Ladies and gentlemen, thank you for standing by, and welcome to Telefonica's January to March 2014 Results Conference Call. At this time, all participants are in a listen only mode. Later we will conduct a question and answer session. Session. As a reminder, today's conference is being recorded.
I would now like to turn the call over to Mr. Pablo Agarroll. Of Investor Relations. Please go ahead, sir.
Good afternoon and welcome to Telefonica Conference Call to discuss January March 2014 results. I'm Pablo Guido, Head of Investor Relations. Before proceeding, let me mention that this document contains financial information that has been prepared under International Financial Reporting Standards. This financial information is outdated. This presentation may contain announcements that constitute forward looking statements, which are not guarantees of future performance and involve risks and uncertainties.
And that certain results might differ materially from those in the forward looking statements as a result of various factors. We invite you to read the complete disclaimer included in the first page of the presentation, which you will find in our website. We encourage you to review our publicly available disclosure documents filed with the relevant security market regulators If you don't have a copy of the relevant press release and the slides, please contact Telefonica's Investor Relations team in Madrid by dialing the following telephone number, 3 491482 87, w. Now let me turn the call to Mr. Angel Villa, who will be leading this conference call.
Thank you, Pablo. Good afternoon, and welcome to Telefonica's first quarter 2014 conference call. Today with me is Jose Maria Alvarez Paiete, Chief Operating Officer. So during the Q And A session, you will have the opportunity to address to us any questions you may have. Telefonica has released today a strong set of results based on the execution of the management priorities established for 2014.
Top line delivered positive year on year organic growth for the 4th quarter in a row. And efforts to improve cost structure allowed to consolidate organic OIBDA stabilization versus the first quarter of 2013. Customer value continued to progress in the right direction, with significant increase in smartphones, fiber and LTE. This is supported by investments focused on growth and transformation areas, leading to accelerated network modernization, and setting the basis for further revenue opportunities. Free cash flow generation reached 2011, despite higher CapEx, asset disposals and FX effects.
Debt reduction of EUR 2,700,000,000 in the quarter allowed for a significant improvement of leverage metrics to two 0.3 times net debt to OIBDA, despite the seasonality effect on free cash flow and ForEx. In summary, I would like to highlight that Q1 results are fully aligned with our internal expectations. Dividend included. Please now turn to Slide 3 for a quick review of our financial performance. Reported year on year change reflected a negative ForEx impact, mainly due to implicit Venezuela devaluation to 10.70 polybar's per U.
S. Dollar, Argentinian peso and Brazilian real depreciation versus the euro. Along with a deconsolidation of Telefonica Czech Republic since 1st January 2014. Let me highlight that the FX factor dragged revenue by 11.8 percentage points year on year and OIBDA by 11.7 percentage points. But at the same time, it reduced CapEx, interest, tax and minorities payments in euros.
As such, the FX impact on OIBDA is neutralized at free cash flow level. Net income totaled EUR 692,000,000 with an EPS of EUR 0.15 per share. In organic terms, sales were up 1.5% year on year and reached over 1,000,000,000, while OIBDA grew 0.5% year on year and exceeded EUR 3,900,000,000 with a margin of 32.1%. Finally, net debt was reduced to EUR 42,700,000,000 at the end of March or EUR 41,900,000,000, including post closing events. In the next slide, let me stress again that free cash flow generation has been the strongest for the first quarter in the last 3 years, achieving 1000000 or 1000000 before spectrum payments.
Let me also remark the positive absolute year on year change in free cash flow of EUR 800,000,000 in the quarter, continuing the improved trend initiated the first quarter of 2013. This performance is based on improvements in every category of free cash flow metrics in spite of adverse FX impacts, CapEx growth and asset disposals. Lastly, free cash flow will be recording a better evolution throughout the year as the first quarter is traditionally impacted by seasonal effects. Turning to Slide number 5. We continue to focus on increasing the value of our customer base through the ongoing launch of differential propositions based on customer insights in each market and with a common approach of tier pricing.
Mobile contract base maintained the high single digit growth rate posted in December 2013, driven by the performance of smartphone net adds doubling dose of first quarter 2013 and leading to a penetration of 30%. 9 percentage points up year on year, clearly advancing in data monetization strategy. The momentum of LTE, fiber and pay TV improved during the quarter, resulting on a remarkable 81% year on year increase of homes passed and 90% growth of connected homes and a high single digit growth of pay TV accesses. All this, along with low prepaid smartphone penetration, represent a massive opportunity for future growth. In Slide 6, I would like to show the improved organic performance year on year from top line to OIBDA.
