Thank you for standing by, and welcome to Telefónica January-September 2018 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad. If you should require any assistance during this call, please press star zero. As a reminder, today's conference is being recorded. I would now like to turn the conference over to Pablo Eguirón, Global Director of Investor Relations. Please go ahead, sir.
Good morning, and welcome to Telefónica conference call to discuss January-September 2018 results. I'm Pablo Eguirón, Global Director of Investor Relations. Before proceeding, let me mention that financial information contained in this document related to the third quarter of 2018 has been under International Financial [audio distortion] the 1st of January of 2018, we implemented IFRS 15 and 9. All financial information in this presentation is based on this standard. In organic terms, the effect of the accounting change of IFRS 15 are excluded in 2018. This financial information is analyzed. This conference call webcast, including the Q&A session, may contain forward-looking statements and information relating to the Telefónica Group. Such statements may include financial or operating forecasts and estimates based on assumptions or statements regarding plans, objectives and expectations that make a reference to different matters.
All forward-looking statements will risk uncertainties and factors, many which are beyond the Company's control. We encourage you to review our publicly available disclosure document filed with the relevant securities market regulator. If you don't have a copy of the relevant press release insights, please contact Telefónica Investor at either number. Now, let me turn the call over to our Chief Operating Officer, Ángel Vilá.
Thank you, Pablo. Good morning and welcome to Telefónica's Third Quarter Results Conference Call. With me today is Laura Abasolo, Chief Financial and Control Officer. Following our presentation, we will host a Q&A session. We invite you to ask any questions you may have. I am pleased to show in slide number two the good progress in the execution of strategic priorities in the quarter. First, improved positive momentum on capturing high-value customers with strong net adds in mobile contracts, LTE, ultra broadband, and pay TV, while extending our fiber coverage to 49 million premises passed and LTE coverage to 75% of population. As a result, average revenue per user grew by a steady 3.5%. Our customers' loyalty is reinforced by stable churn level. Second, by business lines, we highlight that Spain posted its best commercial KPIs in 10 years.
Brazil marked the seventh straight quarter of margin expansion with record net adds in fiber. Germany maintained MSR growth stable ex regulation. The U.K. registered one more quarter of stellar performance. In Hispam Sur, revenue growth improved sequentially on strong ultra broadband and mobile contract. In Hispam Norte, Colombia and Central America are performing very well, while Mexico remains affected by negative regulation. Third, with the aim of a sustainable digital future, we continue to evolve towards smart networks. We advanced in our digitalization program, already yielding efficiencies, and made Aura available in Spain through Movistar Home from mid-November. Overall, we are delivering strong results with better organic year-over-year trends in revenues, OIBDA, and operating cash flow. Free cash flow expanded to EUR 3.6 billion, excluding spectrum acquisition. For the sixth straight quarter, net financial debt has been reduced.
All this allow us to upgrade our full-year outlook to revenue growth around 2% from our previous guidance of around 1%. Turning to slide three, let me summarize key financials. Reported figures were impacted in the quarter by Forex, regulation, hyperinflation in Argentina, and other non-recurrent effects. Isolating these factors, year-over-year organic growth remained very solid, ranging from 2.7% in revenues to 4.1% in OIBDA and 4% in operating cash flow. Strong earnings performance is translated into a 35.8% annual increase in net income in the quarter, surpassing the EUR 1.1 billion mark or EUR 0.21 per share, almost 40% up. Year-over-year net debt decline of 9.7% to EUR 42.6 billion reflects our relentless focus on deleverage. The upgrade of our 2018 guidance is best outlined in slide number four. In the first nine months of the year, revenues grew by 2.2% year-over-year, clearly beating guidance of around 1% annual growth.
The improving trends seen in the quarter and the foreseeable growth for the fourth quarter allow us to increase our guidance for organic revenue growth to around 2%, and again, despite the drag from regulation of minus 0.9 percentage points. We maintain the remaining guidance metrics unchanged, with margin expansion of around 0.5 percentage points and CapEx to sales ex-spectrum of at around 15%. We remain committed to additional deleveraging and to improving return on capital employed. Regarding dividends, we confirm the EUR 0.4 per share in cash for 2018, with the first tranche of EUR 0.2 to be paid this December and the second tranche in June 2019. Turning to slide number five, earnings momentum improved during the quarter, driven by our operations in Europe, which are accelerating top-line growth by 40 basis points sequentially, highlighting their positive operating momentum.
As such, organic growth was 2.7% in revenues, with Europe growing plus 1.6% year-over-year and LatAm 3.2%. OIBDA maintained its trend versus the second quarter, with 4.1% year-over-year organic increase and expansion in margin of 40 basis points. We would like to highlight margin increase of more than 200 basis points in Brazil, 50 basis points in U.K. or 30 basis points in Germany, while Spain continued to surpass the 40% margin level. Operating cash flow up to September had an outstanding performance, growing organically by 2.9% year-over-year or 2.2% reported to EUR 7 billion, despite higher levels of investment, positioning us well for future growth. On slide six, you can see the solid free cash flow generation in the first nine months of the year, reaching close to EUR 3 billion.
Excluding Spectrum, free cash flow would be EUR 3.6 billion with 0.9% annual growth, reflecting the very strong operating performance, lower CapEx intensity, and reduced financial payments and taxes. This performance also shows that the impact of FX in revenues and OIBDA is significantly lower at the free cash flow level. Free cash flow generation is the main driver of the EUR 1 billion net debt reduction during the quarter, or EUR 1.6 billion decrease since December 2017. In slide seven, we show our advances in the digital transformation across our four platforms, aiming for differential customer experience and a linear business model. Starting from the bottom of the slide, we are committed to guarantee excellent connectivity.
We continue to virtualize the network through our unique global solution, now available in 11 countries, and install state-of-the-art customers equipment over an enlarged NGN network that covers 81 million premises with ultra-broadband and 75% population with LTE. Regarding systems and IT transformation, our second platform, 27% of the total customer base has migrated to full stack, and 63% of the process are managed in real time. With the third platform, our products and services, we enhance our growth profile with digital services delivering almost EUR 5 billion digital revenues year to date, up 25%. Finally, on our fourth platform, the use of artificial intelligence positions us a step ahead. Movistar Home smart device will be available from mid-November in Spain through Aura, reinventing the experience for users who will enjoy the possibility of managing by voice the contents of Movistar Plus+, as well as communications and home connectivity.
