Ladies and gentlemen, thank you for standing by, and welcome to Telefonica January, September 2018 Results Conference Call. At this time, As a reminder, today's conference is being recorded. I would now like to turn the conference over to Mr. Pablo Egiron. Global Director of Investor Relations.
Please go ahead, sir.
Good morning and welcome to Telefonica Conference Call discuss January, September 28, and results are published by Gironochovale Direct Profit. For proceeding, let me mention that financial information contained in this document related to the third quarter 2018, as we move under International Finance. Of debt value. From the 1st January of 2018, we implemented IFRS 1590 and all financial information in this this will be based on these organic terms, the effect of the accounting change of IFRS 15 are excluded in 20 His financial information is announced. This conference call webcast, including the Q And A session, may contain forward looking statements and information relating to the equivalents.
These statements may include financial or operating forecast and estimates based on assumptions or statements regarding past brief gives us some information that make a reference to the management platform. All forward looking statements are risks and uncertainties and contingencies. Any of which are beyond the company's needs. We encourage you to review our publicly available disclosure document filled with the relevant securities market due later, you don't have a copy of the relevant press release insights. Please contact the Konikas investor.
Mid-huh. Now let me turn the call over to our Chief Operating Officer, Mr. Angelica.
Thank you, Pablo. Good morning, and welcome to Telefonica's 3rd quarter results conference call. With me today is Laura Avasolo, Chief Financial And Control Officer. Following our presentation, we will host a Q and A session and we invite you to ask any questions you may have. I am pleased to show in slide number 2 the good progress in the execution of strategic priorities in the quarter.
1st, improve 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 49,000,000 premises passed, an LTE coverage to 75% of population. As a result, average revenue per and our customer's loyalty is reinforced by stable churn level. 2nd and by business lines, We highlight that Spain posted its best commercial KPIs in 10 years. Brazil marked the 7th straight quarter of margin expansion with record net adds in fiber.
Germany maintained MSR growth stable ex regulation. The UK registered 1 more quarter of stellar performance. In Southeast PAM, revenue growth improved sequentially on strong goods or broadband and mobile contract. And in Northeast Palm, Colombia and Central America are performing very well, while Mexico remains affected by negative regulation. 3rd, with the aim of a sustainable digital future, we continued to evolve towards the smart networks.
We advanced in our digitalization program already yielding efficiencies and made ORA available in Spain through Movistar Home from mid November. Overall, we are delivering strong results with better organic year on year trends in revenues, OIBDA and operating cash flow. Free cash flow expanded to 1,000,000,000, excluding spectrum acquisition. And for the 6th straight quarter, net financial debt has been reduced. All these allow us to upgrade our full year outlook to revenue growth around 2% from our previous guidance of around 1%.
Turning to Slide 3, let me summarize sorry, 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 on 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 percent annual increase in net income in the quarter. Surpassing the EUR 1,100,000,000 mark or EUR 0.21 per share, almost 40% up.
Year on year, net debt decline of 9.7 percent to EUR 42,600,000,000 reflects our relentless focus on the leverage. Of our 2018 guidance is best outlined in Slide 4. In the 1st 9 months of the year, Revenues grew by 2.2% year on year, clearly beating guidance of around 1% annual growth. Improving trends seen in the quarter and the foreseeable growth for the 4th 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 confirmed the per share in cash for 2018, with the 1st tranche of to be paid this December, and the second tranche in June 2019. Turning to Slide number 5, 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 percent in revenues, with eurogrowing plus 1.6% year on year, and LatAm 3.2%. OIBDA maintained its strength versus the 2nd quarter. With 4.1% year on year organic increase, an 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 UK, 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 on year, or 2.2% reported to EUR 7,000,000,000 despite higher levels of investment positioning us well for future growth.
On Slide 6, you can Excluding spectrum, free cash flow would be EUR 3,600,000,000, 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 1,000,000,000 net debt reduction during the quarter or 1,000,000,000 decrease since December 2017. In Slide 7, we show our advances in the digital transformation across our four platforms, aiming for differential customer experience and a leaner business model. Starting from the bottom of the slide, we are committed to guarantee excellent connectivity.
