Ladies and gentlemen, thank you for standing by, and welcome to the Telefónica January-June 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 would like to ask a question, please press star one on your telephone keypads. 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 Mr. Pablo Eguiron, Global Director of Investor Relations. Please go ahead, sir.
Good morning, and welcome to Telefónica conference call to discuss January 2018 results. I'm Pablo Eguiron, Head of Global Director of Investor Relations. Before proceeding, let me mention that financial information contained in this document related to the second quarter 2018 has been prepared under International Financial Reporting Standards as adopted by the European Union. From the 1st of January 2018, we implemented IFRS 15 and 9, and all financial information in this presentation is based on this new standard. In organic terms, the effects of the accounting change to IFRS 15 are excluded in 2018, and that this financial information is unaudited. This conference call webcast, including the Q&A session, may contain forward-looking statements and information relating to the Telefónica Group. These statements may include financial or operating forecasts and estimates based on assumptions or statements regarding plans, objectives, and expectations that make reference to different matters.
All forward-looking statements involve risks, uncertainties, and contingencies, many of which are beyond the company's control. We encourage you to review our publicly available disclosure documents filed with the relevant securities market regulators. If you don't have a copy of the relevant press release and the slides, please contact Telefónica's Investor Relations team in Madrid or in London. Now let me turn the call over to our Chairman and Chief Executive Officer, Mr. José María Álvarez-Pallete.
Thank you, Pablo. Good morning, and welcome to Telefónica's second quarter results conference call. With me today are Ángel Vilá, Chief Operating Officer, and Laura Abasolo, Chief Financial and Control Officer. During the Q&A session, you will have the opportunity to address us with any questions you may have. I am pleased to present solid second quarter results, which showed continued progress on our strategic goals set for the year, responding today to the needs of the future. Business sustainability leverage on the robust momentum seen in high-value connections. LTE accesses increased 31%, with LTE coverage reaching 73%, whilst ultra-broadband connections increased 23%, having passed more than 47 million premises. In addition, bundling and upselling remains an ultimate lever to increase revenue per access and reduce churn.
By markets, we highlight the stronger franchise in Spain after recent content acquisition and the O2 brand launch, market-leading position in key segments in Brazil, the improving trends in the U.K., the positive impact of new tariffs in Germany, healthy growth in South Hispam, and good commercial traction in North Hispam. Optimizing our capabilities is a must, and we are radically transforming networks. We have created a global digital ecosystem centered around the customer, and we are forefront runners in cognitive intelligence. Digitalization is driving business strategies and is starting to generate efficiencies. All in all, we report strong delivering financials consistent with the full-year outlook, with acceleration in growth trends of key metrics and net debt declining for the fifth consecutive quarter, even after dividend payment of EUR 0.20 per share in cash. To review our latest financial achievements, please turn to slide three.
Reported figures were affected in the second quarter by non-recurring impacts amounting to EUR 225 million in OIBDA and minus EUR 60 million in net income, namely derived from a Brazilian court ruling and Mexico impairment and tax assets reversal. Forex and negative effect from regulation across Europe and LATAM also dragged growth. In organic terms, we posted sustained organic revenues, OIBDA, and operating free cash flow, and operating cash flow growth with margin progression. Revenues surpassed EUR 12.1 billion, 2% more versus last year. OIBDA, EUR 4.2 billion, plus 4.1% year-on-year. Operating cash flow reached almost EUR 2.4 billion, 0.3% more than the previous year. Net income increased to EUR 900 million in the second quarter, plus 9.9% year-on-year.
Net financial debt decreased 10.1% in the last 12 months, leverage on a second quarter free cash flow exit spectrum 1.5 times higher than at the same period last year. Let's move now to the guidance on slide four. We are well on track to deliver our full-year guidance across all three metrics. Regarding our dividend, we paid the second tranche of 2017 dividend, EUR 0.20 per share in cash on June 15. In addition, we confirm EUR 0.40 per share in cash for 2018. Finally, we continue deleveraging and working to improve return on capital employed. Let's move now to slide five. During the second quarter, we posted healthy year-on-year growth rates across the board, improving sequentially in organic terms, plus 10 basis points in revenue, 90 in OIBDA, and 25 in margin terms.
Operating cash flow is decelerating due to CapEx phasing, but growing in the first six months by 2.4 year-on-year. Organic service revenues maintain trends versus what's seen in the first quarter, and OpEx improved on our continued focus on cost control and efficiency measures, digitalizations, and synergies from integration. To highlight, all regions are contributing positively toward the increase year-on-year in second quarter, but not Hispam, which is impacted by regulation. As shown on slide six, we are a platform company advancing towards a digital telco by leveraging both on a customer-centric digitalization and on the use of artificial intelligence across all platforms. Our first platform consists of larger, smarter, and more efficient networks. We are number one in virtualization with our global solution, UNICA, under inter-industrialization process and available in four countries.
We count on 78 million premises passed with ultra broadband and our LTE coverage ranges from 92% in Europe to 67% in LATAM. We have, as well, installed more than 3 million customer devices of home gateway units that incorporate the latest features at a lower price. Systems and IT transformation on our second platform showed solid progress. As such, our end-to-end digitalization index reached 62%, growing eight percentage points year-on-year, the same growth rate of customers migrated to full stack in the period. On our third platform, we are bringing digitalization to customers at a global scale. Our revenue mix is transforming, and up to June, 53% of our total sales are coming from connectivity and services beyond connectivity.
Lastly, benefiting from the capabilities of our fourth platform and aiming to enrich customer experience, since July 3rd, is it possible to access to Aura through Movistar Home in a pilot service in six shops in Spain before the commercial launch anticipated within the coming months. Let me review the main guidelines of our monetization strategy in slide seven. In the customer segment, we are adding new levers to our portfolio, promoting upselling and increasing the customer lifetime value. In prepaid, integrated recurring data plans are present in 43% of LATAM customer base and 62% in Brazil, delivering ARPU uplifts of around 10%. In postpaid, we enlarge data allowances with dedicated data tariffs or family plans, and we bundle video to encourage usage and increase customer loyalty. In fixed, video and ultra broadband continue to be the main growth drivers.