In slide eight, we show how we capture the value of connectivity with our enriched offers. In the consumer segment, we keep innovating our proposal, including new flexible tariffs in postpaid, both in Brazil and U.K., customized to satisfy different customer needs. A comprehensive OTT video service, Movistar Play, already available in most of Latin America, and new tariffs based on more for more strategy in Brazil, Colombia, and Germany. At the same time, recurrent data in prepaid plans increases its weight up to 40% in LatAm. A new Fusión+ portfolio is launched in Spain, leveraging premium content and fiber. Third-party services, such as Netflix, are being integrated already in Chile, Colombia, Ecuador, and the U.K. In the corporate segment, we focus to drive digital transformation to our clients through multi-cloud security and big data solutions, enhanced with strategic agreements, all leveraging on our strong global capabilities.
B2B revenues in the nine months period increased by 3% year-over-year organically. In slide nine, video is at the core of our strategy of offering the best pay TV and is driving ARPU uplift and customer stickiness and therefore data monetization. In addition, video is the main contributor to digital services revenues at 44% and reached EUR 2.1 billion in the first nine months of the year, with a customer base reaching almost 10 million TV customers, nine million pay TV subscribers plus one million OTT active customers in LATAM across Spain, Brazil, and Hispam. Our differential capabilities strengthen our video business. First, powerful video platforms leveraging unique fiber assets in Spain and unified platform in LATAM. Second, scale and distribution power with Movistar Series being an excellent example for own produced content, then resold to LATAM and new partner-based bundle offerings as Netflix.
Third, our superior content and functionalities which make our proposition differential. All this allow us to consolidate our leading position and to capture new growth opportunities. We have enriched our content portfolio and platforms, and we are the leading video distributor in Spain and the best positioned to capture the large OTT video opportunity in Latin America. In slide 10, we make a deep dive in the B2B area. This is a relevant segment, with a 4 million customer portfolio, gaining traction across Telefónica's footprint and delivering above-average performance in key markets. B2B enhances our growth profile with 60% of its revenues backed by a strong demand of advanced data communications and digital services, which are offered in bundled and tailored propositions. B2B is becoming more relevant, and as an example, Spain improves its digital ranking, becoming the third IT provider, according to Gartner.
As a global ICT and cloud communications provider, we leverage on key capabilities to lead corporate digitalization. With presence in 17 operations with 12,000 specialized sales force, our customer-centric value proposal relies on three main pillars: consumption-based softwarization, all as a service. All this together with our network transformation enable the delivery of new B2B services such as bandwidth on demand, access anywhere, and near real time, among others. All in all, we are a reference to our customers in their digital transformation, IoT, and big data. Moving to slide 11, we continue focusing on high-value customers, the pillar of our business sustainability. It's an evidence-based strategy with longer customer lifetimes, with mobile contract in the U.K. standing at 8 years, 6 years for Spain's Fusión customers, 5 years for mobile contract in Brazil, 3 years for fiber in Brazil.
This is the result of having undertaken a deep business transformation. We continue building state-of-the-art networks, leading towards a customer-centric business model through softwarization, data analytics, and artificial intelligence, as well as confirming process automation with full stack deployment and efficient sales, among others. In addition, this transformation is delivered for a truly differentiated customer experience. As such, this has enabled us to gain velocity to scale innovations, reducing complexity, and posting better time to market. Starting from our core connectivity, we have created a global digital ecosystem around the customer, including features such as Novum, Smart Wi-Fi, Consumer IoT, or Movistar Play. In slide 12, we show the tangible progress made on our digitalization priorities. In Spain, Fusión sales in digital channels increased 73% versus Q3 2017, and users of Movistar app were up by 43%.
On the other hand, self-managed technical incidents were up 21% and more than 50 use cases of advanced analytics were implemented. At the same time, in Brazil, users of Meu Vivo app were up by 46%. Prepaid digital top-ups increased by 20%, and e-billing customers rose by 41% year on year, all contributing to 30% reduced calls to the call center. We keep progressing well towards the target savings of more than EUR 300 million in 2018. Furthermore, we are working on other initiatives like robotic process automation, cognitive contact center, and blockchain that will have relevant impacts going forward. Now I hand over to Laura to take you through a detailed review of our business units.
Thank you, Ángel. On to slide 13. We'll go into detail about the excellent KPIs performance delivered by Telefónica España in the quarter, that posted the best commercial activity in the last 10 years, delivering proof points for our content strategy and commercial push focused on high-value convergence. Despite an intense promotional activity from our competitors, our compelling and rich Fusión offer boosted gross add while churn was contained, resulting into remarkable net adds. This includes best ever seen fixed and mobile portabilities, largest fixed broadband net adds since the launch of Fusión in 2012, and the best mobile contract net adds of the last 10 years. Fusión ARPU continued to grow year-on-year, although seasonality on calendar effects explain its lower pace of growth versus the previous quarter.
The new customers' leading quality is noteworthy, as 40% of Fusión gross adds subscribe high-value bundles, adding incremental value to the base. At the same time, Telefónica España's fiber networks continue improving returns both at the retail and wholesale layers, as proved by the more than 1.2 million customers connected in the last 12 months. In a nutshell, our superior assets and unrivaled offering make the difference in terms of value share gain. Moving on to slide 14, we show how Telefónica España delivers solid financial results and preserves profitability, while a strong commercial boost increases business future visibility and proves its differential customer proposition. Service revenues year-on-year growth remains at similar levels as the previous quarter, in spite of the mentioned negative calendar impact of Fusión, the loss of wholesale stream from MásMóvil, which impact is larger than in Q2, and MTR cuts.
Excluding the loss of wholesale stream from MásMóvil and MTR cuts, service revenue year-on-year growth remained at 1.4% on the back of higher IT and football wholesale revenues. At the cost level, efficiencies mostly offset the increase in net content costs since mid-August, when the new football season started, and OpEx posted a narrow increase of EUR 32 million versus Q3 2017, leading to a quarterly 14.5% OIBDA margin, improved from 14% achieved in the first half of the year. All this translated into a robust cash flow generation of EUR 2.6 billion in nine months, stable year-on-year, despite higher CapEx due to phasing in the periods. Moving to slide 15, Telefónica Deutschland maintained a strong commercial momentum in the third quarter. The updated O2 Free tariffs continue to be well received, driving data growth and our ARPU up strategy. During the quarter, the company registered 233,000 contract net additions.
