Other expenses (4,833) (3,975) (17.7%) 21.1%
OIBDA 5,531 4,068 (26.5%) 16.4%
OIBDA Margin 32.8% 30.9%         (1.9 p.p.)         0.5 p.p.
Depreciation and amortization (2,524) (2,034) (19.4%) 5.3%
Operating income (OI) 3,007 2,034 (32.4%) 24.8%
CapEx 3,118 2,842 (8.8%) 29.1%
OpCF (OIBDA-CapEx) 2,413 1,226 (49.2%) 2.2%
(1) See adjustments made to calculate organic variation below.    

 

Adjustments made to calculate organic variations

 

As explained above, year-on-year changes referred to in this document as “organic” or presented in “organic terms” intend to present year-on-year variations on a comparable basis.

 

With respect to Telefónica Hispanoamérica, we have made the following adjustments in order to calculate 2014/2013 variations in organic terms:

 

·Foreign exchange effects and the impact of hyperinflationary adjustments in Venezuela:

 

We have excluded the impact of changes in exchange rates by assuming constant average foreign exchange rates in 2014 and 2013. In particular, we have used the average foreign exchange rates of 2013 for both years.

 

Foreign exchange rates had a negative impact on our reported 2014 Telefónica Hispanoamérica results, mainly due to the depreciation of various Latin American currencies versus the euro, in particular the Argentine peso and the Venezuelan bolívar.

 

We have also excluded the impact of hyperinflationary adjustments in Venezuela by reversing such adjustments.

 

·Restructuring costs:

 

We have excluded the impact of certain restructuring costs associated with certain simplification processes implemented in Telefónica Hispanoamérica. In 2014, restructuring costs totaled 99 million euros. No restructuring costs were excluded from our 2013 results to calculate organic variations.

 

·Results of tower sales:

 

The results attributable to the sale of towers in 2014 and 2013 have been excluded, which totaled 4 million euros in 2014 and 11 million euros in 2013.

 

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·Spectrum acquisition:

 

We have excluded the impact of spectrum acquisitions in 2014 and 2013. In 2014, these acquisitions totaled 405 million euros and related to Telefónica Argentina (168 million euros), Telefónica Colombia (111 million euros) and Telefónica Venezuela and Central America (126 million euros). In 2013 these acquisitions amounted to 251 million euros.

 

The table below shows 2014/2013 variations in reported and organic terms (the latter, calculated in accordance with the adjustments referred to above) of certain income statement and other measures, and the contribution of each item for which we have adjusted to our reported growth:

 

  YoY variation Contribution to reported growth (percentage points)
             
TELEFÓNICA HISPANOAMÉRICA
2014
%Reported
YoY
%Organic
YoY
Exchange rate effect and Hyperinflation Restructuring Costs Towers sale Spectrum acquisition
Revenues (22.0%) 14.6% (36.1) -- -- --
Other income 6.8% 32.6% (18.9) -- (4.5) --
Supplies (22.9%) 4.9% (27.6) -- -- --
Personnel expenses (12.7%) 21.1% (39.5) 6.3 -- --
Other expenses (17.7%) 21.1% (38.2) -- (0.1) --
OIBDA (26.5%) 16.4% (40.1) (2.0) (0.1) 0.0
CapEx (8.8%) 29.1% (50.6) -- -- 15.5
OpCF (OIBDA-CapEx) (49.2%) 2.2% (26.6) (4.6) (0.3) (20.0)

 

Results Discussion

 

Revenues were 13,155 million euros in 2014, down 22.0% year-on-year in reported terms due mainly to the impact of changes in exchange rates and hyperinflation in Venezuela (which accounted for -36.1 p.p. of the evolution). In organic terms, revenues increased 14.6% year-on-year, due to the good evolution of mobile and fixed data revenues and mobile voice revenues, in both cases mainly due to customer base growth and higher data consumption along with higher data penetration, which offset the negative impact of the lower interconnection rates (which reduced growth by -1.6 p.p. year-on-year).