We continue to virtualize the network through our Unica Global solution, now available in 11 countries. And install state of the art customers' equipment over an enlarged NGN network that covers 81,000,000 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 3rd platform, our products and services, we enhance our growth profile. With digital services delivering almost 1,000,000,000 digital revenues year to date, up 25%.
Finally, on our 4th platform, we use the use of artificial intelligence positions us a step ahead Mobi Star Home Smart Device will be available from mid November in Spain through 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 8, we show how we capture the value of connectivity with innovating our proposal, including new flexible tariffs in postpaid, both in Brazil and UK customized to satisfy different customer needs. A comprehensive OTT video service MobiStar 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 Fusion Plus Portfolio's launch in Spain, leveraging premium content and fiber. And third party services, such as Netflix are being integrated already in Chile, Colombia, Ecuador and the UK.
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 9 months period increased by 3% year on year organically. In Slide 9, 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 2,100,000,000 in the 1st 9 months of the year, with a customer base reaching almost 10,000,000 TV customers, 9,000,000 pay TV subscribers, plus 1,000,000 OTT active customers in LatAm across Spain, Brazil and Islam.
Our differential capabilities strengthen our video business. First, powerful video platforms, leverage in unique fiber assets in Spain and unified platform in LatAm. 2nd, scale and distribution power with Movistar Series being an excellent example for own produced content, then result to LatAm and new partner based bundle offerings as Netflix. And third, our superior content and functionalities, which make our proposition differential. All these 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 position 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 4,000,000 customer portfolio gaining traction across Telefonica'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 3rd IT provider according to Gardiner. As a global ICT and cloud communications provider, we leverage on key capabilities to lead corporates digitalization. With presence in 17 operations with 12,000 specialized sales force, our customer centric value proposal relies on 3 main pillars.
Consumption base of organization, all as a service. All these 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 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 UK standing at 8 years, 6 years for Spain's Fusion 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 softwareization, data analytics and official 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 mobile star play. In Slide 12, We show the tangible progress made on our digitalization priorities. In Spain, Fusion 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, prepaid digital top ups increased by 20%, and e billing customers rose by 41% year on year, or contributing to 30% reduced calls to the call center. We keep progressing well towards the target savings of more than 600,000,000 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. And now I hand over to Laura to take you through a detailed review
We'll go into detail about the excellent KPIs performance delivered by Telefonica Espana in the quarter. That posted the best commercial activity in the last 10 years, delivering proof points for our content strategy and commercial push focus on high value despite an intense promotional activity from our competitors, our compelling and rich Fusion offer boosted gross adds while churn was contained resulting into remarkable net adds. This include best ever seen fixed and mobile portability, largest fixed broadband net adds since the launch of Cucion in 2012, and the best mobile contract net adds of the last 10 years. Fusion ARPU continued to grow year on year, although seasonality on calendar effects has been its lower pace of growth versus the previous quarter. The new customer's leading quality is not worth as 40% of Fusion gross adds describe high value bundles adding incremental value to the base.
At the same time, Telefonica Espana's fiber networks continue improving returns, both at the retail and wholesale layers. As proved by the more than 1,200,000 customers connected in the last 12 months. In a nutshell, Our superior assets and unrivaled offering make the difference in terms of value share gains. Moving on to Slide 14, we show how Telefonica Espana delivers solid financial results and preserves profitability, while a strong commercial boost increases business future visibility and proves this 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 Fusion.
The loss of wholesale stream from Mass Mobile, which impact is larger than in Q2 and MTR cuts. Excluding the loss of wholesale stream from mass mobile 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 32,000,000 versus Q3 2017, leading to a quarterly 14.5% of EBITDA margin improved from 40% achieved in the first half of the year. All these translated into a robust cash flow generation of EUR 2,600,000,000 in 9 months, a stable year on year despite higher CapEx due to phasing in the period. Moving to Slide 15, Telefonica 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. LT customers amounted to 17,200,000, up 9.4% year on year. Average monthly data usage of O2 contract LTE customers was up by 6 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 25,000,000 and focus on profitable growth.