LTE customers amounted to 17.2 million, up 9.4% year-over-year. Average monthly data usage of O2 contract LTE customers was up by 65% year-on-year to 3.9 gigabit per month. With regards to the financial highlights in the quarter, mobile service revenue ex regulation stood flat year-on-year, and margin expanded by 0.3 percentage points on the back of successful synergy capture of EUR 25 million and focus on profitable growth. In the first nine months, CapEx increased by 7.6% year-on-year, driven by the final stage of our network consolidation and ongoing LTE rollout while we continue to capture incremental synergies of EUR 35 million. Turning to slide 16. Telefónica UK continues being the largest U.K. mobile operator with 32.3 million accesses and leading loyalty with contract churn stable at 1%.
The launch of custom plans with an industry-first proposition provide flexibility and choice, allowing customers to select contract terms of up to 36 months. We continue to invest in our award-winning network, for example, through rapid deployment of the recently awarded spectrum. Telefónica UK's robust financial performance delivers the ninth consecutive quarter of mobile service revenue growth and was up 3.6% year-on-year. OIBDA accelerated its growth to 9.8% year-on-year in the quarter, with the margin expanding by 0.5 percentage points, benefiting from lower annual license repayments and a commercial settlement. Excluding the commercial settlement, OIBDA grew 5.5% year-on-year. Operating cash flow ex spectrum strongly improved by 12.8% year-on-year in the first nine months. Moving to slide 17.
Vivo continued widening its quality gap after accelerating its 4G rollout and already covering 87% of the population while expanding 4G+ technology across the country, with 850 cities already covered. Simultaneously, Vivo continued to expand its fiber footprint, reaching a total of 230 cities, 104 of them with FTTH, and sustaining the leadership with the largest fiber network in Latin America. Additionally, once again, we deliver a strong set of commercial results. In mobile, leading mobile contract net adds in the market over the last five months with ARPU and churn stable year-on-year in the quarter, despite macro and more intense competition. In fixed, we enjoy outstanding results in cities passed with fiber since 2017, with an average take-up ratio of 42%, allowing fixed broadband and paid TV ARPU to increase by 10% and 4% year-on-year respectively in the first nine months of the year. Moving to slide 18.
Revenues in Q3 decreased by 1% year-on-year, affected by a weaker performance in prepaid due to the macro environment and stronger competition, and a decline in fixed voice. We could expect some future macro stabilization post the recent elections. On the other hand, as a result of our value growth strategy, premium revenues continue posting outstanding progression, plus 8% in contract, plus 30% in fiber, and plus 47% in IPTV. These are all quite sustainable revenue sources. Furthermore, digitalization and simplification initiatives continue to drive the 3.4% decline in OpEx year-on-year in Q3, and include savings from initiatives in call center, back office, and billing.
As a result, organic OIBDA margin increased year-on-year for the seventh consecutive quarter to 37.2%, which, coupled with strict financial discipline and despite higher capital intensity as well as FX headwinds, led Telefônica Brasil free cash flow to already surpass EUR 1 billion in the first nine months of the year. With regards to Hispam Sur, it again show a strong commercial trend, helped by further differentiation in our commercial offers now including Movistar Play, and in spite of tougher competitive environment mainly seen in Peru. Moreover, fiber already reached more than 2.3 million connections, with an outstanding 51% year-on-year increase. Revenue and OIBDA posted a sound growth, thanks to the increase in value accesses, progressive tariff updates in Argentina, and the benefits of efficiency measures, which more than offset the increase in commercial costs. Moving to slide 20.
North Hispam continued to post a sound commercial performance, with positive net adds in high-value accesses, including contract, fixed broadband, and pay TV, namely leveraging on very good performance in Colombia and Central America. On the one hand, financials continue to be strongly affected by weak performance in Mexico as a result of both regulation and the deterioration of the competitive environment. Ex-regulation, revenue in Mexico will be close to stable at -0.9%. On the other hand, there is outstanding performance in Colombia that posted an acceleration in revenue and OIBDA year-on-year growth, and operating cash flow grew by 43% in the first nine months of the year. On slide 21. During the quarter, BRUSA Cable came into service, becoming the highest capacity cable connecting the Americas, U.S., Puerto Rico, and Brazil, with 11,000 kilometers and capacity of 138 terabytes.
The tower portfolio continued to increase with 101 new towers built in the quarter, and the tenancy ratio rose to 1.35 times. On the financial side, revenue and OIBDA increased by 33.6% and by 30.9% year-on-year respectively, positively impacted by the sale of exceptional capacity in BRUSA in a multi-year agreement. Excluding this impact, top line could grow by 5.3% year-on-year and OIBDA by 6.5%. On the other hand, CapEx started to decline after the completion of the new cables that came into service this year, driving operating cash flow up by 18.9% year-on-year. It's also worth mentioning the sale of 9.99% Telxius share c apital to Pontegadea for EUR 379 million this quarter. On slide number 22, you can see the non-recurring factors impacting third quarter OIBDA and net income, which added plus EUR 100 million to reported OIBDA and deducted EUR 10 million at the net income level.
In detail, non-recurring effects were, first, in Brazil, the favorable outcome of a judicial decision plus contingencies. Second, hyperinflation accounting in Argentina. Third, restructuring provisions, mainly in Telefónica Deutschland, Telefónica del Perú, and Telefónica Argentina. Four, others, including mainly capital gains on digital companies and tower sales. Moving to slide 23. Reporting net income increased by 11.6% from the same period in the previous year to EUR 2.7 billion, and the earnings per share grew 6.1% annually to EUR 0.46 per share. Management of non-operating results continue paving the way for bottom line growth, as a 6% increase at the operating income level ramp up 5.6 percentage points to net income. Moving to slide number 24, swings in LatAm market currencies, in particular, the depreciation versus the euro of the Brazilian real and the Argentinian peso, are dragging down reported growth in the January to September period.