Group revenues were consistently accelerating. 80 basis points versus full year 2013 on the back of our financial diversification. Hispam, Hispano America, was the main contributor to growth and Spain eased its pace of decline. Our sales mix is evolving towards data as it is explained by the strong performance of mobile data, increasing the weight of non SMSs by 8 point year on year to 71% over mobile data. Good progress on cost management, transformation and scale efficiencies is reflected in the lowest OpEx year on year increase in the last four quarters, which resulted in an OIBDA growth of 0.5% versus January, March 2013.
Organic OIBDA margin erosion was limited at 0.3 percentage points year on year. Balancing mainly higher network costs coming from increased investments and lower commercial expenses. Let me stress that we exclude the negative impact from regulation, our revenues would have grown 3.4% and OIBDA 1.9% year on year. Global Resources is consistently contributing to network transformation IT simplification and higher efficiencies. In networks, we are accelerating the deployment of ultra broadband infrastructure in main markets.
With 69 percent of investments devoted to growth and transformation, which resulted in approximately 2 times the number of homes passed with fiber year on year and ten times more LTE sites in service than a year earlier. Let me also highlight that more than 70% of 3G and our 4G mobile sites are already connected with Ultra broadband technology. In 2019, simplification of our operating model is delivering results while we continue to progress in infrastructure consolidation. In this sense, I would like just to mention that we decommission approximately 80 applications this quarter and more than 35% of our servers are virtualized at the end of March. Moving to Slide number 8, let me highlight the progress made in digital services.
Regarding the consumer area, we are gaining market share in with exclusive content acquired. The area of global device management is supporting a rapid adoption of smartphones with 65% of total devices purchased in the quarter being smartphones. We also announced the app, the brand of the digital financial services to be launched in the coming months in Spain by the JV established with Kashavank and Santander. In the B2B area, Telefonica signed a machine to machine deal with JCDCO to bring urban connectivity in Europe and Latin America and was chosen as partner in Europe by Tesla, an industry leader of InCard Telematics. Finally, we also made strategic investments, creating Axonics, the 1st mobile advertising exchange platform owned and powered by a mobile operator.
And acquiring iOS that enables Telefonica to offer an open source desktop virtualization service. Moving on to Spain in Slide number 9. Our convergent offer Movistar Fusion continues to gain momentum, reaching 3,200,000 customers as of March, with a higher weight of new upselling customers, 71% in the first quarter, driving solid trading in a market with increasing customer's preference for quality services. Fiber net adds marked a new record in the quarter with 108,000, maintaining a 17% uptake despite the accelerated pace of deployment. Pay TV accesses posted 11% year on year growth and contract mobile net loss was significantly reduced both sequentially and year on year.
Especially worth mentioning is the benefit of the high penetration of Fusion towards a more sustainable revenue model. Through the continued improvement in our services, lifetime, thanks to Fusion churn, which is notably lower compared to standalone services. At the end of April, underpinned by your differential assets, we further increased the value of our offer and revamped Fusion packages including Movistar TV high quality contents in all packages with no price increase. As such, we leveraging the Fusion enhanced portfolio and the continued acceleration of the deployment of fiber and LTE networks We expect to foster further commercial activity in the coming months Turning to Slide number 10, we review Telefonica's financials. Revenue recovery trend accelerated in the quarter.
With year on year decline easing sequentially 3 seventy basis points. This performance is explained by improved commercial momentum, lower back book impact leading to the high penetration of new tariffs and higher handset sales driven by intensified commercial effort. Profitability remains solid with OIBDA margin at 46.9% in a very competitive market, supported by ongoing efficiency gains, and despite increased commercial costs reflected in higher gross adds and handsets sold. Slide 11 shows a quick review of our operation in the UK. We continue to gain high value customers and to maintain market leading contract churn.
Key initiatives supporting our performance include the success of O2 refresh proposition or the proactive upgrade of our customers to LTE. I would also like to highlight that 4G services monetization based on increasing data consumption, to times versus 3g led to high single digit ARPU uplift. Underlying mobile service revenue trend stabilized year on year, driven by solid non SMS revenue growth of 13.9%. In terms of profitability, OIBDA margin grew 3.5 percentage points year on year, benefiting from O2 refresh and a one off contribution from the true up of past commissions in the core amounting to EUR 24,000,000. To review Telefonica Deutschland, please turn to Slide 12.