In the 1st 9 months, CapEx increased by 7.6% year on year, driven by the final stage of our network consolidation an ongoing LTE rollout, while we continue to capture incremental synergies of EUR 35,000,000. Turning to Slide 16. Telefonica UK continues been the largest UK mobile operator with 32,300,000 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 Agua winning network, for example, through rapid deployment of the recently awarded spectrum.
Telefonica UK's robust financial performance delivers the 9th consecutive quarter of mobile service revenue growth and was up 3.6% year on year. OIBDA accelerated its growth to 9.8 percent year on year in the quarter, with the margin expanding by 0.5 percentage points benefiting from lower annual license repayment 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 1st 9 months. Moving to Slide 17.
Vivo continue widening its quality gap after accelerating its 4G rollout and already covering 87% of the population. While expanding 4G plus technology across the country with 850 Cities already covered. Inultaneously, Vivo continued to expand its fiber footprint, reaching a total of 2.30 Cities 104 of them with FTTH and sustaining the leadership with the largest fiber network in Latin America. Additionally, and once again, we delivered a strong set of commercial results. In mobile, leading mobile contract net adds in the market over the last 5 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 fast with fiber since 2017, with an average take up ratio of 42%, allowing fixed broadband and pay TV ARPU to increase by 10% and 4% year on year respectively in the 1st 9 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 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 continued 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 7th consecutive quarter to 37.2 percent, which coupled with a strict financial discipline and despite higher capital intensity as well as FX headwinds, led Telefonica Brasil free cash flow to already surpised EUR 1,000,000,000 in the 1st 9 months of the year. With regards to expense tour, 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 2,300,000 connections with an outstanding 51% year on year increase. Revenue and OIBDA posted a sound growth, thanks to the increase in value accesses, progressive updates in Argentina and the benefits of efficiency measures. Which more than offset the increase in commercial costs. Moving to Slide 20. North East Bank 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 Columbia 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. Exregulation, revenue in Mexico will be close to stable at -0.9%. On the other hand, there's 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 1st 9 months of the year. On Slide 21, during in the Americas, U. S.
For Turico and Brazil, with 11,000 kilometer 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 actively 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% tells you, sir, capital to Pontegadia for EUR 379,000,000 this quarter. On Slide 22, You can see the not recurring factors impacting 3rd quarter OIBDA and net income, which added plus EUR 100,000,000 to reported OIBDA and deducted EUR 10,000,000 at the net income level. In detail, Novakaran effects were 1st in Brazil, the favorable outcome of a UDCAL DECISION Plus contingencies 2nd, hyperinflation accounting in Argentina 3rd, restructuring provisions, mainly in Telefonica Deutschland, Telefonica Peru and Telefonica Argentina, 4 others, including mainly capital gains on digital Companies and tower sales. Moving to Slide 23, reported net income increased by 11.6% or from the same period in the previous year to EUR 2,700,000,000 and the earning 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 the 6% increase at the operating income level ramp up 5.6 percentage points to net income.
Moving to Slide 24, swings in Latin market currencies, in particular the depreciation versus the euro of the Brazilian real and the Argentinian peso are drawing down reported growth in the January to September period. At the 300,000,000 year on year in the 1st 9 months of the year. This negative impact decreased to EUR 1,200,000,000 at the OIBDA level and was further mitigated at the free cash flow level, with a negative impact of EUR 330,000,000. On the contrary, ForEx has lower net financial debt by EUR 106,000,000 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 with stands at EUR 42,600,000,000 as of September minus EUR 1,600,000,000 versus December 2017. Backed by a strong cash flow generation. In terms of our net debt to OIBDA ratio, we ended September at 2.68x. Slide 26, so how Telefonica has successfully approached Capital Market, taking advantage of benign market conditions early in the year, and raising EUR 12,400,000,000 year to date.