In the B2B market, we leverage on our differentiated capabilities, being the best partner for our customers' digital transformation. Our global capillarity and a complete portfolio of owned leading brands and partnerships allow us to deliver strong results with cloud and security revenues growing 42% and 63% year-on-year respectively. Let me explain in more detail our strategy in video, a powerful tool to increase customer engagement and therefore data monetization. In Latin America, we are working to migrate TV customers to our IPTV platform with advanced live functionalities. In parallel, we have launched the over-the-top service, Movistar Play, in almost all countries, increasing the differentiation and value of our connectivity proposition. In Spain, video continues to be at the core of our convergence strategy.
The premium Movistar + portfolio, including exclusive content and the best IPTV platform, results in a superior customer experience, which continues to be key in attracting and upselling customers. Lastly, in the U.K., we have already complemented our existing content offering by launching Netflix as a promotion in June. I will now hand over to Ángel to explain in more detail segment performance and digitalization.
Thank you, José María. Let's move now to slide nine, where we show how digitalization increases customer value and lifespan. Our growth in strategic assets supported the 3% year-on-year organic growth in average revenue per access. As clear examples of relatively longer customer lifetimes, it is worth highlighting eight years in the U.K. for mobile contract, six years for Fusión customers in Spain, five and four years for mobile contract and fiber customers in Brazil, respectively. To fully capture the digitalization benefits, we have first built leading smart networks, as the network accounts for more than 50% of total customer satisfaction. We are now focusing on radical automation of processes with our full stack deployments being the largest worldwide and the seat of our transformation. These are the foundations for providing best-in-class digital experience through a digital ecosystem and to provide our customers with a truly distinctive value proposition.
Moving to next slide. We show our commitment to digital transformation, in which we are pioneers and are already capturing the impact of customer-centric digitalization. Our customer journey is structured around five priorities, which focus on direct sales through digital channels, making payments easier, enhancing service provision, and post-sales technical support. I would like to mention some proof points achieved in our main countries, Spain and Brazil. In Spain, sales in digital channels increased 45% versus Q2 2017, and total users of Movistar app were up by 54%. On the other hand, self-management technical incidents were up 19% in June 2018 versus December 2017, resulting in 13% reduction of unsatisfied customers with technical support. At the same time in Brazil, the interactions through digital channels rose by 22% versus Q2 2017. The users of Meu Vivo app were up by 66%.
Prepaid digital top-ups increased by 16%, and e-billing customers rose by 53% year-on-year. All of these translated into a 25% decline of calls to the call center. Finally, we are progressing well towards our target savings of more than EUR 300 million this year, and we have identified other initiatives like robotic process automation, cognitive contact center, and blockchain, which will also have relevant impacts going forward. Moving to slide 11, we present the performance of the Spanish business. We again delivered a solid quarter in terms of commercial trading, with fixed broadband returning to growth and posting the best quarter in terms of net adds since Q4 2016. And 233,000 net mobile contract adds, which is 7% accesses growth year-on-year. We continue to see value increasing within our Fusión customer base.
Accesses grew 10% year-on-year, whilst ARPU increased 5.5% year-on-year, despite the negative tariff upgrade calendar effect on an improved value mix, thanks to the enhanced portfolio. High-end customers now make for 27% of our total Fusión base. The leading quality and scale of Telefónica España networks remain unrivaled, and they continue to deliver growth in both the retail and wholesale business. In fact, fiber wholesale penetration gains traction in the quarter, with 163,000 net adds. Moving on to slide 12, we detail how the growth profile of Telefónica España is reflected in its solid profitability and strong financials. Service revenues annual growth accelerated to +0.1% in the quarter due to the mentioned negative calendar impact on Fusión tariff upgrades, as well as the loss of wholesale accesses from MásMóvil and MTR cuts, whose impact is larger this quarter than in Q1.
In any case, both residential and business revenues, which altogether account for 83% of service revenues, keep on growing. Cost discipline and lower commercial costs allowed to more than offset higher content costs. OpEx declined by 0.7 percentage points quarter-over-quarter, leading to a 40.5% OIBDA margin in the quarter. As regards to football, last month, we acquired all pay TV rights to broadcast LaLiga football league for seasons 2019-2022, and UEFA Champions League and UEFA Europa League for three seasons starting this next September. As a consequence of this, content cost will peak at the end of this year to start coming down in Q3 2019 and remain stable onwards for the first time in quite a few years. Moving to Slide 13, Telefónica Deutschland delivered robust operational momentum in the second quarter, while successfully progressing with its network integration process.
The company launched a refreshed portfolio of its O2 Free tariffs, including a popular data boost option, as well as new O2 Connect tariffs, further supporting data growth and ARPU uplift strategy. In the quarter, the company benefited from 333,000 contract net additions, mainly driven by good take-up of the O2 Free tariffs and significant partner trading supported by 4G offers. LTE accesses increased by 15% year-over-year to 16.6 million customers, improving LTE penetration to 40% and accelerating average data usage by 22% quarter-over-quarter to 3.4 gigabytes per month. On financials, MSR ex-regulation continued growing by 0.2% versus the second quarter 2017. An ongoing strong demand for smartphones resulted in handset sales achieving a year-on-year increase of 7.5%. OIBDA registered a year-on-year growth of 0.3%, with margin expanding by 0.4 percentage points, driven by a focus on profitable growth and efficient cost management.
In the first half, operating cash flow increased by 3.2% year-on-year, leveraging CapEx and OpEx synergies of a combined EUR 90 million. Moving to Slide 14, Telefónica UK posted a very solid set of second quarter results, again with growing financials. The company remains U.K.'s favorite network carrier, with more than 32 million customers and continues to lead market loyalty with the lowest churn. We have successfully deployed our recently won 4G spectrum to enhance connectivity for our customers right away. The company delivered one more strong quarter, being the seventh consecutive quarter of top line growth. Revenue grew 5.6% year-on-year, and MSR ex-regulation accelerated to 3.5%, mainly driven by an increase in customer spend as customers continue to choose us as their preferred mobile operator.