 

·Mobile service revenues totaled 8,454 million euros in 2014, down 25.7% in reported terms mainly due to the impact of changes in exchange rates and hyperinflation in Venezuela. Excluding these impacts, mobile service revenues increased 17.5% year-on-year. Additional information on the evolution of mobile service revenues, on a by country basis, is provided below:

 

Argentina: mobile services revenues totaled 1,697 million euros, down 19.8% in reported terms due to the foreign exchange effect (which decreased growth by 39.1 p.p.). In local currency, these revenues increased by 19.3% due to the good evolution of voice and data revenues, despite the negative impact of certain changes implemented in our billing (which implies billing on a per second basis once a call’s first 30 seconds have elapsed), and higher network usage by customer and data penetration.

 

Peru: mobile service revenues totaled 1,250 million euros, up 7.8% in reported terms mainly due to the higher customer base and data massification (non-SMS data revenues were up 42.7% in 2014) and the launch of LTE which contributed to an increase in average revenues per client, which more than offset the impact of changes in exchange rates (which decreased growth by 5.6 p.p.). In local currency, revenues increased 13.4%.

 

Mexico: service revenues totaled 1,413 million euros, up 5.4% in reported terms due to the favorable regulatory interconnection terms which allowed the company to launch new competitive offers which boosted the customer consumption level in both voice and data. This increase was partially offset by the foreign exchange effect (which decreased growth by 4.6 p.p.). In local currency, revenues grew 10.0%.

 

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Venezuela and Central America: mobile service revenues totaled 1,305 million euros, down 65.1% in reported terms mainly due to the foreign exchange effects and hyperinflation in Venezuela. Excluding the foreign exchange effects and hyperinflation in Venezuela, mobile service revenues were up by 36.8% year-on-year mainly due to a tariffs increase of up to 25% in Venezuela, since July 2014, in all services and a mobile data services expansion driven by non-SMS revenues growth (+43.4% year-on-year excluding the foreign exchange effects and hyperinflation in Venezuela), which represented 74.0% of data revenues (+10.5 p.p. year-on-year excluding the foreign exchange effects and hyperinflation in Venezuela).

 

Data revenues in the region totaled 2,676 million euros in 2014, down 24.4% in reported terms as a result mainly of the adverse impact of changes in exchange rates and hyperinflation in Venezuela. Excluding the foreign exchange effects and hyperinflation in Venezuela, data revenues were up 23%, mainly driven by non-SMS data revenues (+43.4% excluding the foreign exchange effects and hyperinflation in Venezuela) which represented 74.0% of data revenues (+11 p.p. year-on-year excluding the foreign exchange effects and hyperinflation in Venezuela).

 

·Fixed business revenues totaled 3,604 million euros in 2014, down 10.1% in reported terms as a result mainly of the adverse impact of changes in exchange rates and hyperinflation in Venezuela. Excluding the foreign exchange effects and hyperinflation in Venezuela, these revenues increased 8.4% driven by broadband and new services revenues (+16.2% excluding the foreign exchange effects and hyperinflation in Venezuela). Broadband and new services revenues represented 60.0% of fixed revenues (+5 p.p. year-on-year excluding the foreign exchange effects and hyperinflation in Venezuela). Argentina in particular, experienced an acceleration of the fixed business with strong growth in access and voice revenues (which led to an ARPU increase).

 

ARPU was up by 10.6% in 2014 excluding the foreign exchange effects and hyperinflation in Venezuela, due to the data ARPU increase (+16.0% year-on-year) resulting from higher volume of minutes per client (+5.4%). Data traffic also increased (+65.3%). This growth was mainly driven by higher smartphones penetration and higher average consumption per access.

 

OIBDA totaled 4,068 million euros in 2014, down 26.5% in reported terms as a result mainly of the adverse impact of changes in exchange rates and hyperinflation in Venezuela. In organic terms, OIBDA increased by 16.4% as higher revenues registered in 2014 more than offset higher expenses, which were mainly attributable to:

 

·higher commercial costs, due to higher handset costs as a result of higher high-end handset sales (which more than offset lower interconnection costs resulting from the mobile termination rates reductions in Chile, Colombia, Peru and Mexico);

 

·higher personnel costs driven by increases in inflation in some countries of the region; and

 

·higher costs related to commercial campaigns and higher network costs due to the increased voice and data traffic.