Our average debt life remains high at 9.2 years with an increase relative to 9 years in June 2018 8.1 years in December 2017. We have increased our liquidity cash position by EUR 1,500,000,000 relative to June 2018, maintaining a liquidity position of 20,400,000,000, comfortably exceeding our next 2 years of maturities. I will now hand back to Angel.
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. 2nd, the sound results achieved till September allowed us to increase our revenue growth guidance for the full year delivering sustainable growth through business excellence and aiming for free cash flow accretion. Now we are ready to take your questions.
And 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 Yero Yacono from Citi. Please go ahead, caller. Your line is open.
Hi. I have two questions, please. The first one is around, to our leverage. And in the past, you expressed perhaps an interest in increasing your debt in real should the exchange rate and the funding costs be reasonable at the time and it's been a sharp obviously appreciation of the currency in the past few weeks. So I was wondering if it's something you are considering doing at this point.
And the second question is on Spain and Fusion's ARPU. You mentioned that that are tougher comps because of the price increases we implemented last year. Correct me if I'm wrong, you are not planning any similar tariff rebalancing this year. So 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, George, just for your question. On net debt and debt in local currency, particularly in Brazil, to your 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. And our main objective is to protect solvency. So whenever there's a reduction on free cash flow due to FX, we have a similar reduction on Eberlanger in net debt. In the 1st 9 months of the year, the 1,000,000 reduction in FX go along with a net debt reduction of 1,000,000, which is lower.
However, 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, and therefore, the solvency is protected. Having said that, we continuously look as you said, whether the depreciation of the FX could be useful to increase debt in local currency. We have a benchmark of 1x in LatAm and 2x in Europe and we monitor the economic profit analysis. So if we issue debt in Brazilian reals, we have immediately a higher cost of carried and 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 to do today, after the elections and the Brazilian real ramp up, the economic profit would be negative.
So if we had issue Brazilian debt the beginning of the year, at that one time benchmark of OIBDA, we would have a loss. So we stand 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 certain time and it will be lower free cash flow wheels the FX evolution, it really depends on many movements. And by today, you have been the wrong decision to issue more debt in Brazilian real at the beginning of the year according to that one times for EBITDA to debt ratio in Brazil.
And regarding Fusion and the ARPU, let me comment first generally on Fusion KPIs. And then I will detail on the ARPU. The commercial performance of Fusion 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.
Fusion customer base is up quarter on quarter 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% to 29%. The churn of Fusion is stable both year on year quarter on quarter.
And finally, to your question, Fusion 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 Fusion, we have had a positive impact from 35 grades. 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 Fusion 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. So we are expecting positive net adds and ARPU growth in Fusion in Q4.
Okay. Thanks.
Thank you, Julius. Next question please.
Thank you. Our next question comes from Guy Petty from Macquarie. Please go ahead. Your line is open.
Yes, good morning, everyone. Just a couple of quick questions. Firstly, on Spanish pay TV, you only added 100,000 customers. But 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?
And secondly, can you talk about what is commercially going on in the UK, with strong revenue growth and EBITDA growth, but also net adds. It looked it's quite a positive dynamic. And I just wondered whether, you felt that the UK market was pretty well structured currently.
Thank you, Guy, for your questions. We believe that the net adds in pay TV in Spain in the 2 quarter have been very, 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 older services to Telefonica.
If you compare this to the quarter of this year that figure was 8000. So 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. So 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 UK, the performance is very strong. The performance, we continue to be the favorite mobile network in the UK. We continue to have customer growth We have had the highest contract additions for eight quarters. It's the 9th consecutive quarter of MSR growth, and this comes with continued revenue and OIBDA growth.