OIBDA grew 8.2% in the quarter, and margin expanded by 0.7 percentage points despite the ongoing regulatory drag, while benefiting from top line growth and lower annual license fee payments. In the first half, operating cash flow ex spectrum increased by 21% year-on-year as a result of these healthy operational trends and phasing of CapEx spend. Let's turn now to Slide 15, where we present our Brazilian business, which remains focused on capturing growth in high value markets. Once again, Vivo achieved an outstanding performance in contract, leading the market with a 37% share of new adds thanks to our unrivaled assets. Highlighting this quarter the fast 4G+ deployment with 596 new cities covered so far this year. Contract accesses already account for more than 50% of our mobile customer base, and coupled with the ongoing migration to higher value data offers, mobile ARPU grew by 1% year-on-year.
Fiber reached the highest level of net adds ever, thanks to the continued deployment that already reached 224 cities, 98 of those with FTTH. The higher quality mix of customers led to ARPU and loyalty improvement. Turning to Slide 16. We continue to post solid revenue growth thanks to strong and consistent data growth of 12% and to the accelerated smartphone adoption, boosting handset sales to 16% year-over-year. The transformation journey continued in fixed revenues, with non-traditional services already accounting for 59% of total revenues, driven by our outstanding performance in fiber and IPTV. OpEx declined for the 10th consecutive quarter, thanks to the benefits of digitalization and simplification and the overall ongoing effort to control costs. Finally, Vivo's sustainable business allowed to improve profitability with an upward trend in organic OIBDA margin of 2.2 percentage points to 36.5%. Let's turn now to Slide 17.
Southeast PAN presented a strong acceleration in contract net adds, driven by higher rationality in the region and by the higher differentiation in our offer. Moreover, fiber connections posted an excellent performance and already represent 46% of our total fixed broadband connections base. This value growth is translated into a solid revenue and OIBDA growth trend in the region, highlighting, first, the clear improvement in Chile after posting positive revenue and OIBDA increase for the first time in 10 quarters. Second, in Peru, the progressive improvement in revenue and OIBDA year-over-year trends. On Slide 18, we review the commercial performance of the North region. We sustain strong commercial traction with positive net adds, leveraging on our network quality and against the headwind of the worsening competitive environment in the Mexican market.
Let me point out the strong uptake in fiber connections that almost doubled in just one quarter, driven by Colombia. Financial trends were highly affected by the new regulation in Mexico since the beginning of 2018. Excluding regulatory effects, revenues and OIBDA would have grown versus Q2 2017 by 1.5% and 5.1% respectively. On Slide 19, Telxius showed a solid operational and financial performance, along with increased speed of its infrastructure deployment. The tower portfolio continued to increase, adding 141 towers in the quarter, mainly in Spain, Brazil, and Chile. While tenancy ratio reached 1.34 times. In the cable business, the international data traffic improved significantly year-over-year, both in terms of bandwidth capacity, plus 28%, and IP traffic, plus 27%. Regarding financials, top-line growth accelerated sequentially, with tower business growing 8.8% year-over-year and cable business significantly improving, while OIBDA increased 4.5%.
CapEx reflected the new cable deployment, and it is expected to come down during the second half of the year when BRUSA comes into service. Now, let me hand it over to Laura to explain in detail the financial aspects.
Thank you, Ángel. Turning to slide 20, Q2 reported results are affected by non-recurrent factors that impact positively OIBDA by EUR 225 million and affect negatively net income by minus EUR 60 million. These relate to the favorable outcome of a judicial decision in Brazil, increased OIBDA by EUR 485 million. This factor has also impacted positively net financial expenses in the quarter and reduced net debt by EUR 855 million and is expected to impact free cash flow progressively in the future. The non-cash goodwill impairment and tax asset reversal in Telefónica Mexico, minus EUR 108 million in OIBDA and minus EUR 402 million in net income. Following changes in WACC and terminal growth with a higher risk-free rate reflecting poorer macro conditions. Third, restructuring costs in Brazil and Germany, minus EUR 48 million in OIBDA. Finally, contingencies in Brazil, minus EUR 108 million in OIBDA, also non-cash.
Moving to slide 21, net financial expenses, taxes, and minorities have also been impacted by these factors. Net financial expenses mainly reflect the positive impact of the core ruling in Brazil, while taxes are affected by the Mexican impairment and asset reversal, while minorities reflect as well the stronger results in Telefónica Brazil. Despite the negative impact of these factors, along with a harsh regulatory drag and adverse FX evolution, net income shows high single digits year-on-year growth in reported terms and totals EUR 1.7 billion in the first half of the year. Forex continues weighted and slide number 22 shows. Brazilian reais and Argentinian peso depreciation versus the euro are the main contributors to the minus EUR 448 million drag in year-on-year OIBDA variation, higher than the minus EUR 361 million seen in the first quarter.
The positive aspect is that organic OIBDA contribution ramp up to EUR 289 million in Q2, versus EUR 214 million in the previous quarter. In the first half of the year, the negative FX of EUR 870 million on OIBDA is reduced to only EUR 158 million at the free cash flow level due to FX reduce CapEx, taxes, interest, and minorities. At the net debt level, this reduced the level by EUR 117 million on a third-month rolling basis. On slide 23, we can see that second quarter free cash flow reached almost EUR 1 billion after being impacted by the U.K. spectrum payment on EUR 0.6 billion and negative seasonality. Excluding spectrum free cash flow growth, 54.7% year-on-year and 32.7% in the first half. In the first half, reported free cash flow surpassed EUR 1.5 billion or EUR 2.2 billion ex spectrum.
For the second half of the year, we expect free cash flow to improve further. Finally, net financial debt decreased in the second quarter year-on-year for a second consecutive year despite dividend payment and the usual first half seasonality. Let's move now to the financial metrics on slide 24. We keep on reducing our net debt figure, which stands at EUR 43.6 billion as of June, backed up by our strong cash flow generation. We have lowered our net debt figure by EUR 637 million in the first half of the year. In terms of our net debt to OIBDA ratio, we ended June at 2.68 times, which is roughly in line with our 2017 year-end. Slide 25 shows how Telefónica has successfully approached capital markets taking advantage of benign market conditions early in the year and raising EUR 11.4 billion year-to-date.
