Business Transformation at Telefónica De España

For the nine months ending September 30, 2006, the Spain-based diversified telecommunications group, Telefónica SA (Telefónica) generated total revenues of €38,704³ million and a net profit of €5,185.7 million. The net profit witnessed an increase of 59.4% over that of the previous year. Telefónica was one of the leading telecommunication companies in the world with a major presence in Europe, Africa, and Latin America. As of June 2006, it had 191.7 million customers. Telefónica de España S.A. (Telefónica de España), a subsidiary of Telefónica, was a leader among the telecommunication operators in Spain, involved in providing fixed telephony and broadband services (Refer to Exhibit I for details of subsidiaries of Telefónica).

The revenues from Telefonica's traditional access business stood at €2,078.7 million, traditional voice services at €3,665.6 million, Internet broadband services at €1,762.6 million, data services at €806 million, and IT services at €255.8 million (Refer to Exhibit II for Revenue, Operating Income, and OIBDA⁴ of Telefónica de España for the first nine months of 2006 and 2005). Telefonica de España's improved financial performance was the result of a business transformation program implemented in the year 2000. The program enabled the company to reverse its declining earnings trend, and become one of the leading broadband operators in Europe and an integrated communication solutions provider.