Ladies and gentlemen, thank you for standing by, and welcome to Telefónica's January to June 2017 results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. If you should require any assistance during the call, please press star zero. As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr. Pablo Eguiluz, Head of Investor Relations. Please go ahead, sir.
Good morning, welcome to Telefónica conference call to discuss January and June 2017 results. I'm Pablo Eguiluz, Head of Investor Relations. Before proceeding, let me mention that financial information contained in this document related to the second quarter of 2017 has been prepared under International Financial Reporting Standards as adopted by the European Union. 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 and all of which may cause actual results, plans, objectives, or expectations to differ materially from those expressed.
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 Investor Relations team in Madrid by dialing the following telephone number, 34-91-482-8700. Let me turn the call over to our Chairman and CEO, José María Álvarez-Pallete.
Thank you, Pablo. Good morning, welcome to Telefónica's first half results conference call. I would like to take this opportunity to highlight the changes to our organizational structure announced last Tuesday to accelerate the pace of business growth, facilitate the achievements of new goals, and promote the new values that will shape corporate governance in the coming years. I would like also to congratulate Ángel Vilá as Chief Operating Officer and Laura Abasolo as Chief Financial and Control Officer. With me today is Ángel, during the Q&A session, you will have the opportunities to address us with any questions you may have. I'd like to begin by highlighting the acceleration in organic growth this quarter across revenues, OIBDA, and operating cash flow, thanks to the successful implementation of our strategy. Our focused approach is paving the way for our ongoing transformation with efficiency, synergies, and digital agenda.
Our business is more efficient, with OIBDA margins expanding to 32.1%, an increase of 1.2% year-on-year in organic terms. Moreover, higher quality assets drive our strong competitive position in main markets. This progress results from targeted investment towards ultra broadband, fostering digitalization, cognitive intelligence, and differential value proposition to our customers. Our balance sheet continues to get stronger, with net debt down EUR 3.7 billion year-on-year, and a robust free cash flow in a context of lower cash interest cost and longer average maturities. To sum up, we are accelerating growth with organic revenue growth of 4.1% ex regulation. Margin expansion is fueling organic OIBDA growth to 7.2%, which accelerates again at operating cash flow level to 17.5% thanks to lower CapEx. In addition, we are reducing net debt by EUR 5 billion year-on-year when including Telexius closing.
We are in the right direction, as reflects the upgrade of our 2017 guidance while we reiterate our dividend. Turning to slide three, let me summarize the key financials. Second quarter revenues increased 1.9% in nominal terms to reach almost EUR 13 billion and 3.1% in organic terms. OIBDA topped EUR 4.2 billion at 6.1% or 7.2% in organic terms. Operating cash flow ex spectrum totaled EUR 2.3 billion, with very robust double-digit growth both in reported and organic terms. I would qualify this as a strong set of group financials. The upgrade of 2017 guidance is best outlined in slide number four. In the first half of the year, revenues have clearly beat guidance growing by 2.3% versus guidance of stable.
We think that better trends posted in the second quarter, in addition to profitable growth expected for the second half of the year, allow us to increase this guidance to a growth of above 1.5%, maintaining 1.2% of negative impact from regulation. This higher revenue growth is not expected at the cost of other variables, as we maintain our guidance for the rest of the metrics. We continue guiding for margin expansion and lower CapEx intensity. Regarding the dividend, we paid the second tranche of 2016 dividend of EUR 0.2 per share in cash the last 16th of June. In addition, we confirm the EUR 0.4 per share in cash for 2017. Finally, we reiterate our main to maintain a solid investment-grade rating. Moving to slide five.
First half of the year reported OIBDA growth of 5.5% flowed directly to net income increase of 28.9%, reaching EUR 1.6 billion in the first half of the year, driven by sound management of non-operating results. Underlying EPS totaled EUR 0.38, up 32.3% year-on-year. Let me mention that we have adopted synthetic effects in Venezuela. This has had a negative impact on revenues and OIBDA. With this, Venezuela's contribution to the total group being reduced to 0.3% in revenues and 0.2% in OIBDA. On slide six, you can see very robust free cash flow dynamics in the graph on the top left of the slide, accelerating sequentially and year-on-year, surpassing the EUR 1.6 billion mark in the first half, an increase of 98.6% versus a year ago.
Of this increase, as seen on the right, 70% came from operating cash flow, while interest payments and working capital more than offset the drag from taxes and others. For the second half of the year, we expect free cash flow to improve further. Let me mention that net debt decreased in the second quarter year-on-year, despite seasonality and dividend payments, in contrast to trends in previous years. On slide seven, we show the breakdown of OIBDA growth looking at organic trends and effects. In the second quarter, OIBDA increased by EUR 234 million compared with 2016. It is worth highlighting that the organic contribution was EUR 285 million in the quarter versus EUR 52 million in the first quarter. Growth has higher quality. Effects deducted EUR 51 million year-on-year as the Venezuelan bolivar was devaluated.
If we exclude this, exchange rates continued to add EUR 70 million this quarter, mainly coming from the appreciation of the Brazilian Real against the euro. Turning to slide number eight, we review the composition of this growth with the strength that organic figures have shown. Total revenues grew a solid 3.1% versus the second quarter of 2016 or 4.1% excluding regulation. Service revenues and OIBDA accelerated versus the first quarter by 120 and 590 basis points, respectively, with a generalized improvement across regions in both service revenues and OIBDA. OIBDA expansion and CapEx decline explain the 860 basis point sequential acceleration in operating cash flow, with all segments growing year-on-year. I would like to highlight the operating leverage improved returns. Data monetization continued to contribute to revenue acceleration, as you can see on slide nine.