Our average debt life remains high at nine years. We enjoy a healthy liquidity position, close to EUR 19 billion, comfortably exceeding our next two years of maturity. Effective interest payment cost in the last 12 months stood at 3.48% as of June 2018, two basis points below that of March 2018. I will now hand back to José María.
Thank you, Laura. To summarize. We continue to execute on our strategic priorities, focused on our customer-centric transformation. Second, we continue delivering robust financials and strengthening our balance sheet. As such, we are posting healthy growth rates in revenues and OIBDA across the board. We continue to accelerate momentum in high-value accesses, and this is the fifth consecutive quarter of net debt reduction. This allow us to return value to our shareholders whilst reiterating our 2018 guidance. Thank you very much for listening, and we are now ready to take your questions.
Thank you. Ladies and gentlemen, if you would like to ask a question at this time, please press star one on your telephone keypad. To cancel your request, please press star two. Once again, that is star one to register a question, and star two to cancel. We would kindly ask you to ask a maximum of two questions per participant. If possible, we recommend you not to use your cell or hands-free phone. There will be a short silence while questions are being registered. We'll take our first question from Nicholas Lyall from Berenberg. Please go ahead. Your line is now open.
Hi, good morning. Thanks for taking the question. I have two questions. First is regarding the expectations in H2 in Spain regarding the pipeline for your commercial strategy. You have the agreement with Netflix. You going to launch Movistar Home, you're going to launch O 2. You're going to have the changes in the Champions League distribution. So, the H1 was a decent commercial momentum. Shall we expect a clear acceleration of the KPIs, let's say, in H2 based on that pipeline? The second question is regarding LATAM. Any potential, let's say, M&A opportunities to reshuffle the portfolio, asset swaps or any discussions on the network sharing? Thank you.
Thank you, Nicholas, on the question regarding Spain. As you have seen in the second quarter, we have continued with a very positive commercial momentum amid signs of market rationality. We've posted positive net adds across the board in fixed broadband, in fiber, in NEBA fiber, in mobile contract, and TV. We have seen so far a positive commercial momentum. When we look towards the second half, we think that we have a business, which, if anything, is even stronger. We have the best capabilities. We have the best functionalities. We have the best content. We see that commercial momentum should be strong also in the second half. We would expect Fusión positive net adds. We would expect ARPU growth, mobile growth to continue. Fiber take-up is growing and is expected to continue increasing, driving fixed broadband accesses growth. Even in TV, growth is also expected.
Taking your second question. Over the last years, we have, as you know, reshaped our portfolio, and we have been actively managing our assets. Our focus was always to optimize return on capital employed and capital allocation, and that's why we did the Telxius transaction, among others. We are constantly reviewing our asset portfolio in order to reinforce our strategic positioning. Our aim is to build leading positions to have the stronger networks in the market where we operate, while at the same time to increase the focus, clear focus, on improving return on capital employed. We are permanently evaluating our assets' return on capital employed, aiming to optimize efficiency and effectiveness of our portfolio. Our balance sheet has been strengthened, we don't need to sell any asset at any price. The fact is that we will review our portfolio when it makes strategic sense.
To conclude, you should expect from us to actively manage our balance sheet to provide us with enough flexibility and at the same time to decide our convenience on timing of potential asset disposals, always focusing on improving return on capital employed.
Thank you.
Thank you, Nico. Next question, please.
Next question comes from Mathieu Robilliard from Barclays. Please go ahead. Your line is now open.
Good morning. I had two questions, please. First, with regards to your content strategy. You've secured the right for La Liga for a few years. It seems that Vodafone isn't completely committed into buying on a wholesale basis those rights from you. My question is: couldn't that be actually a positive opportunity for you if you think about the customer pool that's on your competitor's network and that value content, and given the high level of ARPUs? Obviously, you would receive less from a wholesale basis, but couldn't you make that up with increased market share? If you could elaborate on that, it would be helpful. Second, with regards to leverage. Obviously net debt has come down since the beginning of the year. Leverage is flat because of Forex, as we all know.
I was wondering if you could maybe detail a little bit how you see leverage developing in H2, what are the pluses and minuses? Thank you.
Thank you, Mathieu. Regarding your question on content in Spain. Far, Vodafone has announced that they would not buy El Partidazo, the best match of the week, nor the UEFA Champions League for the season 2018, 2019, Orange has confirmed they will buy both. You should expect us to be ready to launch to the market compelling commercial offers, including all the football aimed at those potential customers who are now left unsatisfied by the current provider. These tend to be the most valuable, the highest ARPU, the lowest churn customers. Many of these customers from other players are customers that had explicitly chosen to have football as an add-on to their package with their current or their former provider. Customers who explicitly wanted and chose to subscribe to football.
Those customers will be very welcome at Movistar TV, in addition to the football, they will experience a better set of content and functionalities compared with what they have enjoyed up to now.
If I can follow up, do you think that could be actually a net positive, this outcome?
Well, in order to quantify the impact we can have in the short term because of Vodafone not buying the rights from us, you should consider the balance between loss of wholesale revenue and increased retail revenue from an enlarged customer base capturing high-value customers. Here there are many factors which are relevant and which we think we are quite strong. Our Fusión ARPU stands at EUR 90, which is significantly more than what other gets. This is because our offer is richer and more complete. We use football as a tool to upsell, all of our high-value customers have football in their bundles, in addition to other benefits. It's a content that helps to reduce churn.
Owning the content rights, not buying the channel from somebody else is more valuable because it gives us commercial flexibility to design the content, to label it, to do the wholesale structure, to have additional revenue from advertising. Penetration of overall Pay TV is still slow, and football penetration in our base, although it's much higher than other players, still has way to go. We think that when you run the numbers to try and measure the impact of this situation, you should bear in mind all these effects, which all of them would work towards it being positive for us. Taking your second question and before handing it over to Laura, you should expect from us to keep taking debt down both organically, and Laura will give you more color on that, also inorganically, depending on market conditions.