 

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Set forth below is additional information on OIBDA on a country basis:

 

·Argentina: OIBDA reached 802 million euros, down by 17.9% in reported terms mainly due to the exchange rate effect. In local currency, OIBDA increased by 22.1% as higher revenues more than offset the higher costs. Higher costs were attributable to the overall prices increase, although Telefónica continued to carry out cost containment plans in order to offset the inflation effect.

 

·Peru: OIBDA reached 844 million euros, down by 3.5% in reported terms mainly due to higher costs, which impact was partially offset by the exchange rate effect. In local currency, OIBDA increased by 1.4% mainly due to the higher services revenues that offset the higher commercial costs resulting from higher competitive pressure in the Peruvian market.

 

·Venezuela and Central America: OIBDA reached 463 million euros, down by 73.4% in reported terms mainly due to the exchange rate effect and the hyperinflation in Venezuela. Excluding these impacts OIBDA grew 21.1% mainly due to higher service revenues that offset the overall rise of prices and the higher purchases in U.S. dollars for services and equipment purchases, both affected by the negative impact of currency devaluation in Venezuela.

 

OIBDA margin was 30.9% in 2014, decreasing 1.9 percentage points year-on-year in reported terms as a result mainly of the impact of changes in exchange rates and hyperinflation in Venezuela.

 

Our services and products

 

Mobile business

 

Telefónica offers a wide variety of mobile and related services and products to personal and business customers. Although they vary from country to country, Telefónica’s principal services and products are as follows:

 

·Mobile voice services: Telefónica’s principal service in all of its markets is mobile voice telephony.

 

·Value added services: Customers in most of the markets have access to a range of enhanced mobile calling features, including voice mail, call hold, call waiting, call forwarding and three-way calling.

 

·Mobile data and Internet services: Current data services offered include Short Messaging Services, or SMS, and Multimedia Messaging Services, or MMS, which allow customers to send messages with images, photographs, sound recordings and video recordings. Customers may also receive selected information, such as news, sports scores and stock quotes. Telefónica also provides mobile broadband connectivity and Internet access. Through mobile Internet access, customers are able to send and receive e-mail, browse the Internet, download games, purchase goods and services in m-commerce transactions and use Telefónica’s other data and software services.

 

·Wholesale services: Telefónica has signed network usage agreements with several MVNOs in different countries.

 

·Corporate services: Telefónica provides business solutions, including mobile infrastructure in offices, private networking and portals for corporate customers that provide flexible online billing.

 

·Roaming: Roaming agreements allow Telefónica customers to use their mobile handsets when they are outside their service territories, including on an international basis.

 

·Fixed wireless: Telefónica provides fixed voice telephony services through mobile networks in Brazil, Venezuela, Argentina, Peru, Mexico, Ecuador, El Salvador, Guatemala and Nicaragua.

 

·Trunking and paging: Telefónica provides digital mobile services for closed user groups of clients and paging services in Spain and most of its operations in Latin America.

 

Fixed-line telephony business

 

The principal services Telefónica offers in its fixed businesses in Europe and Latin America are:

 

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·Traditional fixed telecommunication services: Telefónica’s principal traditional fixed telecommunication services include PSTN lines; ISDN accesses; public telephone services; local, domestic and international long-distance and fixed-to-mobile communications services; corporate communications services; supplementary value added services (including call waiting, call forwarding, voice and text messaging, advanced voicemail services and conference-call facilities); video telephony; business oriented value-added services; intelligent network services; leasing and sale of handset equipment; and telephony information services.

 

·Internet and broadband multimedia services: The principal Internet and broadband multimedia services include Internet service provider service; portal and network services; retail and wholesale broadband access through ADSL, naked ADSL (broadband connection without the monthly fixed line fee); narrowband switched access to Internet for Universal Service, and other technologies. Telefónica also offers high-speed Internet services through fiber to the home (FTTH) in certain markets (primarily Spain, Brazil and Chile) and VDSL-based services (primarily Spain and Germany). Telefónica also offers VoIP services in some markets.

 

·Data and business-solutions services: the data and business-solutions services principally include leased lines; virtual private network, or VPN, services; fiber optics services; the provision of hosting and application, or ASP, service, including web hosting, managed hosting, content delivery and application, and security services; outsourcing and consultancy services, including network management, or CGP; and desktop services and system integration and professional services.