We are launching to the market very innovative proposition. We launched the custom plans, which are very flexible for our customers in order to tailor what type of users 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 discount for additional family members. All of these and allowing to have a consistent ARPU growth. So, the performance and the traction And the momentum in our UK business continues to be very strong and we see no reason for this trends not to continue along the year.
Thank you.
Our next question comes from Jacob
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. Mean, is this acceleration really just purely driven by getting more Vodafone football customers?
Or are you seeing a sort of broader halo effect so a broader pickup where you're getting customers from the other operators as well. And then secondly, there's some press articles a few ago talking about a potential disposal of Mexico and Central America. I'm just wondering if you can maybe share any thoughts on that and perhaps also more broadly any other sort of noncore disposals, what your sort of current thinking is on that? Thank you.
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 a market compelling offers, including football, that, were aimed to attract customers that were interested in that type of content that were not satisfied by the provider offering. So we moved very dynamically and decisively from others to make attractive offers. To our customers. 1 has to take into account that Q3 is always a very strong promotional quarter with a back to school campaigns and the start of the football season. So, not so atypical, maybe this year a bit more intense And 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 we're looking for a provider with those type of content.
So 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 Fusion, in fixed broadband, in fiber, in TV, in mobile contract, And this has not come at the expense of also increasing our presence in wholesale Never fiber. So we have growth both in retail but also in wholesale fiber. So 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, 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, very good performance. It's a small region, but it's doing very nicely. We have noticed precise speculation about potential interested parties on those assets, but we prefer not to comment on sites rumors.
That's very helpful. Thank you.
Our next question comes from Akhil Ghatani from JP Morgan. Please go ahead. Your line is open.
Yes, 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.
And as you're talking about Q4, if I understood correctly, you're saying that the momentum will improve. So does that mean that you're expecting the consumer revenue performance to improve, or 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 to the EBITDA into next year? And then the second thing was just on leverage and spectrum. And I guess yesterday Telefonica 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 special auctions you're expecting next year would be useful too?
Thank you, Akil. 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, maybe a bit more intense. And we added customers in the second part of the quarter because football campaign is mostly in August September. So 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 And 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. So, we are which we have good visibility and we have confidence in seeing a 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 costs will peak in Q4 this year. We'll stay the same in Q1, Q2 next year. And will start declining from Q3 onwards.
This will be reflected in our accounts, but as you saw in Q3, we already had to step up in, in, content cost. Because it's the 1st season of the previous Raliga cycle, which had cost inflation versus the 2nd season. And we have been able through efficiencies to absorb that extra content cost, and we have achieved actually 40.5% to EBITDA margin, which is higher than the 40% that we we're having in the first half of the year. So yes, we will see some incremental content cost in Q44 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 and or free cash flow. We are not in a position at the moment to give you further visibility. The information that is under analysis.
As you know, there will be an increase in net debt but OIBDA will also improve. And it's important to note is that credit rating agencies are already taking into account for all leases within the ratio So it won't be an increase in that regard. But we are working on the analysis. There's a very 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. And I guess any other small point, just any color around special auctions you're expecting next year?
Do you mean spectrum auction since Spain or elsewhere?
Yes. I guess I'm just asking which markets you're expecting. The next year.
Okay. Sorry. I didn't get a part of the question. For next year, we seeing that there could be spectrum auctions in Germany, potentially the 700 Megahertz in Spain as well. Those could be the more significant, although it's not 100% sure they will take place in 2019.
Some of them could move to 2020.
Thank you. Our next question comes from Keval Quiroga from Deutsche Bank. Please go ahead.
And thank you for two questions. 1 on Brazil and 1 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? And whilst the top line is still a little bit weaker than what we start of the year, do you still see the current rate of EBITDA growth as sustainable?
And second, on Peru, obviously saw quite a bit of situation 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. On Brazil, which presented results yesterday and had a very nice performer in the market. We have had a mix of items that affect our revenue evolution. On the one hand, we continue to be a very strong in contract. We have a good performance with churn stable.