Our aim is to keep taking the debt down in both fronts. I will hand it over to Laura to give you more color on the organic part.
Yes. Thank you, Mathieu, for the question. Let me emphasize again the reduction of the net debt in the first half of the year, which is being by 10%. It's not only the amount of the debt, it's also the management we've done through the first six months of the year, increasing the average debt life to nine years in June, enlarging the proportion of fixed rate, which is now 73%, which will decrease slightly interest payment cost, which is standing at 3.48%. This is complemented with the liability management exercise on the high rates that in the second half of the year will have a slight negative impact in net debt. As you recall, it's a very good exercise that has a payback of around 1.5 a year.
I can tell you that Telefónica is definitely committed to maintain a solid investment-grade credit rating. Our intention, as José María said, is to continue reducing debt in organic basis. For that, you should improve the second part of the year, increasing free cash flow and increasing the quality of free cash flow. We are operating a growing business in terms of revenue or EBITDA, and with lower cash CapEx intensity, and that's going to flow through the free cash flow that comfortably exceeds dividend payments, labor commitments, and the hybrid coupon payments. There's buffer to continue further deleveraging. That could be complemented, as José María also pointed out, within organic measures, provided that they add value to the company and they make a strategic sense.
Thank you very much.
Thank you, Mathieu. Next question, please.
Next question comes from Keval from Deutsche Bank. Please go ahead, your line is now open.
Thank you. I've got two questions, one on Spain and one on LATAM. On the Spanish slides, you do highlight personal expenses as a potential source of further savings. I know it can be a bit difficult to comment on future headcount reduction till you've decided upon it, but do you think we could expect something similar to what we saw at the start of early 2017 with the extension of the early retirement program? Second on LATAM, I thought it was encouraging that we've now started to see improvements in Chile and Peru. Should we expect these improvements in the rate of EBITDA deterioration or rather EBITDA growth to also continue as well? Thank you.
Thank you, Keval. On the first question, we are seeing incremental savings from the personnel redundancy programs that have already been announced, because this will achieve full run rate in 2019. Nothing else has been decided so far. With respect to your questions in LATAM, we have in this quarter the very good news of Chile having turned around after several quarters of decline. The company is back to growth in revenues and OIBDA. We believe that will be sustainable. Peru, as I said in the previous conference call, is progressing in their turnaround progress. In the previous quarter, they were already in positive commercial activity. This commercial activity has accelerated into the second quarter. The next stage of this turnaround should be moving to growth in revenues, eventually growth in OIBDA, which we may see towards the end of this year.
We see a sustainable recovery in Chile and very good trends in Peru.
That's clear. Thank you.
Thank you, Keval. Next question, please.
Next question comes from Georgios Ierodiaconou from Citi. Please go ahead. Your line is now open.
Hello. I've got two questions, please. Both on Spain. The first question is a follow-up. I appreciate you've already partly answered this around the football content. I was wondering, I know in the run-up to the decision you were running some sensitivity analysis on your customer base. Do you mind just sharing with us some thoughts around how could, let's say, one of your competitors use the savings from football to reinvest in other content or discounts, whether this could be a strategy that has some potential success? I'm guessing it's something you looked at at the time as well.
Also, if you could perhaps share with us the importance of the different packages, like the Match of the Week, and the Champions League versus the other games, whether there is sensitivity in having all the packages or whether there is a significant part of the base happy with the other games. Then my second question is around O2. I know it's been just a few weeks of a soft launch, but if you could share with us some of your learnings, the traction you are seeing, and there were some reports of some teething issues earlier in the month. If you could share with us some information on that. Thank you.
Thank you, Georgios. Well, on the first question regarding potential reaction from some competitors that don't have the football. How can I say this? It is not clear. To us, it's highly questionable that a subsidy or some retention tools may be an effective way to retain the higher football fans who had explicitly bought an add-on because they wanted to watch the best football. Bear in mind that this will be the first season in the history of Champions League, where no free-to-air game will be broadcast in Spain. In the previous seasons, half of the matches were broadcasted in free-to-air, not anymore in Spain. These potential tactical moves from competitor may only result in double self-inflicted damage, putting tension on their commercial costs, added to loss of football subscribers anyway. In any case, we prefer to talk about ourselves.
Our strategy will continue to be to grow our business based on value customers. Regarding the impact of the different matches of the week, obviously the Partidazo, which is the best match of the week, normally played by Barcelona and sometimes by Madrid, is a very important piece of content that is critical to have traction with football fans in Spain. Regarding your question on O2, we have a multi-brand strategy designed to better suit all segments fulfilling market needs. It's a way to efficiently reach diverse customer profiles and having the objective to strengthen our commercial traction and our financial indicators. We are positioning those brands with differentiated offer propositions through different channels, targeting different type of customers with different product components, different communication, following different strategies. We do not foresee cannibalization risk. The launch of O2 has been still on a beta launch, we call.
The official launch will be in September. O2 complements both our premium brand, Movistar, and the low cost Tuenti proposals by filling a commercial space in between. Targeting customers that demand a plain but competitive quality proposition, easy product portfolio structure, and innovative customer care, what we call a premium simple brand, and it will be competitive but rational. The official launch will be in September.
I would like to compliment to Ángel that the Champions League has been especially important for Real Madrid supporters the last three seasons. We expect that to continue. Thank you.
Okay, Georgois. Next question, please.
Next question comes from Sam McHugh from Exane. Please go ahead, your line is now open.
Yeah, morning, guys. Hope you're all well. Two questions for me. Just first on the U.K., obviously, you have some currency and IFRS impacts, but when I try and disaggregate everything together, it looks like the underlying retail business itself is maybe declining 3%-4% despite some inflationary price increases. That's being offset by tremendous growth of around 50% in wholesale. Does that sound about right? How should we think about the core retail business versus wholesale going forward? Secondly, in Brazil, we all know what a terrific business Vivo is. They have 43% mobile market share, but you're now underperforming TIM and Claro probably by the widest margin that I can remember. Should we be worried about negative MSR growth at Vivo going forward? What can you do to turn this around? Thanks.