At the revenue level, FX, excluding hyperinflation adjustment in Argentina, deducted EUR 3.3 billion year-on-year in the first nine months of the year. This negative impact decreased to EUR 1.2 billion at the OIBDA level, and was further mitigated at the free cash flow level, with a negative impact of EUR 330 million. On the contrary, Forex has lowered net financial debt by EUR 106 million year-to-date. Organic contribution to headline figures continue to be very solid and consistent. Let's move now to financial metrics on slide 25. We keep on reducing our net debt figure, which stands at EUR 42.6 billion as of September, -EUR 1.6 billion versus December 2017, backed by a strong cash flow generation. In terms of our net debt to OIBDA ratio, we ended September at 2.68 times.
Slide 26 shows how Telefónica has successfully approached capital markets, taking advantage of benign market conditions early in the year and raising EUR 12.4 billion year-to-date. Our average debt life remains high at 9.2 years, with an increase relative to nine years in June 2018 and 8.1 years in December 2017. We have increased our liquidity cash by EUR 1.5 billion relative to June 2018, maintaining a liquidity position of EUR 20.4 billion, comfortably exceeding our next two years of maturities. I will now hand back to Ángel.
Thank you, Laura. To conclude, let me highlight first that our quarterly results show the continuous progress on strategic positioning, the delivery and profitable results, and the commitment on financial discipline. Second, the sound results achieved till September allowed us to increase our revenue growth guidance for the full year to around 2%. We remain focused on long-term value creation, delivering sustainable growth through business excellence, and aiming for free cash flow accretion. We are ready to take your questions.
Ladies and gentlemen, if you would like to ask a question at this time, please press *1 on your telephone keypad. To cancel your question, please press *2. Once again, that's *1 to register for a question and *2 to cancel. We would kindly ask you to ask a maximum of two questions per participant. If possible, we recommend you not to use the cell or hands-free phone. There will be a short silence while questions are being registered. Our first question comes from Georgios Ierodiaconou from Citi. Please go ahead, caller. Your line is open.
Sorry, I have two questions, please. The first one is around your leverage. In the past, you expressed perhaps an interest in increasing your debt in reais, should the exchange rate and the funding cost be reasonable at the time. There's been a sharp, obviously, appreciation of the currency in the past few weeks. I was wondering if it's something you're considering doing at this point. The second question is on Spain and Fusión ARPU. You mentioned that there are tougher calls because of the price increases you implemented last year. Correct me if I'm wrong, you are not planning any similar tariff rebalancing this year. I was wondering whether the mix of customers you've seen coming through in Q3 is such that gives you confidence this will come through regardless of any tariff rebalancing. Thank you.
Thank you, Georgios Ierodiaconou, for your question. On net debt and debt in local currency, particularly in Brazil, to your question, as you know, the first thing we always emphasize is that the FX impact diminishes quite substantially until we go to the free cash flow level, no. Our main objective is to protect solvency. Whenever there's a reduction of free cash flow due to FX, we have a similar reduction or even larger in net debt. In the first nine months of the year, the EUR 330 million reduction in FX go along with a net debt reduction of EUR 106 million, which is lower. If you look at this historically, and we have shared this information with you in the past, you can see that usually the net debt reduction is higher than the OIBDA reduction, the free cash flow reduction, and therefore the solvency is protected.
Having said that, we continuously look, as you said, whether the depreciation of the FX could useful to increase debt in local currency. We have a benchmark of one times in LATAM and two times in Europe, and we monitor the economic profit analysis. If we issue debt in Brazilian reais, we have immediately a higher cost of carry than hedging of that debt that will flow through free cash flow with higher interest payments, and we may have, or not, a reduction of net debt, depending on the FX evolution. If we were to do that economic profit analysis today, after the elections and the Brazilian real ramp-up, the economic profit would be negative. If we had issued Brazilian debt at the beginning of the year at that one-time benchmark of OIBDA, we would have a loss.
We can be sure that we continue monitoring and doing that analysis of the cost of carrying versus the FX evolution. However, the cost of carry is a third time, and it will be lower free cash flow, whilst the FX evolution, it really depends on many movements. By today, it would have been the wrong decision to issue more debt in Brazilian real at the beginning of the year according to that one times OIBDA to debt ratio in Brazil.
Regarding Fusión and the ARPU, let me comment first generally on Fusión KPIs, and then I will detail on the ARPU. The commercial performance of Fusión is measured by several KPIs. All of them have had positive performance this quarter. The customer base, the mix of the base, the churn, and the ARPU. Fusión customer base is up quarter-on-quarter and year-on-year, 4.1%. The mix, as you can see on slide number 13, is attractive. 40% of the gross adds we had in the quarter were in the high-end segment, and this high-end segment is moving from 27%-29%. The churn of Fusión is stable, both year-on-year and quarter-on-quarter. Finally, to your question, Fusión ARPU is up again year-on-year, reaches EUR 89.2 with a growth of 1.8% year-on-year.
To explain this year-on-year improvement of Fusión, we have had a positive impact from tariff upgrades. The impact from upselling this quarter has been neutral, as increasing high but also increasing low-end have compensated each other, and we have had some dilutive effect from promos and from mobile add-ons migrating to Fusión multi-line packs. What we see is that the quality of the customers that we have captured in the third quarter and the good value mix of those customers will impact positively on ARPU and also on B2C revenues already in Q4. We are expecting positive net adds and ARPU growth in Fusión in Q4.
Okay, thank you.
Thank you, Georgios. Next question, please.
Thank you. Our next question comes from Guy Perry from Acquire. Please go ahead. Your line is open.
Morning, everyone. Just a couple of quick questions. Firstly, on Spanish pay TV, you only added 100,000 customers. Did you have any problems registering people in the quarter, and should we expect a continued strong development in Q4 because of a bit of a time lag? Secondly, can you talk about what is commercially going on in the U.K.? With strong revenue growth and EBITDA growth, but also net add, it looks like it's quite a positive dynamic. I just wondered whether you felt that the U.K. market was pretty well structured currently. Thank you.