We are leading net adds in the market. And we are being able to apply some more for more price increases in pure postpaid in September. And you should expect for hybrid contracts as well, some more for more moves. On the other hand, implicate 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 on acquisition and then migrating to hybrids. So as a result, and as was expressed by my colleagues in Brazil yesterday, We expect better trends in revenues in Q4 in a more rational competitive environment.
On the fixed side, what we see is the decline in the traditional voice, And we see double digit increase in fiber and pay TV. So this would be the trends or in all, we think we have seen the early, we have seen the bottom. And in the 4th quarter, we would see better trends. And this comes with a future effort on efficiency in Brazil. We have had, I think now it's eleven quarters of decline in OpEx.
So we are increasing OIBDA margins. We're expanding margins in in Brazil. And yes, we have CapEx intensity because we see an opportunity to grow in fiber in Brazil. But still a very good performance in operating cash flow and combined with tax impacts and so on, very good performance in in free cash flow. In Peru, we have been working in the turnaround, commercial activity, 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, and we think that we can improve the operation, but Q3 clearly was a point of competitive intensity that maybe slowed us down a bit on our turnaround trajectory. It could be and we are working to try to post revenue growth in Q4 in Peru.
Thank you, Keval. Next question please.
Our next question comes from Matthew Robilliard from Barclays. Please go ahead. Your line is open.
Good morning and thank you. I had 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? And 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 And generally, how is the competitive environment in that segment of the market?
Thank you.
Thank you, Matija. 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 excesses.
This is driven by contract, which grows 2%, prepaid 10%, LTE is up 47%, smartphones, 14% and in fixed from a lower base, but we are growing fixed broadband, 27% year on year in accesses. And pay TV 6%. So we think that the market is 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. And we think that that our results are proving this to be the case.
Sorry, your second question. Oh, yes, sorry, on 2. The launch of O2 Brand which we launched on betamode 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 offering in such a way that we provide to different type of customers with appealing and competitive products. OTU is complementing both our premium offering that we offer to Movistar and Fusion and the low cost that we far through through 2020.
So we're trying to feel a commercial space in between targeting customers that demand plain but competitive quality, propositions with easy product portfolio structures, and in innovative and frictionless customer care, what we call premium simple. So the attributes that we're looking for this brand is quality, easy, price structure on the communications and name recognition. We use the O2 gram, by the way, because this is, it's a very well recognized brand. And at the same time, provides us with a very cost efficient way to 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.
Our next question comes from Mandeep Singh from Redburn. Please go ahead.
Hi, thank you for taking the question. Look, main question really is on Spain again. The first component of the question is the sort of 1.4% service revenue growth you're suggesting ex Masmoville and ex MTRs. Is that a sort of good proxy for where you see the real underlying health of the business? And once this 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, 1% to 2% I know you don't really give guidance, but just to get a feel for the sort of underlying trend.
So that's the first question. And 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? And what's the margin dynamic of the IT Services type of business relative to the base of business?
Thank you. Thank you for your questions. Talking about the 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 3 components to service revenue, B2C, 55% of service revenue, B2B, 27% of service revenue, and wholesale and others, which is 18%.
So on B2C, what we see is that increases in both volume and ARPUs and the commercial performance in Q3 should, if anything, accelerate the trends that we have seen so far in the year. In B2B, and this includes your second question, which is which is AT B2B in the 3rd quarter is growing 1.5%. The 2nd quarter consecutively of B2B growing. This has 2 components. The traditional communications revenue declined 1.6% in Q3.
And IT in the quarter grew 13.3%. So what we see is that and this not lumpy. This, 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. So we have a good position in IT. During my presentation, I was saying how Gardner is recognizing our Spanish operation in its IT propositions.
So the revenues and composition of B2B revenues is improving and the trend and the trend is there. And then wholesale, because we have been flagging that ex Masmovi Land regulation of server revenue would be growing 1.4%. Wholesale, you have several components. 1 is the MVNO loss. Which, will annualize some faith, probably from Q2 2019 onwards.