LTE customer base increased 63% versus June 2016, and average data per user was 59% up, resulting in booming traffic that is threefold compared to last year. The consistent growth in volumes is fostered and further monetized by the development of integrated data offers that follow a more for more approach and increase value for money. The benefits of this strategy is a clear ARPU accretion, translating into a ramp-up in mobile data revenue growth to 17.8% year-on-year, representing already 60% of mobile service revenues. On the fixed business, data volumes continued to post high growth, showing a huge monetization potential. As an example, fiber traffic per customer in Spain continued expanding and is now 2.5 times higher than average DSL traffic. On slide 10, we show the value creation opportunities we have ahead of us as we evolve through.
First, the speed and connectivity is our core competitive advantage, allowing us to monetize the ultra-broadband networks deployed. Second, service beyond connectivity offer our customer differential services besides the traditional ones, and TV is the main driver. Third, cognitive intelligence will add more value to our customers, building loyalty, improving efficiency, and opening new optionality. We are currently working to launch Aura in several markets in the next few quarters. On slide 11, we show our progress in the digital ecosystem. Video continues to be a key pillar of growth now and in the future, accelerating revenue growth in the quarter to 4.8% year-on-year as we consolidate our leading position in Spain and LATAM as one of the main distributors of content in the Spanish language. This success is built on our TV platform and differential bundling strategy.
In all the digital services, we are integrating solutions to strengthen our B2B offering and become an increasingly relevant player with progress made across clouds, security, and machine to machine. Turning to slide 12, we show progress in Telefónica Global Solutions to adapt our network to traffic growth, as well as to provide greater flexibility and foster end-to-end capabilities. Our fiber and cable coverage surpassed 41 million premises, while our LTE coverage reached 68% on average across our footprint, 89% in Europe. Regarding virtualization, we are currently implementing in four countries our UNICA program, providing the support needed to smoothly adopt and deploy virtualized solutions, enabling the transformation to software-driven networks. In parallel, end-to-end digitalization, mainly at the back of full stack projects, increasingly delivers efficiency and agility. Now please turn to slide 13.
Telxius posted a solid set of results in the second quarter, with a strong organic revenue growth of 11.4% and robust OIBDA margin of 47.9%. Regarding its business performance, the tower tenancy ratio of the quarter improved to 1.3 times, while cable IP traffic grew 31% and capacity bandwidth 62%. It's also worth mentioning that marine deployment of MAREA and BRUSA continued as expected. Now, I hand over to Ángel.
Thank you, José María. On to slide 14, Spain showed a clear improvement of commercial trends and positive momentum in our upselling strategy. Our focus on value and churn reduction allowed us to achieve sound commercial results as follows: The mix of Fusión subscribers continued to improve, with high-value packages increasing to 24%, while Fusión ARPU grew quarter-on-quarter to almost EUR 85, up 6.4% year-on-year. TV returned to positive net adds on a widespread take-up of a new Fusión bundle. Fixed broadband gained traction gradually since March, heading in the right direction, and mobile contract base posted very solid growth of 5% with a better portability balance. Furthermore, we continue to strengthen our positioning with market segmentation. As such, the new convergent entry-level offer with differential TV content, launched in July, will foster trading dynamics in the coming months.
Continuing with Spain on slide 15, service revenues year-on-year trend posted a sequential improvement of 0.8 percentage points, driven by consumer revenues growth and a lesser decline in other revenues. Revenue is on the right path, as service revenues have already stabilized year-on-year, excluding the lower TV wholesale of LaLiga, an impact that will disappear from mid-August onwards. Despite tougher comps of personal savings, ongoing cost reduction led to a 0.9 percentage points improvement in OIBDA trend and margin reaching 40.6%, up 0.8 percentage points sequentially. Moreover, I'd like to draw your attention to the falling CapEx, -21% year-on-year in the first half. That comes from our early build of new generation networks and translates into superior cash flow conversion, as shown in the 8% of year-on-year growth delivered in operating cash flow. In short, strong cash flow generation is here to stay.
Moving to slide number 16, Telefónica Deutschland is driving solid momentum in a market shifting to stimulating data growth. O2 Free and O2 brand 15-year anniversary promotions accelerated net additions, 297,000 in contract and 322,000 in prepaid in the quarter. A robust LTE increase sustained traffic and data usage growth, with impressive early statistics from O2 Free 15 customers with data usage above three gigabytes. On financials, MSR trend continued to improve in the second quarter to minus 0.4% year-on-year, excluding regulation. OIBDA growth rate accelerated to 3.8% year-on-year, and OIBDA margin expanded 1.9 percentage points, leveraging on incremental savings of EUR 40 million despite commercial investments. In January to June, operating cash flow growth remained strong at 4%, leveraging synergies and transformation initiatives.
Over now to the U.K. on slide 17, where we have once again leveraged on our strong customer focus, resulting in a positive performance across metrics. We continued to grow our quality customer base, as contract was up 2% year-on-year, maintaining market-leading loyalty levels, and LTE penetration reached 58%. This led to an acceleration in financials this quarter. Revenues were up 2.6% year-on-year, OIBDA 3.9%, and operating cash flow 5.3%, despite the fact that our accelerating LTE rollout is driving an increase in CapEx. Moving on to Brazil now, on slide 18. We have posted another set of strong results this quarter, accelerating profitable growth. In mobile, our best-in-class service quality, significantly increasing our 4G and 4G+ coverage, drove stronger adoption of data services, and as a result, mid-single-digit ARPU growth.