Thank you, Guy, for your questions. We believe that the net adds in pay TV in Spain in the third quarter have been actually very strong. We are above 100,000 net adds in the quarter. These net adds have come in the higher end, so these are very valuable customers that have brought not only their TV subscription, but all their services to Telefónica. If you compare this to the second quarter of this year, that figure was 8,000. Now we are in the third quarter, more than 100,000, and we have seen a performance that has not been seen many times in the past. We feel very good on this front. This has exceeded our expectations. We expect to continue to see traction, and this has taken us a very long way in compensating the loss of wholesale revenues to other parties.
In the U.K., the performance is very strong. We continue to be the favorite mobile network in the U.K. We continue to have customer growth. We have had the highest contract additions for eight quarters. It's the ninth consecutive quarter of MSR growth, and this comes with continued revenue and OIBDA growth. We are launching to the market very innovative propositions. We launched the custom plans, which are very flexible for our customers in order to tailor what type of usage they want to do, both on the device side and on the consumption side. We continue to have the YoYo flexible tariffs. We have been launching family plans, which give discounts for additional family members. All of these are allowing to have a consistent ARPU growth.
Performance and the traction and the momentum in our U.K. business continues to be very strong, and we see no reason for this trend not to continue along the year.
Thank you.
Thank you, Guy. Next question, please.
Thank you. Our next question comes from Jakob.
Hi. Good morning.
From Credit Suisse. Please go ahead. Your line is open.
Thank you. Hi. Good morning. I've got two questions as well. Firstly, on Spain, can you maybe help us understand, in terms of where you're getting the incremental customers from? Clearly, a big part of it's going to be from Vodafone. Is this acceleration really just purely driven by getting more Vodafone football customers? Or are you seeing a broader halo effect as a broader pickup where you're getting customers from the other operators as well? Secondly, there's some press articles a few weeks ago talking about a potential disposal of Mexico and Central America. I was just wondering if you could maybe share any thoughts on that, and perhaps also more broadly any other sort of non-core disposals, what your current thinking is on that. Thank you.
Thank you, Jakob. With respect to the commercial performance in Spain, I should say that, as we said in the Q2 results call, we were ready to propose to the market compelling offers, including football, that would aim to attract customers that were interested in that type of content that were not satisfied by the provider offering. We moved very dynamically and decisively from August to make attractive offers to our customers. One has to take into account that Q3 is always a very strong promotional quarter with the back-to-school campaigns and the start of the football season. Not so atypical, maybe this year a bit more intense. We wanted to move decisively because, of course, both ourselves and Orange would have that content, and we wanted to grab a significant part of customers that were looking for a provider with those type of content.
As I said in the presentation, we've had the best commercial performance in 10 years. We have had record number of portabilities. We have positive net adds in all segments, in Fusión, in fixed broadband, in fiber, in TV, in mobile contract. This has not come at the expense of also increasing our presence in wholesale NEBA fiber. We have grown both in retail but also in wholesale fiber. Probably when one looks at the portability numbers, you can see the trends of every player, how all of us are performing, but it goes beyond just the name that you said. With respect to speculations on Mexico and Central America, as you know, we look at our portfolio of assets looking to improve the return on capital employed. We are managing our assets in order to move in this direction.
Mexico is still suffering from the impact of regulation. Central America, which you saw on slide number 20, is posting a very good performance. It is a small region, but it is doing very nicely. We have noticed press speculation about potentially interested parties on those assets, but we prefer not to comment on such rumors.
That's very helpful. Thank you.
Thank you, Jakob. Next question, please.
Our next question comes from Akhil Dattani from JPMorgan. Please go ahead. Your line is open.
Yeah. Hi, good morning. Thanks for taking the questions. Firstly, just to stick on Spain, I guess just a couple of clarifications. We've had quite a lot of promotional activity in the quarter. I guess I'm quite keen to understand to what extent or not that's been impacting the ARPU dynamics that you've talked about. As you're talking about Q4, if I understood correctly, you're saying that the momentum will improve. Does that mean that you're expecting the consumer revenue performance to improve? Am I maybe reading that a little bit wrong? I guess maybe just sticking with Spain as a follow-up. I guess next year, the La Liga dynamics between yourselves and Vodafone will change, and I guess Vodafone will stop making payments. Can you maybe help us understand how you think about what that means for the EBITDA into next year?
The second thing was just on leverage and Spectrum. I guess yesterday, Telefónica Deutschland talked about IFRS 16 and the impact that they're expecting from that accounting change next year. I guess I'd be interested to understand how you're thinking about that, and linked to that, just any comments around what Spectrum auctions you're expecting next year would be useful too. Thanks a lot.
Thank you, Akhil. Again, on Spain and the evolution in the third quarter. As I said before, Q3 is always a quarter that sees significant promotions. This year may be a bit more intense. We added customers in the second part of the quarter because football campaign is mostly in August and September. The impact of those customers was not in all the quarter, but in the last part of the quarter. This will be seen in Q4 already. We got a number of those customers through promotions. As those promotions end, you will see also the revenues coming from this new subscriber base to start adding revenue growth already in Q4, and gradually have a larger impact over the next months as those promotions expire. We have good visibility, and we have confidence in seeing growth acceleration in B2C in Spain in the fourth quarter.
Regarding the content cost of La Liga, we said already in the previous conference call that the content cost will peak in Q4 this year, will stay the same in Q1, Q2 next year, and will start declining from Q3 onwards. This will be reflected in our accounts. As you saw in Q3, we already had a step-up in content cost because it's the first season of the previous La Liga cycle, which had cost inflation versus the second season. We have been able, through efficiencies, to absorb that extra content cost, and we have achieved actually 40.5% of EBITDA margin, which is higher than the 40% that we were having in the first half of the year. Yes, we will see some incremental content cost in Q4 this year and in the first half of next year.
We will continue working to mitigate that extra content cost with efficiency measures as we have been doing up to now.
Thank you, Akhil. With regards to IFRS 16, the group is currently assessing the effect of the application of this standard that will have an impact in the reported financial information, but not an impact on economic or free cash flow. We are not in a position at the moment to give you further visibility. The information is under analysis. As you know, there will be an increase in net debt, but OIBDA will also improve. It's important to notice that credit rating agencies are already taking into account for all leases within the ratio. It won't be an increase in that regard. We are working on the analysis. There's a significant work around it, and we will be in a position to give you further visibility at the time we announce results next at the end of the year.