Sam, sorry. Could you please repeat the first question? We didn't hear you well.
Yeah. Just on the U.K., it looks like the underlying retail business, excluding currency and IFRS, is perhaps declining around 3% or 4%, despite inflationary price increases. That's being offset by 50% growth in wholesale. I was just wondering how we should think about the trends in the retail business versus the wholesale business going forward, and I guess the relative importance of the two to you.
Thank you for your questions. As you've seen, our U.K. business continued to deliver very solid results in the second quarter. We remain to be the leading mobile network carrier with the highest number of subscribers, in excess of 32 million, which is a growing base year-on-year. It's not only growing overall, but our post-pay base is growing 1.2% with growing ARPU and reduced churn. We believe that our retail traction in the U.K. is quite strong, and it's proven to be consistent in the last quarters. Regarding Brazil, we are very focused or extremely focused in contract, in the contract segment, because every contract customer has a lifetime value, which is substantially, but very substantially higher than prepaid.
As far as we continue to get the lion's share of the net adds in contract, we are happy or we are tolerating a lower traction in prepaid. When you look at contract performance, 37% share of net adds in the last month. We have 41.3% market share. We continue to have superior assets, be it the network, the service, the brand recognition. We have had in contract very strong net adds, 9% year-over-year up. Churn has been stabilizing, 51% of our total customer base, and 80% of our mobile revenues are in contract. We see, and we continue to focus in the high-value segments in mobile in Brazil, and we feel confident on that.
Thank you, Sam. Next question, please.
Next question comes from David Wright from Bank of America. Please go ahead, your line is now open.
Hello, guys. Apologies if the mobile reception's a little poor. A very strong set of results. José María, when I look at your guidance and I think about H2, you're obviously running ahead on the revenue line. You're very much in line with the margin, there are indications that operations in H2 could become stronger, Spain in particular. You probably have the toughest comp. O2 UK, you had that very tough comp in Q3 last year with roaming. We're seeing some good momentum in the key LATAM markets. Obviously Germany yesterday was a better number too. Is the guidance starting to look almost a little too conservative now? My second question, just on the net debt. I understand the focus on deleverage, Laura, we spent some time on this recently.
Is there not an opportunity with the balance sheet very much in shape now with the debt profile very clear, with the cash flows improving to do some targeted buybacks, especially given your, I think you'll probably agree, your undervalued share price right now. Could there be an opportunity just to do some targeted, quite opportunistic moves there? Thank you.
Thanks for your questions. In terms of the guidance. Revenue guidance is to be around 1%. We are at 2% growth in the first half. You know that we are always prudent when we set up our guidance metric. What we can tell you is that current business trends are solid. We have not seen anything that could significantly alter on the downside what we are seeing today. We feel confident that we can comfortably meet our guidance.
What we can tell you that we will revisit the issue at the time of the third quarter results. For the time being, we feel pretty confident. We feel pretty comfortable, you know that we have always been very prudent on that part. In terms of debt evolution and potential share repurchase program, we keep being very focused on debt reduction. What you should expect from us is to focus on free cash flow generation to be devoted to debt reduction. Only we will be feeling comfortable that we are there, then we will certainly analyze potential share buybacks, because we strongly believe that wherever you approach it in any metric, namely un levered or equity free cash flow yield, our share price is significantly attractive.
That's why we will monitor the best use of our capital in order to improve return on capital employed for our shareholders.
Okay. Thank you very much, guys.
Thank you, David. Next question, please.
Next question comes from Luis Prota for Morgan Stanley. Please go ahead. Your line is now open.
Yes. Hello, good morning. Two questions, please. First is on, again, on the football rights, a potential wholesale offer to over-the-top providers. What I would like to know is, first of all, whether this is mandatory, as it happens to all the telco players as part of your remedies. Secondly, how you see this option, whether this is more an opportunity to monetize the football rights or whether there is a higher risk of cannibalization or reducing your competitive position with other peers like Euskaltel, which were offering this through beIN Sports. I would like your thoughts on how should we look into this, whether it would be a positive or a negative, and how to address this optionality.
The second question is on the ownership of the network, and more specifically about these comments in the press a few weeks ago on the board exploring a potential sale of the fiber network. Anything you can tell us on that would be helpful. Thank you.
Thank you, Luis. On the football wholesale offer to OTTs, we are now in the process of formally getting offers, both on pay TV and OTT for our content. This will be due with the end of July. Far what we see is very limited interest on this front. We don't see risk of cannibalization.
Hi, Luis. Taking your question on those rumors. We have been hearing the rumors around this potential divestment or contribution of our fiber network in Spain into a fund. We don't know where those rumors are coming from. Our fiber network in Spain is one of our key differential assets. It took us a significant amount of capital and determination to build it. Telefónica España is the European leader in ultra broadband. As you know, there is more fiber in Spain than in the sum of the U.K., Germany, France, Italy and Portugal together. We have no intention to sell it or to contribute it to any fund.
Very clear. Thank you.
Thank you, Luis. Next question please.
The next question come from Akhil Dattani from JPMorgan. Please go ahead. Your line is now open.
Yeah. Hi, good morning. Thanks for taking the questions. I've got two questions, both on Spain, please. The first one is just on the competitive environment going forward. I guess I'm just keen to get your thoughts on two things. One, Vodafone's comment from yesterday, which I'm sure you've heard around the, I guess, renewed efforts they're making in the market to turn around the business. I guess we saw a good mobile quarter from them, but still very weak on fixed line. Clearly that's where they seem to be much more focused. Are you seeing anything in the market yet? Is this something that you're seeing is having much of an impact? I guess the second bit around that was just MásMóvil launching a low-end TV product. Again, is that relevant at all? Is that having any sort of impact?
So that is the first question. The second question was just on fiber regulation. We had a couple of years ago, the decision by the Spanish regulator to effectively deregulate fiber in competitive areas. Since then, the level of fiber deployment in Spain has continued to ramp across all players. Could you help us understand if there is any visibility around when the regulator might update that framework? If they did, how much of Spain you think might end up getting deregulated? And ultimately, whether you think that would have any sort of meaningful impact in terms of how the landscape looks. Thanks a lot.