On top of that, it also allowed us to capture almost 60% of new contract customers in a context of more intense competition. In fixed, we continued to focus on fiber deployment, passing new cities and complying with our plan to expand our reach. Thus, we achieved new record-high FTTH and IPTV net adds, and ARPU is reflecting the shift to upgraded networks. On slide 19, you can see how this strategy is flowing into the P&L with results, once again, well ahead of the market. Top line service revenue was 2.3% up year-on-year, with solid mid-single-digit MSR growth and fixed revenues recovering momentum. Moreover, consistent cost control, coupled with continued capture of synergies, are reflected in the improved profitability with OIBDA increasing by 7% in Q2 and operating cash flow by 17% in the first half of the year.
In Hispanoamérica, as shown on slide 20, customer upgrade to higher value services is the main driver behind ARPU growth. Thus, in mobile, ARPU growth jumped to 21.1% year-on-year in the second quarter, with positive trends both in prepaid and contract. In the fixed business, fiber and cable connections grew 46%, driving fixed broadband and Pay TV ARPU to increase by more than 9% and 12% respectively. The continued expansion of our 4G and fiber networks, coupled with the relatively low penetration levels, represent a strong support to continue maintaining this quality growth. Moving to slide 21, we can see how these positive trends are reflected in revenue and OIBDA growth, ramping up to 15.5% and 20.9% respectively, and flowing into a 43.2% operating cash flow growth in the first half of the year.
These positive trends illustrate the outstanding performance in Argentina, the steady positive contribution from Colombia, the recovery in Mexico, and some signs of improvement in Peru and Chile against a backdrop of intense competition. Let me also remark that positive growth rates are visible in both organic and reported terms, despite the devaluation in the exchange rate of the Venezuelan currency this quarter. Let's move now to the financial metrics on slide 22. We keep on steadily lowering our net debt to OIBDA ratio, down to 2.86 times as of June 2017, which would be further reduced to 2.78 times including the Telxius stake sale. Strong organic free cash flow generation is the key driver of this leverage improvement. Including the Telxius deal, net debt is EUR 5 billion down year-on-year, a 9.5% decline.
We expect further deleverage until year-end, thanks to stronger free cash flow in the second half of the year. On slide 23, let me highlight the strong liquidity position, above the EUR 21 billion mark, built to face comfortably next two years of maturities. The effective cost of debt in June 2017 stood at 3.22%, 72 basis points lower than at the end of 2016. I will now hand it back to José María to recap.
Thank you, Ángel. To finish, please move to slide number 24 for our final conclusions. Today's strong set of results demonstrate our excellent position for delivering sustainable long-term growth. Our organic growth is accelerating across the board on sustained commercial momentum, with a focus on high-quality connections and a more for more actions. These allow us to strengthen our differentiation based on two key pillars: network leadership and quality assets, thanks to upfront CapEx efforts made in previous years. Our EPS is growing very nicely, and the free cash flow profile is clearly improving, driving a remarkable organic debt reduction. We are upgrading our guidance for the year. Thank you very much. Now we are ready to take your questions.
Ladies and gentlemen, if you'd like to ask a question at this time, please press *1 on your telephone keypad. To cancel your question, please press *2. Once again, that's *1 to register the question and *2 to cancel. We would kindly ask you to ask a maximum of two questions per participant. If possible, we recommend you not use your cell or hands-free phone. We will take an opening question from Georgios Ierodiaconou. Please go ahead. Your line is open.
Yes, hello. I've got two questions, one regarding Spain and one regarding Peru. In Spain, you show the mix of the customers in Fusión between the three different tiers, and obviously it looks like the lower end is the one that is losing weight. I just wanted to see if it's possible to get an idea of the churn levels you are seeing between the different tiers and whether there's a big difference between the lower end and the other two tiers. Secondly, whether you are seeing some down trading as you continue to offer more for more on one side and then have some promotions in the market on the other side.
My question around Peru is, as I can see, the margin is now in the mid-20s. We all know it's a very competitive mobile market, and indeed, you still seem to be losing a lot of contract customers. Under the pressure of the competition in fixed is more balanced. I was wondering, how low could these margins fall, given that around half of your revenues come from the fixed line services. Is it a point we've reached now where in mobile, effectively, the margins are at very low levels? Thank you.
Thanks for your question. In terms of our churn levels in the different segments of the Fusión customer base, what I can tell you is that in the mid to high end churn in the second quarter, the numbers is in the high and mid-term churn is 70% of the total churn on the lower levels, which means that churn is much lower in the high and mid end than in the lower segments, which is natural. We think that will keep improving going forward. That will put more value in the equation. In terms of your question around Peru, the evolution of Peru has different performance in the mobile and in the fixed. In mobile, competition remains very high. Also this quarter, we have the effects of the El Niño and some flooding effects. Prepaid is under a significant amount of pressure and also postpaid.
You know that we have launched very recently a repositioning of our prepaid offer. We are starting to have some positive signs of recovery, mainly in terms of the level of recharges, which is the level of active customer base that you have. We are starting to see some signs of improvement. On the fixed line side, commercial trading remains very robust. Service bundling with pay TV accesses have been growing 5% year-on-year. TV output, to give you an example, is up 13% year-on-year. These broadband accesses are 2% up year-on-year. We have been having positive net adds of 15,000. That means that we are seeing a robust trend on wireline and some signs of improvement on the wireless side. It is true that OIBDA is significantly down year-on-year, and the margin has been falling significantly.