Great. Thank you. I guess the only other small point was just any color around spectrum auctions you're expecting next year?
You mean spectrum auctions in Spain or elsewhere?
Yeah. I guess I'm just asking which markets you're expecting auctions in next year, really.
Okay. Sorry, I didn't get that part of the question. For next year, we think that there could be spectrum auctions in Germany, potentially the 700 megahertz in Spain as well. Those would be the most significant, although it's not 100% sure they will take place in 2019. Some of them could move to 2020.
That's great. Thanks.
Thank you, Akhil. Next question, please.
Thank you. Our next question comes from Keval Khiroya from Deutsche Bank. Please go ahead.
Thank you. Got two questions, one on Brazil and one on Peru. We obviously saw the mobile service revenue trend being a bit weaker in Brazil in Q3, given competition and macro, as you mentioned. You have repositioned your tariffs now. Should we therefore expect the service revenue trends to improve in Q4? Whilst the top line is still a little bit weaker than what we saw at the start of the year, do you still see the current rate of EBITDA growth as sustainable? Second, on Peru, we obviously saw quite a bit of a deterioration with EBITDA growth in particular, given the competitive environment. Looking beyond Q3 and in terms of what you've seen in Q4, has that market still remained competitive or has it improved at all? Thank you.
Thank you, Keval. On Brazil, which presented results yesterday and had a very nice performance in the market. We have had a mix of items that affect our revenue evolution. On the one hand, we continue to be very strong in contract. We have a good performance with churn stable. We are leading net adds in the market. We have been able to apply some more for more price increases in pure postpaid in September. You should expect for hybrid contracts as well, some more for more moves. On the other hand, in prepaid, we have seen weakness due to macro performance and more aggressiveness in the market coming from some competitors. We have made a new launch in prepaid in September, and the new prepaid offer is focused on acquisition and then migrating to hybrids.
As a result, as was expressed by my colleagues in Brazil yesterday, we expect better trends in revenues in Q4 and a more rational competitive environment. On the fixed side, what we see is the decline in the traditional voice, we see double-digit increase in fiber and pay TV. These would be the trends. All in all, we think we have seen the bottom, in the fourth quarter, we would see better trends. This comes with a huge effort on efficiency in Brazil. We have had, I think now it's 11 quarters of decline in OpEx, so we are increasing OIBDA margins. We're expanding margins in Brazil.
Yes, we have CapEx intensity because we see an opportunity to grow in fiber in Brazil, but still very good performance in operating cash flow and combined with tax impacts and so on, very good performance in free cash flow. In Peru, we have been working in the turnaround. Commercial activity is improving. We continue to have a strong performance in fixed. However, the market is quite competitive, and we need to continue working in improving the operations and the performance in our Peruvian asset. We have a strong base of assets in Peru. We think that we can improve the operation. Q3 clearly was a point of competitive intensity that maybe slowed us down a bit on our turnaround trajectory. It could be. We are working to try to boost revenue growth in Q4 in Peru.
That's great. Thank you.
Thank you, Keval. Next question, please.
Our next question comes from Mathieu Robilliard from Barclays. Please go ahead. Your line is open.
Good morning, and thank you. I have two questions, please. First, in Colombia, you had a very strong performance, clearly doing better than your competitors there, and I was wondering if you could give a little bit of color as to what is behind that and how sustainable that is. Second, coming back to Spain and focusing on the O2 brand, can you give a bit of color in terms of where you are in the launch process and what are the initial reactions? Generally, how is the competitive environment in that segment of the market? Thank you.
Thank you, Mathieu. Colombia, we are very happy with the performance. We have a solid commercial performance, which is leading to strong financial results. Both revenues and OIBDA growth are accelerating. In mobile, we had an increase of 8% year-on-year in accesses. This is driven by contract, which grows 2%, prepaid 10%, LTE is up 47%, smartphones 14%. In fixed, from a lower base, but we are growing fixed broadband 27% year-on-year in accesses and PTV 6%. We think that the market is a good market. Our asset, once we left behind the recapitalization of the company, we said that we were ready to go to capture profitable growth in Colombia. We think that our results are proving this to be the case. Sorry, your second question?
O2.
Oh, yes, sorry. On O2. The launch of O2 brand, which we launched on beta mode in July, has now in October been made in full-fledged. We have been designing the proposition under accretive criteria, and we want to segment the offer in such a way that we provide to different type of customers with appealing and competitive products. O2 is complementing both our premium offering that we offer through Movistar and Fusión and the low cost that we offer through Tuenti. We try to fill a commercial space in between, targeting customers that demand plain but competitive quality propositions with easy product portfolio structures and an innovative and frictionless customer care, what we call premium simple. The attributes that we're looking for this brand is quality, easy price structure, only communications, and name recognition.
We use the O2 brand, by the way, because it's a very well-recognized brand, and at the same time, provides us with a very cost-efficient way for this launch. It will be competitive, but it will be rational, so should not trigger disruption in each segment of the market. It's still early days. We have done the full launch now in October, but I can already say that we are having very good sensations. Thank you, Mathieu.
Thank you very much.
Thank you, Mathieu. Next question, please.
Our next question comes from Mandeep Singh from Bloomberg. Please go ahead.
Hi. Thank you for taking the question. Look, the main question really is on Spain again. The first component of the question is the 1.4% service revenue growth you're suggesting ex MásMóvil and ex MTRs. Is that a good proxy for where you see the real underlying health of the business? And once those effects lap next year, all other things being equal, is that the sort of growth trajectory you think the business should be on, something in the positive 1%-2% range? I know you don't really give guidance, but just to get a feel for the underlying trend. That's the first question. Related to Spain, I noticed that IT services was like a 25% growth. Can you just give us a little bit more color on what's driving that? Is there anything one-off, anything lumpy in there? Is it seasonal contracts?
What's the margin dynamic of the IT services type of business relative to the base of business? Thanks.