So that headwind will disappear in due course. Then we have the wholesale of neva fiber and the migration from copper to that, which is value accretive. And then now that we have more, content than we used to have, the wholesale revenue line will increase. So what we have been seeing in 2018 as as a headwind from the 3rd component of service revenues, which is wholesale and other, should change sign going forward. So again, we cannot guide.
It's too early to guide for 2019, but we see good visibility that gives us confidence.
Thank you. Thank you, Mandeep. Next question, please.
Our next question comes from Nicholas Deo 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 kind of partnership with Netflix in Spain. Just relating to the content and negotiations of the rights, with Netflix as a multiplayer growing, you have, on the other side, the traditional pay TV with the output deals, can you, kind of renegotiate with lower tariffs and the output deals with the majors in the U. S, or the rise of Netflix is not impacting anything on there.
And with Netflix, is it kind of you provide them content and you would get, a favorable access to their offer in terms of billing or Is it a pure you resell revenues and you will, you will have a kind of normal relationship with Netflix? That's the first question. The second is regarding LATAM M and A. We have seen Millicom doing a 1,000,000,000 deal in Panama. I mean LATAM is very fragmented.
You have a focus on Databridge. Is this focus on Databridge preventing you to do a bolt on deals? Or the fact that there is no deals on your side is just the conclusion that delivery is key for you. And maybe a follow-up on content just to understand what you're saying on absorbing higher food costs next year. So far on Q2 2019 Vodafone as the 8 league against, do you assume in your latest Fusion price change and in your 2019 budget that Vodafone, we now pay you for the 8 games and will stop completely football?
Just to have a use on that. Thank you.
Thank you, Nicolas, for your questions. Regarding content, I think Netflix and Majors are different items. We as the expire, we will aim to renegotiate the contacts with majors. And we think that our competitive position in 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 BD and TV platforms in Latin America. This takes the format of our revenue share, carrier billing in such geographies is something that is very much appreciated by OTT players, and we're integrating not only Netflix, but some others. And 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 Fusion customers who choose to include it in the package.
This will provide our customers an enhanced customer experience because we will offer Netflix through APTV, 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 that will be improved quality, thanks to our 4 K Deskos. So, Fusion customers will be able to enjoy a better customer experience with Netflix through the integration with us. And Fusion customers would receive a unified bill from Movistar, including the Netflix.
So it will make delayed 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 and 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 3 year strategic plan, a 3 year business plan. We are requesting from all our units to improve on these metrics. And our portfolio management decisions are also linked to this every time that there is an opportunity for a market consolidation, which we continue to believe that it's probably the type of M and A activity that adds more value We have a duty to monitor and analyze those opportunities. And 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. So 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 merits according to our financial criteria and value creation criteria.
Thank you.
Thank you, Nico. Next question please.
Our next question comes from David White 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, but I'm just trying to understand the discount rate on a lot of the, commercial activity, in the 100,000, also TV ads in the very strong underlying Fusion. Should we be thinking that the kind of incremental ARPU from those guys has kind of come in sort of circa 50% or so discount? Is that the kind of discount you guys are running?
I'm just trying to get a feel of of how we should be factoring that in. But 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 2,400,000,000. How are you guys accounting for that? Is that just coming straight into net debt as a potential receivable? Or is that just coming going to come in as as effectively lower tax paid over time. How should we think about accounting for those numbers given they are really quite material?
Hi, David. Thank you for your questions. Let me let me say something. The average ARPU of the of the ads that we have had in the third quarter is higher than the average ARPU of the ads that we had in the first half of the year. As you saw in Slide 13, 40 percent of the gross adds have come in the high end segment of of Fusion.