If we are able to stabilize the prepaid segment and we keep working on the postpaid segment, we should be able to have a better performance in the second half of the year. Please bear in mind that in the second quarter of 2016, we recorded a positive impact from the reversion of a tax provision, and that has been also impacting the year-on-year comparison in OIBDA. Finally, in terms of the downtrading in Spain, promotions are, namely the last one that we launched on the low end, are starting to foster growth adds. We are also following the value strategy, which means that we are improving the mix from the standalone to convergence, and the upselling convergent from low to mid-high segments keeps also working.
We are not seeing so far, it is early times because of the recent promotion, different levels of migration on the chain. We don't have signs to be concerned on that side so far.
If I could ask a very quick follow-up. I know it's only been a few weeks, but since you launched the new promotions, have you seen a broadband improvement or are you still losing broadband customers?
We have seen an improvement, but again, it's early days. It's just two weeks away from the promotion. Yes, we have been seeing an improvement.
Thank you.
Thank you, Georgios. Next question, please. We will take our next question from Luis Prota of Morgan Stanley. Please go ahead. Your line is open.
Yes. Thank you. My first question is on Spain, I would like to get some more color on the market dynamics and how this could evolve going into the second half. I've seen that Fusión customers have come down Q on Q 4,000, which is first time happening, and also decline in broadband net additions, lower growth in fiber. Are you really seeing a lot of competition? We're just stepping back from the market or also revenues were growing a bit less than expected in the consumer segment, so I wonder whether there are discounts. If you can elaborate a bit on the dynamics this quarter and how this could progress into the second half would be useful. The second question is on the potential IPO of assets like Colombia and Argentina that have been coming out in the press.
I don't know whether you have plans for that. Also the recapitalization of Colombia, whether there are any new news on that. Thank you.
Thanks for your question, Luis. In terms of Spain, let me start by saying that we are seeing a sequential improvement in revenue evolution. We are seeing better trends in commercial trends with few exceptions, which is also very important, churn reduction in almost all segments. Remember that Fusión is already a highly penetrated product in our base, which means that 85% of broadband customer are under Fusión, 84% of TV customer, and 77% of contract customers. It's also growing in value. Ultra broadband fiber is up 38% year-over-year, TV 70% year-over-year, and high value packages 24% year-over-year. Also worth highlighting that Fusión ARPU is up 6.4% year-over-year to almost EUR 85 in average, and Fusión churn is down to 1.3%. I will also highlight the mobile accesses evolution.
It's the best performance we have had since the third quarter of 2010, with net adds of almost 70,000, excluding machine to machine, and churn down to 1.3%. What I'm trying to tell you is that the market consolidation plus the environment is helping us with this More for More strategy. We think that the B2C improvement that we have seen in this quarter should keep growing in the next quarters. We also aim to keep improving on the B2B segments. The wholesale impact will be fading away progressively as the year-over-year comparison will ease away. Therefore, we think that we will keep improving, we keep evolving towards service revenue stabilization in Spain.
Also, it is worth highlighting that handset revenues are significantly down, as it took us a while to eliminate the structural subsidies out of the equation in the Spanish market. As also hardware revenues leave very low margin, we will not push much on that side. We have a better and more positive outlook this quarter in revenues. We think that evolution could keep growing for the next quarters.
Hello, Luis. Regarding Argentina first. In the second quarter of 2017, Telefónica's Argentina revenue, OIBDA, and operating cash flow growth accelerated due to increased consumption and better regulatory environment. We believe our business in Argentina is currently undervalued. The opportunities that the market offers are not priced in, as valuations applied in the sum of the parts are very low, despite the fact that performance is very good. We're already repatriating cash from the country. Having said this, we do not comment on market rumors regarding any potential IPO there. Regarding Colombia recapitalization, the process of recapitalization of Coltel continued progressing on recent months. The government continued advancing. On June 30th, a law was approved by the Colombian Congress to allow the government to subscribe the capital increase in order to prepay the obligations with the PARAPAT in accordance with their shareholding.
The next steps in the process is approval of a decree and other internal government approvals. Once that decree is approved, a shareholder meeting can be held in order to approve the capital increase. However, there has been recent news, a result of an arbitration initiated by the Ministry of Information and Communication in connection with the potential reversibility of certain assets under mobile former concessions. We believe that this arbitration is not conducive to investments in the telecommunications sector in Colombia. We are analyzing the implications of that arbitration award and the legal measures available to us at both local and international levels. Obviously, yesterday news could potentially affect the process, although it's too early to say what would be the potential impacts.
Okay, thank you.
Thank you, Luis. Next question, please.
We will take our next question from Akhil Dattani of JPMorgan. Please go ahead. Your line is open.
Hi, good morning. Thanks very much for taking the questions. I've got two questions, both related to Spain, please. Firstly, just on the new EUR 45 Fusión offer that you've launched, I guess just as a follow-up to the prior question on this, if I look at the slides that you've provided on the mix of customers, it looks like it's about 27% of the base that are on your low end. I guess it would just be useful to get some color in terms of how you're thinking about what the impact of this is, both in terms of down trading from the current EUR 55 plan to the EUR 45, how you think that drives your adds mix. When we think about the move to that, obviously there's been a lot of emphasis in the market around MásMóvil.