Hi, Akhil. Thank you for your questions. On the competitive landscape, what we see is that, in 2018, rationality is back. We have seen more or new, more formal tariff upgrades applied by most players in the first half, by all of them. Vodafone, it is true, has been more active in promos in the second quarter to try to revert some of their trends. But we see an environment which is rational and constructive in the high-end segment or mid high-end segment. There are three infra players with rational behavior. We are oriented to upselling, cross-selling. These are the segments where there is more loyalty. We see tactical promotions. But not structural ones, and aiming to be ARPU accretive. In the low end, we have seen more intense competition, but now a multi-brand approach is being applied by most players.
We are getting, and we should be getting, more traction on this front. We believe that we continue to have differential strength. As José María was saying, the best fiber network in Europe, LTE coverage, which is second to none. We have the best TV platform in terms of content functionalities. None of our competitors has a similar level of contents like the one that we have in spite of regulation that makes us to offer premium content to competitors. We think we have the best distribution channels. We are working to have the best digital customer experience. We have the most valuable customer base, the highest ARPU, the longest customer lifetime. So we think that we feel very well equipped to compete in what we perceive to continue to be a rational market. And in all of these, you may say stock, our results are the clear proof.
Regarding fiber regulation has a geographical segmentation in Spain. The wholesale prices in regulated areas has been determined already. It is based on replicability, when it used to be cost-oriented. It means that every retail offer from Telefónica must be replicable with profitability by competitors. The price was set at points higher than the initial expectations. And these prices allows us to combine generation of wholesale revenues and a competitive retail offer. We signed, as you know, wholesale revenues with our main competitors, which is helping to avoid what some people have feared, the risk of potential overbuilding fiber in Spain. So we are getting very good traction both on retail and in wholesale fiber revenues. The prices will be reviewed periodically, on a half-year basis. And the way the formula goes, more for more strategies will be reflected in NEBA price reviews.
If there is tariff upgrades, that should result in NEBA price increases.
If I may complement, in terms of the competitive zones that you were mentioning, those are 66 cities today, and this is reviewed every 4 years. I think we have one more year to go on this, or a year and a half to go on this before being reviewed. According to our calculations, today, it is 250 cities that should be included. We think that the competitive zone should be significantly expanded in the next regulatory revision.
Thanks. That is very helpful. Can I just clarify one point? When the regime gets updated in a year and a half, how should we think about what that really means in real terms, in terms of the average wholesale rate? Does it effectively mean because there is more regions that are deregulated, the average wholesale rate rises in those areas for those individuals using your network?
It will provide us with additional commercial flexibility that somehow today is constrained by the regulation. Bear in mind that we have already long-term wholesale agreements in place with Vodafone, with Orange. That should not have any bad impacts.
On the upside, I think that that would foster migration from bundling of the local access of the local loop into fiber wholesale market. That should accelerate the migration into higher speeds, and therefore the migration into higher ARPU coming from the wholesale access.
That's very clear. Thanks a lot.
Thank you, Aki. Next question, please.
Next question comes from Joshua Mills from Goldman Sachs. Please go ahead. Your line is now open.
Hi there. Thanks for taking the question. Sorry to come back to the football rights, maybe I can ask in a slightly different way. In the press release, which you put out after you had confirmed the Mediapro deal, you said that the net costs, i.e., how much you're spending less the wholesale revenues you were hoping to receive, of the combined La Liga and UEFA rights would be 5% higher compared to the previous cycle. On my numbers, it looks like you're spending about half a billion more on content going forwards. Clearly, if Vodafone decide not to renew the agreement, there's potentially quite a big hole in your Spanish EBITDA next year.
My question is, what percentage of Vodafone's 1.3 million TV customers would you need to win, given that Orange will also be going after them, for this to be actually a net positive, to put it in another analyst's words? If you do win those customers, do you also have to assume that there's some ARPU increase versus what they're currently paying on the Vodafone network? Thanks.
Thank you, Josh, for the question. Let me guide you a little bit on the evolution of football content costs in the coming quarters, then I'll get to the Vodafone specific comment. As you know, we are now entering the third season of the previous La Liga cycle. Here we had only bought as exclusive content the Partidazo, the main match of the week, which is what is subject to wholesale resale. We didn't buy the remaining matches, which we buy the channel from Mediapro. We are not reselling those. The impact of resale of content rights in the current season is just restricted to, regarding La Liga, to the Partidazo, and then, of course, to the Champions League that we just bought.
This means that football content cost will peak in Q4 this year, will stay the same in Q1 and Q2 of 2019, will decline from Q3 2019 onwards for the following four quarters, and then stabilizing. All of this has been factored into our internal projections. For year 2018, we continue to aim to a 40% OIBDA margin since efficiencies, digitalization benefits, and other savings will offset this evolution of content cost. To be clear, starting second half of 2019, there will be deflation in football content costs. This provides high visibility and sustainability to the Spanish business model and the P&L of the Spanish operation for the next three, four years and will allow us to continue to maintain the highest operating cash flow margin of all the European peers. Regarding Vodafone subscribers. Vodafone claimed to have 400,000 subscribers with football add-ons not so long ago.
Now they say 300,000. I don't know, but maybe two possibilities, that they try to minimize the potential erosion of their base or that they are already losing subscribers. In any case, we aim to produce a compelling customer proposition to attract a fair and significant number of the football fans who now may be unsatisfied with their provider.
Thank you, Josh. Next question, please.
Next question comes from Mandeep Singh from Redburn. Please go ahead. Your line is now open.
Thank you very much. I just wanted to come back to the sort of Spanish revenue and OIBDA trends. I noted that service revenue growth Q2 decelerated versus Q1, just 10 basis points organic growth, so pretty much flat. OIBDA also pretty much flat. You're sort of projecting or painting a much more bullish picture of the Spanish business, which actually is demonstrating no growth. How should we think about the sort of growth outlook for Spain? Is this a business that can actually grow a few %, or is this literally a flat business with flat margins, or how should we think about this? I don't really see the growth.