Thank you for your questions. Talking about service revenue growth, let me go through the components, the trends that we see, to try to give you some visibility and try to convey to you why we feel confident. B2C, there are a few components to service revenue. B2C, 55% of service revenue, B2B, 27% of service revenue, and wholesale and others, which is 18%. On B2C, what we see is that the increases in both volume and ARPU and the commercial performance in Q3 should, if anything, accelerate the trends that we have seen so far in the year. In B2B, this includes your second question, which is IT. B2B in the third quarter is growing 1.5%, the second quarter consecutively of B2B growing. This has two components. The traditional communications revenue declined 1.6% in Q3, and IT in the quarter grew 13.3%.
What we see is that, this is not lumpy. You will have seen in the previous quarters that IT revenues have been either mitigating, which was the case in Q1, but more than compensating, which was the case in Q2 and Q3, the decline in communication. We have a good positioning in IT. During my presentation, I was saying how Gartner is recognizing our Spanish operation in its IT propositions. The revenues and composition of B2B revenues is improving and the trend is there. Wholesale, because we have been flagging that ex MásMóvil and regulation of service revenue would be growing 1.4%. Wholesale, you have several components. One is the MVNO loss, which will annualize some fate, probably from Q2 2019 onwards, that headwind will disappear in due course.
We have the wholesale of NEBA fiber and the migration from copper to that, which is value accretive. Now that we have more content than we used to have, the wholesale revenue line will increase. What we have been seeing in 2018 as a headwind from the third component of service revenues, which is wholesale and other, should change sign going forward. Again, we cannot guide. It's too early to guide for 2019. We see good visibility that gives us confidence.
Thank you.
Thank you, Mandeep. Next question, please.
Our next question comes from Nicolas Didio from Berenberg. Please go ahead.
Hi, good morning. I have two questions and one follow-up. One question is regarding the content. You haven't yet, I think, launched the partnership with Netflix in Spain. Just relating to the content and negotiations of the rights. With Netflix as an OTT player growing, and you have, on the other side, a traditional pay TV with the output deals, can you renegotiate with lower tariffs the output deals with the majors in the U.S.? The rise of Netflix is not impacting anything on there? With Netflix, is it you provide them content and you would get favorable access to their offer in terms of billing, or is it a pure you resell revenues and you will have a normal relationship with Netflix? That's the first question. The second is regarding LatAm M&A. We have seen Millicom doing a EUR 1 billion deal in Panama. LatAm is very fragmented.
You have a focus on de-leverage. Is this focus on de-leverage preventing you to do bolt-on deals, or the fact that there is no deals on your side is just a conclusion that de-leverage is key for you? Maybe a follow-up on content, just to understand what you are saying on absorbing higher football costs next year. So far into Q2 2019, Vodafone has the eight league games. Do you assume in your latest Fusión price change, and in your 2019 budget, that Vodafone will not pay you for the eight games and will stop completely football? Just to have your thought on that. Thank you.
Thank you, Nicolas, for your questions. Regarding content, I think Netflix and Majors are different items. As they expire, we will aim to renegotiate the contracts with Majors. We think that our competitive position and customer base, which has hit a record high in the Spanish market in Pay TV, will allow us to have a proper negotiating position at the table when we get to negotiate those contracts. Regarding Netflix, it's a different item. It's our strategy of integrating OTTs in our platforms. We have reached a global agreement with Netflix to integrate their contents with our video and TV platforms. In Latin America, this takes the format of a revenue share. Carrier billing in such geographies is something that is very much appreciated by OTT players, and we integrate it in not only Netflix, but some others.
This is a very cost-efficient, no commitments revenue share type of approach, which is very valued by our customers. The agreement in Spain, which we are planning to launch by the end of this year, we will resell Netflix contents to our Fusión customers who choose to include it in the package. This will provide our customers an enhanced customer experience, because we will offer Netflix through IPTV, not over the top, as other deals in the market, and it will be fully integrated within our platform and equipment. The search will be integrated. There will be integrated capabilities in our systems to recommend contents to the customers. There will be improved quality, thanks to our 4K decos. Fusión customers will be able to enjoy a better customer experience with Netflix through the integration with us.
Fusión customers will receive a unified bill from Movistar, including the Netflix, it will make their life simpler. This is a win-win proposition for both Netflix and us. You added a question regarding Vodafone and the football. If Vodafone wishes to reconsider and acquire the football, of course, they have all the right, and we would welcome them to do so. We will continue in spite of that decision. That you have to ask them if they want to reconsider, but we are quite confident with our strategy, and performance in Q3 has shown that our strategy has proven right. On your question on LatAm M&A, we are driven in our decisions by return on capital employed. We look at our operations. We are in the process of approving our three-year strategic plan, our three-year business plan.
We are requesting from all our units to improve on these metrics. Our portfolio management decisions are also linked to this kind of metric. Every time that there is an opportunity for a market consolidation, which we continue to believe that it's probably the type of M&A activity that adds more value, we have a duty to monitor and analyze those opportunities. We have proof in the past that we are not only open, but we have been very active in market consolidation in certain markets. We analyze those, but we only move when we think that the opportunity makes sense for us. I don't know if this responds to your question. We are driven by return on capital employed, and we will analyze in-market consolidation opportunities and move if they have merit according to our financial criteria and value creation criteria.
Thank you.
Thank you.
Thank you, Nico. Next question, please.
Our next question comes from David Wright from Bank of America. Please go ahead.
Hello, guys. A couple of questions. I think the first may have been asked to death a little, I'm just trying to understand the discount rate on a lot of the commercial activity in the 100,000 or so TV ads and the very strong underlying Fusión. Should we be thinking that the incremental ARPU from those guys has come in at a circa 50% or so discount? Is that the kind of discount you guys are running? I'm just trying to get a feel of how we should be factoring that in. I know that question's been asked many times. My second question was just on Brazil, actually, and some of the tax rebates or the court cases that you guys have recently won. Another one announced yesterday, I think it was BRL 2.4 billion. How are you guys accounting for that?
Is that just coming straight into net debt as a potential receivable? Or is that just going to come in as effectively lower tax paid over time, how should we think about accounting for those numbers, given they are really quite material? Thank you.
Hi, David. Thank you for your questions. Let me say something. The average ARPU of the adds that we have had in the third quarter is higher than the average ARPU of the adds that we had in the first half of the year. As you saw in slide 13, 40% of the gross adds have come in the high-end segment of Fusión. Even if we have been attracting customers with promotions, which I insist, we always see promotional activity at the beginning of the football season every year. The customers, when the promos finish, will provide ARPU accretion, and will provide revenue growth in this customer segment. Higher number of customers that have come at ARPUs higher than what we were capturing before Q3, that are in the high end of the profile of the customer base.