Should we think about that as having been a relevant factor for you driving this change in pricing, or do you think there are other factors behind why you've done that? The second question is really around your other and wholesale segment. You mentioned earlier in the call that we should expect a decent recovery through Q3 and Q4 as the wholesale TV drag washes out. Could you just remind us of some of the bigger ticket items that are likely to impact as we look at the next couple of years? I guess what I'm mindful of is you've got, on the negative side, the Yoigo contract washing out, but again offsetting that, you've got the new wholesale contracts on fiber you've signed with Vodafone.
I guess it's a really broad question as to how do you think post this year that wholesale and other revenue stream develops? Thanks a lot.
Thanks for your question. Regarding the first one around the new tariff that was launched three weeks ago. Our main target was to reactivate the gross adds at that level, because we are having good results in upselling our customer base, therefore, if you compare the quality of the Fusión customer base this quarter compared with a year ago, you will see that it has improved. We see the opportunity of having an upgraded and competitive, in the new environment, low-end offer. That's why we have launched this EUR 45 tariff, which allow us to fight and capture some activity on the low end. Certainly, as there are new actors, as MásMóvil, that you mentioned, I think that we can be competitive because remember that we have the best network, the best content, and the best distribution channel in Spain.
We think that we can reactivate the low-end activity for Telefónica without triggering downtrading in our customer base. The proof of that is that in the first three weeks, and again, it is too soon to conclude, but in the first three weeks of launching that tariff, we are not seeing major activity on customers moving from the EUR 55 into the EUR 45 offer. Again, three weeks is not a good sample, but we think that so far it proves that we can be more active on the low-end segment without triggering significant downselling in our customer base. In terms of MásMóvil, it has been certainly a disruptive element in the market. It is focused on low cost instead of value, so we do not see immediate risk to market evolution in the mid-to-high end.
It is capturing market share, not that much revenue share, and it also faces several challenges in the current market structure. The market is oriented to value with differential assets. Remember that MásMóvil has no TV. Subscribers are more loyal on the back of convergence and totalization with lower churn, and they have a smaller market growth in fixed broadband and mobile. We think that by revamping our entry-level portfolio, we will have significant possibilities going forward to reactivate our growth in Fusión without affecting the quality of the base. In terms of the wholesale revenues, we include there, as you know, the TV and the MVNOs part. I was mentioning before that the football impact that has been affecting us because we have no revenues from LaLiga since the third quarter of 2016 will be progressively fading away.
Remember that we are having also right now, not just the Vodafone contract, which is going to be affecting positively, but also good performance in NEBA and roaming revenues. We think that we could have a relevant upside coming from the NEBA growth in the mid-term. It is going to be progressive, and that would be compensating progressively the decline in the traditional unbundling of the local access. We will give you more color in the next quarter of this change of mix in the wholesale revenues, we think that the bulk of the impact coming from the football rights will start to fade away starting in August, and therefore we should have an easier comparison year-on-year in the next quarters.
That is great. Thank you.
Thank you, Akhil. Next question, please.
We'll take our next question from David Wright of Bank of America. Please go ahead. Your line is open.
I think actually, a lot of it was covered in the last question, but I just wondered whether I could get a little more granularity on wholesale fiber, because it seems like that is one of the big opportunities to drive cash flows on next year. The agreement with Vodafone, please, when exactly does that kick in terms of the new rates being offered to them? How are you expecting the actual fiber wholesale rate to evolve over time? My understanding is the DSL unbundling is around EUR 9. What should we expect the fiber level to be, please? When could we really expect the Vodafone agreement to catalyze an acceleration? Is that the right way to read it? Thank you.
Well, thanks for your question. I will try to give a little bit more of color. In the wholesale segment, NEBA is growing very fast. It's 2.6 times more important this quarter than a year ago. The growth is accelerating, but it is just 14% of the total amount. The Vodafone agreement, as you know, is a five-year commercial agreement. It will give them access to our fiber network. It's already starting, and it will be accelerating progressively, but it's still very low figures, including in this quarter. In terms of the mobile side of the wholesale revenues coming from MVNOs, MásMóvil is still with Telefónica in 2017 because it will be migrating progressively. As a final piece of color, let me tell you that excluding LaLiga, all the revenues will be flat year-over-year.
I think that going forward, we should see better performance of the wholesale segment. With respect of the price of the abandoning of the local access, the local loop, and the EUR 9 of the copper line, that price will be settled, I think, in the first quarter of next year. That's expectation that we have, and should be significantly higher than the EUR 9 that you are contemplating. It is still unclear when the price of the local NEBA is going to be established.
Okay
With the new rates coming from the fiber access, the progressive improvement coming from the Vodafone agreement, and the softening of the impact of the football rights, we should expect a better performance of the wholesale revenues going forward.
That's great, José María. Thank you.
Thank you, David. Next question, please.
Our next question comes from Julio Arciniegas of RBC. Please go ahead. Your line is open.
Yes. Hello. Thank you for taking my question. My first question is regarding the mix of customers. I see that the mix of the low end has decreased from 29 to 27. Can you give us some color of the dynamics? Is this mix reducing due to higher churn in the low end? How should we think going forward after, basically, the company has launched some attractive offers in the low end, spinning down? That's my first question. The second question is that by looking the results of your main competitors in terms of broadband KPIs, they have grown, but they haven't been great. The rate of growth has been lower. Do you see any risk that they are going to become a little bit more active, more aggressive in the low end to try to boost growth again? Thank you.