 

·Wholesale services for telecommunication operators: the wholesale services for telecommunication operators principally include domestic interconnection services; international wholesale services; leased lines for other operators' network deployment; and local loop leasing under the unbundled local loop regulation framework). It also includes bit stream services, bit stream naked, wholesale line rental accesses and leased ducts for other operators’ fiber deployment.

 

Digital services

 

The main highlights in services developed by Telefónica Digital are:

 

·Video/TV services: IPTV services (Internet protocol), over-the-top network television services, and cable and satellite TV. In certain markets, advanced pay TV services are offered, such as high-definition TV (HDTV), Multiroom (allowing clients to watch different TV channels in different rooms) and Digital Video Recording (DVR).

 

·M2M: The Telefónica M2M Portfolio includes both Horizontal Services where the managed connectivity platforms “Smart M2M” and “Jasper” are the key pillars and end-to-end solutions (including Transport, Connected Car, Utilities, Energy Efficiency, Industry Telemetry, Retail and Smart Cities among others) where Telefónica delivers full solutions “device + connectivity + application”.

 

·e-Health services or telecare: Set of services that help to support usual healthcare practice through electronic and communication processes, that lead to healthcare sector costs and time optimization for all agents involved, workers and patients. They include remote chronic patient management, telecare services allowing tele-assistance through connectivity services, emergencies and medical appointments management and Digital Imaging.

 

·Financial services and other payment services: These services allow merchants and financial institutions to make and receive payments.

 

·Security services: A broad set of facilities and services (Managed Security, Cloud and Comms Security, Cybersecurity (threats, vulnerabilities and antifraud platforms)) which aim to protect information stored in different end customers devices and networks from unauthorized access, use, disclosure, disruption or destruction, and including 11Paths developed services such as Latch, FaasT, Metashield or Tacyt.

 

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·Cloud computing services: Telefónica offers a broad set of products and services to large enterprises which are focused on “Managed Services” and aim to build fully managed infrastructure environments and manage the complex tools and applications that run on top of the IT infrastructure,  and small and medium-sized businesses including different SaaS bundles services with communications services that aim to expand customer digital presence (“Smarter Selling + Serving”) and  increase the employees’ productivity and collaboration (“Smarter Working”). 

 

·Advertising: Portfolio of marketing channels that third party brands can use to acquire and engage with customers. Traditional channels such as messaging may be utilized alongside new channels like programmatic display and sponsored connectivity. These are powered by our in-house technologies; SMS, bulk SMS, mobile portals- and fuelled by our customer data.

 

·Big Data: Includes the product “Smart Steps” which helps retailers, municipalities and public security bodies to understand the influx of people. Anonymous mobile data network and aggregates are used to calculate the influx of people in an area. Telefónica also offers B2B opt-in services to the financial sector (Risk Management) for improving fraud prevention and credit scoring in Brazil, United Kingdom and Chile. Recently a Smart Steps joint venture has been launched with China Unicom based out of Beijing to sell data insights in China.

 

·Future Communications: Includes “TU Go”, Movistar’s exclusive application that lets clients have the same number on all their devices and communicate among such devices via Wi-Fi.

 

Sales and Marketing

 

Our sales and marketing strategy is aimed toward reinforcing our market position, generating brand awareness, promoting customer growth and achieving customer satisfaction. We use a variety of marketing initiatives and programs, including those that focus on customer value, with in-depth market segmentation; programs to promote customer loyalty; pricing initiatives aimed toward stimulating usage, including segmented packages and innovative tariff options; and initiatives that are responsive to the latest market trends, including those aimed toward boosting demand for our mobile Internet and mobile broadband offerings. In connection with these and our other sales and marketing initiatives, we market our products through a broad range of channels, including television, radio, billboards, telemarketing, direct mail and Internet advertising. We also sponsor a variety of local cultural and sporting events in order to enhance our brand recognition.

 

Competition

 

The telecommunications industry is competitive and consumers generally have a choice of mobile and fixed line operators from which to select services. We are a global telecommunications services provider and face significant competition in most of the markets in which we operate. In Europe, our largest competitor is Vodafone and in Latin America, our largest competitor is América Móvil. Newer competitors, including handset manufacturers, MVNOs, internet companies and software providers, are also entering the market and offering integrated communications services.