So the 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 and the promos finish will provide ARPU accretion and will provide revenue growth in this customer segment. So 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. So 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 a 3 potential more to come of a smaller size, but there's still potential for more coming in Brazil, 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 asset and for the short term portion as tax receivables. In our net debt, we are accounting for the full amount of peak as this is a monetary asset that leads to interest. So therefore, in the net debt amount of June, you could see the 1st part of the judicial and now in the September, you can also see the additional of the 2nd 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 peace coffins. So for other indirect taxes in Brazil. So you will also see that tax coming through the free cash flow and it's already been the case in September. In September, we have about EUR 150,000,000 of euro cash flow in the Brazil free cash flow and the group free cash flow. But that won't impact net debt because the net debt is being accounted one off.
So when we have the recognition of the asset, we are accounting for the reduction on net debt. And you've seen that in June and also in September, And going forward, we are going to see a reduction of taxes in Brazil and in the group, mostly indirect taxes. And that's going to flow through free cash flow, but won't reduce net debt because we accounted it as a one off as the judicial revision. Decision has taken place.
Our next question comes from Fernando Cordero from Banco Santander. Please go ahead.
Hello and thanks for taking my two questions. The first one is coming back to Spain and then dig in a little bit more on B2C segment and particularly on the nonfusion revenues. Which for the first time in the last ten quarters have been growing quarter on quarter. And I would like to know if you all have seeing or you're starting to see stabilization on that business line, particularly in terms of volumes? And the second question regarding the UK, Given the strong performance there, I would like to get a view on what are the weight of the 2 main drivers probably on this on this performance, on one side, at which you spend the retail or the unusual activity is driving the growth in EBITDA And what is the contribution of the wholesale business in this EBITDA growth in UK?
Thank you.
Thank you, Fernando. On your first question of around non Fusion revenues, in the B2C segment in Spain. The trend is, as you said, is improving. This trend is is due to lower 1P TV decline. We still have customers in 1 and in single play TV, which have been migrating towards IPTV and Fusion.
And this decline is lowering in the quarter. And also it's impacted by the different calendar of tariff upgrades. With respect to the, to the UK OIBDA, what we have is continued strong growth in subscriptions. We have seen the RPI increases And we see customers choosing to continuing to choose higher value tariffs. NBNO growth 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 the commercial settlement in the quarter. And the OIBDA performance in the UK was very high in the quarter, growing 9.8%.
But even if you exclude this commercial settlement, it's growing at 5.5%, which we think is a spectacular performance with benchmark margins for the UK market and margin expansion.
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 for 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? And if the latter, how is this going to be affected by the new range of football tariffs you've set up with you accessed the football at lower price point than previously. The second was just around current investment schemes that we've seen announce in the Spanish market, so Vodafone Masmerviel has discussed doing more on 5% pro investment
You should tell you're talking to
a client's network as well. Would you consider participating in any kind of co investment scheme in some regions where you haven't already rolled out your own fiber? And then finally, if I can just ask a quick one. The hedging and kind of free cash flow drop through from FX impacts you show on Slide 24 is quite encouraging. But 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, sorry, high medium and low end. In the high end, we have Fusion Total, Fusion Total Plus, Fusion Total Plus with 4 mobile lines. So these are packages that we've, with a fiber of 600 megahertz per second, have prices of 1,000,000 above. Low end, are packages that we call Fusion 0 and Fusion base. This, although we call them low end, the price with a EUR 600,000,000 per second fiber could range between EUR 55,000,000 and EUR 72,000,000.
And the mid end is the point in between, sorry. Regarding your second question on Vodafone and Massmobile. 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 And of course, the market is regulated. So 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 in the wholesale neva 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's also taxes, minority, financial payment So there's a whole flow of things reducing the impact. I also have to say the EUR 330,000,000 has been very much affected by the Brazilian real, and that situation is turning with a big appreciation already in the month of October. So we should expect that Brazilian impact getting reduced going forward.
Also on the CapEx in hard currency. First, we do as part of our operational hedging strategy. We do hedge for invoices in hard currency effects. But 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 FTTH deployment, there's a lot of outsourcing with local companies. So the the hard currency piece is not as big as you can imagine.
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.
Telefonica's January, September 2018 Results Conference Call is over. You may now disconnect your line. Thank you.