Thanks for your question. I would try to give you a little bit more of color. First, taking the quality base for Fusión, we see it improving, and in fact, we keep working on that. The tariff that we have launched is mainly devoted to attract new customer, because we see value on the low end. Not to preserve our existing customer base. The proof of that is that, again, too soon to say, but in the first 3 weeks of the offer, we have not seen major change of dynamics in customers migrating downwards. We think that we should be able to keep building on the quality base of Fusión going forward. The proof of that is the ARPU expansion. Again, let me try to give you a little bit of color on the ARPU expansion main levers.
Out of the 6.4% increase year-on-year, which is roughly EUR 5.1, on the positive side, we have the tariff upgrades, the more for more strategy, the upselling to higher value tags. We have also some dilutive effect from promos. The promos are mainly devoted to give a taste to our customers of the superior product. A significant part of them stay on the higher packages. We also have some diluting effect from the old mobile add-ons that should be progressively fading away. Just to tell you as a result that we keep working on improving the quality base, and that links perfectly with the second part of your questions. It is true that we are seeing some less gross adds and net adds, mostly gross add, in some of our competitors.
It is also true that all of them, the bulk of them, are also based on upgrading their customer base, on improving their customer base. I think that's a positive sign of rationality in the market. We do not see major changes in the market dynamics in Spain, and it's something probably towards more rationalization. Again, we will keep you posted on the reaction of our own customer base and of the market to our recently launched tariff.
Thank you very much.
Thank you, Julio. Next question, please.
Our next question comes from Giovanni Montalti of UBS. Please go ahead. Your line is open.
Hello, good morning. Thanks for taking the question. Very quick ones. On towers, would you consider as an option the contribution of additional towers to Telxius? This was one of the strategic pillars at the time of the IPO. I was wondering if this could be still a lever for you. On South America, is there any progress? Are you more optimistic about the possibility to reach some more extensive sharing agreement, especially with your top competitor there? Very last one, if I may, on wholesale volumes. I see that disconnections from your fixed network in Spain are improving materially both quarter-over-quarter and year-over-year. Should we expect this trend to continue, obviously also thanks to the Vodafone wholesale agreement, and is there any room to reach some similar comparable agreement, at least in some parts of the country, with Orange? Thank you.
Hello, Giovanni. Regarding Telxius, on the one hand, we are progressing very well in the process to close the transaction with KKR. We've got
All but one of the approvals that we needed, and we're expecting to do the first closing in Q3 or very early Q4, and the second closing in Q4. That's progressing well. The strategy, of course, is to grow the vehicle by contributing more towers. Telxius is already increasing its tower perimeter. It is working a lot in build-to-suit towers for Telefónica units and other parties. Also we are contemplating contributing some of our portfolios of towers into Telxius. Yes, you should expect it to grow its number of towers. As José María said during the presentation, we are progressing in the layout of the new submarine cable systems.
Taking your question on the network sharing agreements in Hispam and in Brazil. The answer is yes, we have already some very interesting agreement in place, like in Colombia with Millicom. We think that this is a field in which we can do much more. In places where infrastructure deployment is not going to be a competitive advantage, I think that it makes all the sense to share more elements of the network in order to accelerate deployments. I think that the interests of everybody are aligned, the customer, the society, and the different players. Yes, as we speak, we are having different conversations, including our largest competitor in the region. We don't have concrete news to share with you at this stage. Yes, we are open. We think it makes all the sense.
In terms of the wholesale volumes, the reading that you have is correct. Also remember that out of the total number of wholesale accesses, which is 4.3 million, just less than 600,000 are coming from fiber. We do see a significant opportunity, again, in places which makes all the sense to offer these kind of agreements, to extend those kind of agreements to other players. The answer is, yes, we are open to extend those agreements to other players.
Thank you very much.
Thank you, Giovanni. Next question, please.
Our next question comes from Mandeep Singh of Redburn. Please go ahead. Your line is open.
Hello. Thank you for taking the question. I have two questions, please. One, sorry to come back to Spain. I know you've had a lot of minute details so far. I think in the presentation you said that service revenues were growing at +0.2%, excluding the impact of wholesale drags or the TV drags, rather. I think Akhil asked about this earlier as well. Once you move into Q3 and Q4, obviously that diminishes, but Yoigo, Pepephone grow. Is +0.2, i.e., something north of positive, a reliable indicator for what service revenues could look like in the second half of the year? Just bearing in mind the various moving parts, are we on an underlying basis back to positive? That's the first question.
The second question is just if you could perhaps give us a little bit more color on the sort of hybrid call date for next year, strategy around hybrids, please. Thank you.
Thanks. To answer your question on the expected evolution of revenues in Spain, let me reiterate, we do not provide guidance on the different business division. Having said this, we expect revenue trends in Spain to continue improving in the next quarters. Bear in mind that total revenues will continue to be affected by lower handset sales. As you know, those have very little impact on OIBDA. If you ask me about service revenues evolution, the message is that service revenues would be already stable in the second quarter when you exclude the negative impact from the lower wholesale sales of LaLiga rights, as I mentioned before. That this negative impact will disappear from August. The next two quarters, we expect that service revenues should continue to improve and will remain relatively stable in year-on-year terms.
We'll give you more color in the third quarter when we see the actual result of the EUR 45 tariff.
Thank you.
Regarding hybrids, we have an outstanding amount of EUR 6.5 billion equivalent recorded as equity, accounting-wise. This amount includes the $500 million issuance in Colombia. The first date of first call will be, I think, in September next year. Of course, we cannot make a definitive or irrevocable commitment to redeem the notes as the first call date. It should be noted that at the first date, the securities are expected to lose their entire equity credit from S&P, which is a strong incentive to replace them with an instrument of similar seniority or equity. We would be focusing on replacement to keep the equity component.