Thank you, Mandeep, for the question. Revenues in the second quarter for the Spanish business were up 0.3%. This was the combination of Sorry. Hello? Okay. Revenues were up. Are you asking another question or?
Mandeep, could you please put the telephone on mute because there is some echo.
Apologies. Sorry.
Sorry.
Okay. Sorry. As you saw, Q2 revenues were up 0.3%. This is a combination of handset sales, which are having a positive trend on the back of the commercial activity, the positive commercial activity that I spoken about in a previous question. Service revenue trends decelerated or reduced the rate of growth compared to the first quarter due to the tariff repositioning calendar. This year we have done some tariff upgrades in first quarter. Last year it was in the second quarter. The calendar effect is the one which is affecting the rate of growth. We do not guide revenues by regions, but if you look at the trends you can extrapolate things now. In B2C, looking at the different components of service revenue. In B2C, which accounts for 54% of service revenues, it's growing in Q2 1% year-on-year.
72% of this is Fusión revenue growing at 7.7%. We have been seeing increases both in volumes and ARPU with contention or reduction of churn. We may see some promotional activity in the second half in B2C, but this is a trend that is behaving nicely. In B2B, which accounts for 29% of service revenue, is accelerating growth. It was back to growth already last quarter. It's plus 1.2% in Q2. This is a combination of communication revenue services that declined 0.7%, more than compensated by IT revenues, which are growing at 7.4% in Q2. The trend and composition of B2B revenues is gradually improving, and we aim for stabilization in B2B for the whole year. You have wholesale and other. Wholesale and other this year is declining.
The two main For this was the loss of MVNO revenue from the MásMóvil-owned units and regulatory impacts due to MTR price cut. This is partially compensated by a growing volume of NEBA wholesale, migration from copper to fiber wholesale, and content resale dynamics that we've spoken at length in this call are also going to be relevant. We do not guide for revenues for the year, but we are reasonably optimistic.
Thanks very much.
Regarding OIBDA, I already said in a previous question that we see margin levels to remain around 40% for the year.
Thank you, Mandeep. Next question, please.
Thank you. Our next question comes from Giovanni Montalti from UBS. Please go ahead. Your line is now open.
Hello. Thank you. Sorry, just a very quick follow-up again on football. You were saying that you expect the decision of Vodafone to have a positive impact on your numbers. Will this be valid also for the short term, for Q4, for Q3? Thank you very much.
Thank you, Giovanni. As I was commenting before, you should expect us to be ready to launch, and now I add the word immediately, to the market compelling commercial offers, including all the football aimed at those potential customers who explicitly wanted and chose to subscribe to football with other providers. I add the word immediately.
Sorry, if I may, a very quick follow-up also on the point you were making before about the trend of football costs. You were saying peaking in Q4, then starting to decline as of H2 or flattening? My understanding was that as of H2 2019, football costs will be kind of flat for the coming years. Did I understand correctly? You said they would actually decline?
Let me repeat it. The football content cost will peak in Q4 this year, will stay the same in Q1 and Q2 of next year, will start declining in Q3 of 2019, also Q4, Q1 and Q2 of 2020, then stabilizes.
Okay, Giovanni. Thank you.
Thank you, Giovanni. We have time for one last question, please.
There are no further questions over the telephone at this time.
Okay.
Thank you very much for your participation.
Pardon the interruption. We just have someone in queue. Julio Acin from RBC. Please go ahead. Your line is now open.
Good morning. Thanks for taking my question. Sorry to come back again with this question, but I don't really understand the answer. I understand that the company announced a 5% inflation of net cost of football, assuming that basically we will receive wholesale revenues from Orange and Vodafone. How this 5% inflation announced by the company is going to change if Vodafone doesn't go? I don't really understand how basically content cost, the net cost is going to be basically lower than it is right now. My second question is regarding O2. The company said that due to regulation, Telefónica wasn't allowed to use a national price of EUR 45, and that it was basically forced to use two prices. However, the regulatory reply saying that Telefónica can use EUR 45 in all the regions, and that basically Telefónica, they just need to change the wholesale price of FTTH.
Has the company considered changing the wholesale price of FTTH to be able to use EUR 45 nationally? How this will impact also the contracts that you have signed with Orange and Vodafone? Thank you.
Thank you, Julio. Let me try again on the evolution of content cost. Here, maybe what you need to bear in mind is the different cycles of three years of one content and the other. When we announced the deflation of the cost of La Liga, that's for the season that starts in September 2019 onwards. Now, this coming season that starts after the summer, we're still in the third year of the previous cycle of La Liga, which had inflation versus the second year of the previous cycle of La Liga. That's why I'm saying that we're going to see content cost increase due to that third season of the previous cycle of La Liga. We will see the reduction in the cost of La Liga starting in Q3 2019.
Obviously, the net cost that we had calculated, assuming that Vodafone would be buying those content at this moment with the current decision of Vodafone, which, by the way, if they think twice, they're always welcome and capable to come back. With the current decision of Vodafone, the net cost will change, and the overall economics for us will depend on the trade-off between that reduced wholesale revenue versus increased retail revenue if we manage to get, which we are reasonably confident we manage to get, additional subscribers. With respect to O2 prices, we are constrained by the regulation to offer a nationwide offer with the same prices. We want to have a proposition, the EUR 45 proposition, we would like to have launched nationwide. Regulation prevents to do it so in regulated areas.
The customer promise is that as soon as there is a change in the number of regulated cities and areas, according to the comment that José María made before, we will compensate the customers accordingly. We would have desired or wished to launch that offer from the outset nationwide at the lower price, unfortunately, regulation is not making it possible for us to offer such benefit to our customers.
Thank you, Julio.
Thank you.
I now hand over to José María to close the call.
Well, thank you very much for your participation, and we certainly do hope that we have provided some useful insights for you. Should you still have further questions, we kindly ask you to contact our Investor Relations Department. Good morning, and thank you.
Telefónica's January, June 2018 results conference call is over. You may now disconnect your line. Thank you