This will be ARPU and revenue accretive from Q4 onwards.
David, regarding the judicial decision in Brazil, as you said, we had a second recognition this quarter, and there are still three potential more to come of a smaller size, but there is still potential for more coming in Brazil accounts and group accounts. Accounting-wise, this is for the long-term portion, this is accounted as a financial asset and other non-current assets, and for the short-term portion, as tax receivables. In our net debt, we are accounting for the full amount of VIC, as this is a monetary asset that leads to interest. Therefore, in the net debt amount of June, you could see the first part of the judicial, and now in September, you can also see the additional of the second decision.
Going forward, the free cash flow is going to reflect as well that cash inflow, because we are going to be mostly compensate for the PIS/Cofins. For other indirect taxes in Brazil. You will also see that tax coming through the free cash flow in, and it has already been the case in September. In September, we have about EUR 150 million cash flow in the Brazil free cash flow, in the group free cash flow. That will not impact net debt, because the net debt is being accounted one-off. When we have the recognition of the asset, we are accounting for the reduction on net debt, and you have seen that in June and also in September.
Going forward, we are going to see a reduction of taxes in Brazil and in the group, mostly indirect taxes, and that is going to flow through free cash flow but will not reduce net debt because we accounted it as a one-off, as the judicial revision decision has taken place.
That's entirely clear, guys. Thank you.
Thank you, David. Next question, please.
Our next question comes from Fernando Cordero from Banco Santander. Please go ahead.
Hello, thanks for taking my two questions. The first one is coming back to Spain and digging a little bit more on B2C segment, and particularly on the non-Fusión revenues, which for the first time in the last 10 quarters have been growing quarter-on-quarter. I would like to know if you all have seen or you are starting to see a stabilization on that business line, particularly in terms of volumes. The second question regarding the U.K. Given the strong performance there, I would like to get a view on what are the weight of the two main drivers probably on this performance. On one side, at which spend the retail or the end user activity is driving the growth in EBITDA, and what is the contribution of the wholesale business in this EBITDA growth in U.K. Thank you.
Thank you, Fernando. On your first question of around non-Fusión revenues in the B2C segment in Spain, the trend is, as you said, improving. This trend is due to lower 1P TV decline. We still have customers in single play TV, which have been migrating towards IPTV and Fusión, and this decline is lower in the quarter. Also is impacted by the different calendar of tariff upgrades. With respect to the U.K. OIBDA, what we have is continued strong growth in subscriptions. We have seen the RPI increases, and we see customers continuing to choose higher value tariffs. MBN overall is also there.
We have had a little bit more of commercial cost on the other hand, which partially has been mitigated by reduction in functional costs, the reduction in the annual license fee, and we had a commercial settlement in the quarter. The OIBDA performance in the U.K. was very high in the quarter, growing 9.8%. Even if you exclude this commercial settlement, it's growing at 5.5%, which we think it's a spectacular performance with benchmark margins for the U.K. market and margin expansion.
Okay. Many thanks.
Thank you, Fernando. We have time for one last question, please.
Our last question comes from Joshua Mills from Goldman Sachs. Please go ahead.
Thank you. Just a couple of quick ones from me. The first is a point of clarification on slide 13. How exactly do you define high, medium, and low-end customers? Is it based on the price point at which they're brought into the bundles, or is it based on the content they receive? If the latter, how is this going to be affected by the new range of football tariffs you've set up with access to football at a lower price point than previously? The second was just around co-investment schemes we've seen announced in the Spanish market. Vodafone, MásMóvil have discussed doing more on fiber tech co-investment. Euskaltel is talking to Planet Network as well. Would you consider participating in any co-investment scheme in some regions where you haven't already rolled out your own fiber? Finally, if I can just ask a third quick one.
The hedging and free cash flow drop due from FX impacts you show on slide 24 is quite encouraging. I just wanted to understand why it is that the free cash flow impact is so low when presumably quite a lot of the CapEx you spend is in hard currency for equipment in LATAM, and I'd also expect the hedging of your interest expense comes at a cost as well. Thanks very much.
Thank you for your questions regarding how we define high, medium, and low end. In the high end, we have Fusión Total, Fusión Total Plus, Fusión Total Plus with four mobile lines. These are packages that with a fiber of 600 megabit per second have prices of EUR 130 and above. Low end are packages that we call Fusión Cero and Fusión Base. Although we call them low end, the price with a 600 megabit per second fiber would range between 55 and EUR 72. The mid end is the point in between. Sorry. Regarding your second question on Vodafone and MásMóvil, we think it's a limited agreement that does not entail enlargement of the footprint. We have entered into wholesale agreements with Vodafone, with Orange, of course, the market is regulated.
We think that we can provide economically efficient wholesale access to fiber to any player in the Spanish market. We are seeing good traction in the wholesale NEBA and the accretion between the migration from copper to fiber, and this should see no need for overbuild in the Spanish market.
Thank you, Joshua, for your question. With regards to the page in which we saw the free cash flow impact from FX, you have to take into account that that is not only being diminished because of CapEx, it is also taxes, minority, financial payments. There is a whole flow of things reducing the impact. I also have to say the EUR 330 million has been very much affected by the Brazilian real, and that situation is turning with a big appreciation already in the month of October. We should expect that Brazilian impact getting reduced going forward. Also, on the CapEx in hard currency, first, as part of our operational hedging strategy, we do hedge for invoices in hard currency FX. You have to take into account a lot of the CapEx we have also has to do with local currency, particularly with the FTTH and FTTx deployment.
There is a lot of outsourcing with local companies. The hard currency piece is not as big as you can imagine.
Thank you, Josh. I now hand over to Ángel to close the call. Thank you very much for your participation. We certainly hope that we have provided some useful insights about the strong performance in Q3 and the good prospects that we see going forward. Should you still have further questions, we kindly ask you to contact our investor relations departments. Good morning, and thank you very much.
Telefónica's January to September 2018 results conference call is over. You may now disconnect your line. Thank you.