Okay. Thank you very much.
Thank you, Mandeep. Next question, please.
Our next question comes from Tanmay Binchandani of Bernstein. Please go ahead. Your line is open.
Yes. Thank you very much. My question is on consumer revenues in Spain, which account for about half of Spanish revenues. Fusión revenues, which are about two-thirds of consumer revenues, grew by 10%, and yet the segment posted a moderate 1% revenue growth year-over-year. It's rather obvious that the decline is coming from the non-Fusión revenues, a third roughly, which were declining at 13%. Could you please help us understand how voice line loss trends in the consumer segment are evolving, and more importantly, where these customers are going to?
Thanks for your question. You are right. The 54% of total service revenues is the B2C segment. Out of that, the bulk is Fusión. The main drivers of the growth of Fusión is one-third subscriber growth and two-thirds the ARPU increase. In the non-Fusión, they are declining 30% year-on-year, which is a smoothening its evolution compared with previous quarter. It's also been affected on the non-Fusión side, revenues for the DTS, the former Digital+ customers, which again, the year-on-year comparison should be easing in the next quarter. It's not just the traditional lines, it's also the DTS, the former Digital+ customer. Those contracts are either migrating into the fiber product or even going to some fiber competitors, offers from the competitions.
I don't have here the exact number of all those customers and the percentage, but I guess that we are trying to attract most of them to our fiber offer. To summarize, the non-Fusión declining -30%, softer decline than a quarter ago. It is not just the traditional lines. It includes also the Digital+ customer whose bundling is also progressing and therefore should be fading away in the next quarter. Out of the traditional lines, part are coming to our fiber offer, and part are going to the competitors.
Thank you. May I ask a follow-up question or a second question, please?
Please go ahead.
Thank you. Orange today announced its average revenue per converted account of about EUR 58. Your Fusión ARPU, which arguably is a similar indicator, was about EUR 85 for the quarter. That's a 45% premium. How do you explain this spread or justify this premium? What are you doing to address what looks at face value like a pretty disproportionate exposure to a potential repricing risk in the market?
The explanation that we have for the quality of our Fusión base is, first, we have the best fiber network in Europe. There is no country in Europe that has a similar fiber network as the one that we have been building in the last years. By the way, keep an eye on operating free cash flow generation in Spain, because as we are reaching a significant coverage of fiber in Spain, CapEx intensity should be progressively going down. The price premium is justified because we have the best network. We have the best platform in terms of functionality, DVR. We have the best content. None of our competitors have a similar level of content as the one that we have, in spite of regulation that force us to offer premium content to our competitors. Also, we think we have the best distribution channels.
We have started first to upsell our customers. I guess that in the case of the competitor that you mentioned, you are including all the customers that they have, including the Jazztel customers. Therefore, I would not be surprised that they would start to offer upsell offers to their customer base. Therefore, their ARPU could expand and shorten that differential. I think that there is a mix of effects. If you ask us if we are concerned, let me point out that churn in Fusión customer is very significantly controlled. For the time being, we think that this is a sustainable market evolution. We think that there is significant incentive for our competitors to upgrade their customer base by offering the customer better products through the network.
Finally, let me highlight that, again, churn in the different levels of Fusión is highly controlled. Fusión churn overall is 1.3%, is down 0.1 percentage point year-on-year. Postpaid churn on the mobile side is 1.3%, is down. TV churn is also down. For the time being, it looks like competitors and customers are appreciating that we have a significant competitive advantage in terms of all the different features that I mentioned before.
Thank you.
Thank you very much.
Next question. Thank you. Next question, please.
We will take our next question from Keval Khiroya of Deutsche Bank. Please go ahead. Your line is open.
Thank you. I got one question on Spain and one question on Brazil, please. In the second half of last year, you did have another price increase in return for giving free football included in some of the bundles. Do you see much of a drag on Fusión ARPU in the second half as this price rise annualizes, or did it not have much of a net benefit given some TV customers would have no longer paid for the football? Secondly, on Brazil, this time four years ago, I think we were starting to get excited about potential consolidation in the Brazilian wireless market. Do you expect Brazilian consolidation to return on the agenda at all? Would you be in favor of it if it were to happen? Thank you.
In terms of your first question of the packages and the football, we are not seeing major changes in the composition of the packages going forward. I would try to understand better your question offline and give you some color through the IR. Because we are not seeing major changes on the football side, on the content. We have launched Fusión+ Ocio in trying to differentiate ourselves through movies and series as an alternative, and our customers are reacting well to that. We are not seeing major changes in the composition or the appetite of customers based on the football. In terms of consolidation, on the consolidation agenda in Brazil, I will hand it to Ángel to give you a little bit of color. We think it makes all the sense if that was to happen.
Thank you, José María. Again, in Q2, Brazil maintained a very healthy revenue and OIBDA growth trends with margin expansion, posted double-digit operating cash flow growth. We have increased synergies generation. We have had a record share of mobile net adds, especially in contract. We are delivering very nicely. We do not see the need for inorganic movements. However, as always, we would analyze in-market consolidation opportunities if they make sense and they create value.
Thank you. May I come back to my first question? Just to be clearer, my question really related to the price increase you put through in July of last year, where you included the football in some of the TV packages, and obviously, this will then start to annualize in Q3 of 2017. Will there be much of a drag on the second half Fusión ARPU from the annualization of this move you did in the second half of last year, or is it not too much of an issue? Thank you.