 

We compete in our markets on the basis of the price of our services; the quality and range of features; the added value we offer with our service; additional services associated with those main services; the reliability of our network infrastructure and its technological attributes; and the desirability of our offerings, including bundled offerings of one type of service with another and, in the case of the mobile industry, in most of the markets offerings that include subsidized handsets.

 

To compete effectively with our competitors, we need to successfully market our products and services and to anticipate and respond to various competitive factors affecting the relevant markets, such as the introduction of new products and services, different pricing strategies and changes in consumer preferences. See “Risk Factors – Risks Relating to the Group’s Industry – The Company may not be able to adequately foresee and respond to technological changes and sector trends.”

 

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Strategic Partnerships

 

China Unicom

 

Since 2005, we have had a stake in China Unicom and its predecessor company. On September 6, 2009 we entered into a strategic alliance agreement with China Unicom, which provides, among other areas for cooperation, joint procurement of infrastructure and client equipment, common development of mobile service platforms, joint provisions of service to multinational customers, roaming, research and development, sharing of best practices and technical, operational and management know-how, joint development of strategic initiatives in the area of network evolution, joint participation in international alliances and exchanges of senior management. In furtherance of this strategic alliance we entered into a subscription agreement with China Unicom, pursuant to which we increased our voting interest in the share capital of China Unicom to 8.06% and China Unicom obtained 0.87% voting interest in our share capital in October 2009.

 

Pursuant to the strategic alliance agreement mentioned above, China Unicom has agreed to use its best endeavors to maintain a listing of all the issued ordinary shares of China Unicom on the Hong Kong Stock Exchange. For so long as the strategic alliance agreement with us is in effect, China Unicom shall not (i) offer, issue or sell any significant number of its ordinary shares (including treasury shares), or any securities convertible into or other rights to subscribe for or purchase a significant number of China Unicom’s ordinary shares (including treasury shares), to any current major competitor of Telefónica or (ii) make any significant investment, directly or indirectly, in any current major competitor of Telefónica. We made similar undertakings.

 

The initial term of the strategic alliance agreement between us and China Unicom terminated on September 6, 2012 and it is subject to automatic annual renewals, subject to either party’s right to terminate on six months’ notice. Also, the strategic alliance agreement may be terminated by China Unicom if our shareholding in China Unicom drops below 5% of its issued share capital or if China Unicom’s shareholding in us drops below 0.5% of our issued share capital. In addition, the strategic alliance agreement is subject to termination in the event either party is in default and automatically terminates on a change in control of China Unicom.

 

On January 28, 2011, China Unicom completed its acquisition of 21,827,499 Telefónica shares.

 

On June 10, 2012, Telefónica, S.A. through its 100% subsidiary, Telefónica Internacional, S.A.U., and China United Network Communications Group Company Limited (“Unicom Parent”) through a 100% owned subsidiary, signed an agreement for the acquisition by this last company of 1,073,777,121 shares of China Unicom-Hong Kong-Limited, owned by Telefónica, equivalent to 4.56% of the issued share capital of China Unicom.

 

On July 21, 2012 the aforementioned agreement was complemented by a Supplemental Agreement which determined the acquisition of the shares at a price of HK$10.02 per share, for a total amount of HK$10,759,246,752.42 (approximately 1,142 million euros). The transaction was completed on July 30, 2012.

 

On November 10, 2014, Telefónica, through its 100% subsidiary, Telefónica Internacional, S.A.U., sold 597,844,100 shares of China Unicom, representing 2.5% of the share capital of the company, by means of a block trade, at a price of HK$11.14 per share, for a total amount of HK$6,660 million, approximately 687 million euros at the exchange rate as at the date of the sale.

 

Further to the sale, Telefónica maintains its commitment to the strategic alliance with China Unicom.

 

Recently a Smart Steps joint venture has been launched with China Unicom based out of Beijing to sell data insights in China.

 

As of the date of this Annual Report, Telefónica’s shareholding in China Unicom amounts 2.51% of its capital stock. Furthermore, Mr. César Alierta, chairman of Telefónica, S.A. is a member of the Board of Directors of China Unicom while Mr. Wang Xiaochu, chairman of China Unicom, is a member of the Board of Directors of Telefónica.