Let me try to give you a little bit of guidance to that. We have a price move, that you mentioned last year, but it is also true that we have been having other offer upgrades this year in April, in February, and also recently in August. The evolution going forward will be a mix of all of those. The year-on-year comparison is going to be negatively affected by the prices that were done in the second half of the previous year, but they will be positively affected by the price upgrades that we have done so far this year. We see still room for this more for more strategy going forward before the year end.
That's clear. Thank you.
Thank you, Keval. Next question, please.
We will take our next question from Joshua Mills of Goldman Sachs. Please go ahead. Your line is open.
Thanks. Two questions on Spain, please. The first is just on the trade-off between offering customers speed and content within your Fusión base. If you look at the Fusión subscribers taking 100 or 300 meg broadband packages, there's been a big step down in the net add growth this quarter. My question is that because people are sacrificing a bit of speed, maybe churning down to 50 megs in order to keep on to content which was discounted before and now isn't? In that context, how do you think about Sky's announcement this morning that they'll be looking to do an OTT service in Spain? The second question is just on CapEx. I know it's difficult to read too much into phasing, but Spanish CapEx is down 20% year-on-year in the first half.
Do you think that there's scope to deliver a greater than 1% CapEx to sales saving in the domestic market? The 1% reduction in CapEx to sales is obviously what you're guiding to at group level. What's driving that lower CapEx effectively? Thank you.
Well, taking your question on the mix of features that we put in play in order to build this more for more strategy. You are right, it's a mix of speed on the fiber network, capacity on the mobile side, number of mobiles included in the bundle, and certainly content. Also the technological features of the platform. We try to build different attributes, speed and capacity on the wired and wireless side, number of mobile lines included, technological features of the platform like cloud DVR or latest seven days recording or access. It's a mix of those. The customer chooses between the different features. The more we build into that, the more versatility of the offer we have. Again, the proof of that is the mix of the customer base.
If we put more value, it might be a different combination, but the result of that needs to be that we keep upgrading our customer base. That has been happening in the last year. Our customer base is of better quality this quarter than a year ago, and there is a mix of effects out of that. We will keep building that. Remember that the network capacity that we have and the network speed that we can offer to our customer is just starting, and we just deployed the fiber network. We have significant room to go in terms of the capacity and the speed of the network. Your question about potential more over-the-top players or offer in Spain.
We have already here the largest players, we see that more as an opportunity than anything because that will increase the usage of the fiber network. We think that there is room for our customer to choose between different options. Finally, let me get back to the previous question. We have the best fiber network in Europe. We have the best platform, therefore, we should be able to offer our customer a very attractive proposition going forward. In order to give you a summary, I think that you're right. The speed is one of the elements. Capacity on the mobile side is another as we keep deploying LTE content. The features of the platform should allow us to keep upselling our customer base.
In terms of the CapEx, we are already reaching levels of penetration of fiber in Spain that are eight times or 10 times the ones that you could see in the U.K. or Germany. Spain has become the best country in Europe, I think it's the third in the OECD in terms of ultra broadband network expansion. Therefore, CapEx intensity should keep going down in the future. That's why I was trying to drive your attention into the free cash flow generation in Spain, not just revenues, which are very important and will be a significant focus for us going forward, but free cash flow generation of Spain. That will be a key lever for the group going forward. Thank you, Joshua. We have time for the last question, please.
Our last question comes from Sam McHugh of Exane. Please go ahead, your line is open.
Yeah, morning, guys. Just wanted to follow up on that last question a lot, actually, on Netflix. They obviously launched at the end of last year. Sky have said that they're launching second half of this year. Have you seen any impact from Netflix on the consumer appetite for some of your TV bundles? How are you trying to factor in the Now TV launch in terms of how you're thinking about the low-end Fusión product? Is there a greater risk that people just take skinny bundles? Just more broadly, can you remind us of your plans for original content, whether the cost is OpEx or whether it's being capitalized? Thank you.
Sorry, we didn't catch the first part of your question. Could you please repeat it?
Yes. Can you hear me now?
Yeah, we can.
I was just saying, Sky confirmed they're launching Now TV in the second half of the year, and we've had nearly a year of Netflix post-launch. Have you seen any impact from Netflix? Just how do you factor in this growing OTT availability into your thinking around the low-end bundles? Is there a greater risk of people taking just the Fusión #0 offer with more OTT video?
The second one? Sorry.
The second one was just on whether the content costs, remind us of the plans and whether they're OpEx or being capitalized.
Thank you. Well, thanks for the question. We have already, as you were mentioning, Netflix and other over-the-top players in Spain. We have not seen a major shift in the evolution of our customer base so far. Again, remember that Netflix is already very active for a year now in Spain, and our Fusión customer base keeps improving. I think that over-the-top players are seen so far in Spain by consumer as a complimentary service to their bundle TV. Remember that we have, today, a significantly better catalog in terms of series and movies than any over-the-top in Spain. I think that we still have a better offer than any of them. As a result, I think that at least our customer base are seeing them as a complimentary product rather than a replacing product.
In terms of the second quarter, we are seeing just the opposite. Even with Netflix already here, net adds in high and mid-end are up six times year-over-year. We do not see that cannibalization, namely on the high-end or mid-end customer base. In terms of content, it is all flowing through the OpEx side. We are not capitalizing any content element in Spain. It's fully reflected at OIBDA level.
Fantastic. Thank you very much.
Thank you.
At this time, no further questions will be taken.
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. Again, thank you very much to all of you, and good morning.
Telefónica's January to March 2017 results conference call is over. You may now disconnect your line. Thank you