FTE continues to gain traction in the market. We keep on seeing very positive signs of LTE adoption with 78% of devices sold being LTE enabled, thus increasing the value of our customer base. With this, and the fast rollout of LTE of the LTE network with 50% coverage in April, we are improving our position to capture the data monetization opportunity. As a result and to further promote customer growth, we introduced a refreshed O2blue, Olin portfolio for consumers as well as O2 Unite for business. Mobile service revenue year on year performance stabilized.
Though affected by a combination of lower SMS volumes, steady renewals and weaker prepaid dynamics. I would like to highlight the lower weight of SMSs of our data revenues. Up to March, this represented 28 percent of data revenues 9 percentage points lower than this around LTE. In Brazil, moving to Slide 13, We continue outperforming the mobile market, capturing more than 60% of the new contract customers for the third quarter in a row. Driven by our superior network and better service quality.
This strategy allows us to be in the best position to capture the new wave of data growth. Let me also remark the success of Vivo Tudo capturing 4,000,000 customers in just two months. In the fixed business, our turnaround strategy continues to focus firstly on a highly segmented approach with quality growth through accelerated fiber deployment as a clear priority and secondly on increased coverage of the fixed wireless technology with growing net adds volumes outside Sao Paulo. Slide 14 shows our solid Brazilian financial performance. Services revenue year on year growth accelerated to 3.8%.
Excluding the higher regulatory effect this quarter, and amid a more balanced contribution of our fixed and mobile businesses. As such, it is worth to highlight the evolution of fixed business, the best in almost 3 years and increased contribution of non SMS data sales growing by 42% year on year. Finally, profitability showed limited erosion year on year, thanks to strong cost discipline and despite more intense commercial activity. Turning to Slide 15, let me summarize our operations in Espana America with a strong revenue and OIBDA growth in a balanced country contribution as the main highlight this quarter. The region is accelerating its revenue and OIBDA growth, even excluding Venezuela.
Especially noteworthy is the higher contribution of countries like Mexico, Colombia and Chile, posting all of them strong revenue year on year acceleration. During the quarter, telefonica, Espana America recorded a healthy revenue expansion on new revenue sources, with non SMS data revenue up 3% year on year as the main growth driver. In the fixed business, transformation process to capture increased growth opportunities, is also delivering results. With fixed broadband and new services up 17% year on year, and gradually increasing their revenue weight. And finally, despite higher network and commercial expenses OIBDA posted a solid year on year growth leading to a slight improvement in profitability on strict cost control and efficiency efforts.
On a per country overview, in slide number 16, Colombia reinforced its market positioning consolidating double digit growth in both revenue and OIBDA. At the same time, Argentina posted solid revenue increase while increased profitability year on year. In Chile, let me highlight that excluding regulatory effects, Year on year growth has been the highest in the last 4 years, delivering the benefits of better commercial volumes captured in recent quarters. Moving to Slide 17. In Peru, revenue in OIBDA year on year growth trend remained strong with increased profitability year on year.
In Mexico, we posted an outstanding acceleration in revenue year on year performance this quarter, taking the benefits of our strong network and the ReShape commercial portfolio that is progressively gaining traction. Let me remark that these results do not yet include any positive impact from the improved regulatory framework expected from Q2. And finally, in Venezuela and Central America, increased volumes remained as the main growth driver with data and voice traffic strongly up, year on year. Let me now move to the financial side on Slide 18. Once again, in the first quarter, we have demonstrated our deleverage capabilities by reducing our net debt figure by close to EUR 4,000,000,000 after Venezuela and Bolivar FX impact or EUR 5,000,000,000 when factoring in post closing events.
These efforts translate into a reported net debt figure below EUR 43,000,000 and leverage rates show at two point three times both within the target range. In achieving such figures, we have offset the negative effect of Venezuela and Bolivar implicit devaluation with a new hybrid issuance, the closing of Telefonica Czech Republic Disposal and a growing free cash flow. Slide 19 shows our steady and diversified access to different pockets of liquidity across our footprint with close to 1,000,000,000 raised year to date. In parallel, we are smoothing our maturity profile by prepaying EUR 2,300,000,000 of higher coupon financings at holding level mainly maturing in 2015. On top of that, we maintain an ample liquidity cushion at EUR 22,000,000,000 which allows us to comfortably address the maturities going forward.
Effective interest cost fits in the middle of the target range despite increase on average cost of debt driven by, 1, keeping hedging strategy in LatAm currencies with higher cost. And second, reduction held mainly in euro and Czech Corona with lower cost than average within the de leveraging process. To recap, we had a strong start of 2014, increasing customer value and network differentiation, while improving financials. Our organic top line and OIBDA accelerated year on year with profitability almost flat. At the same time, Finally, we made a step forward in debt reduction, strengthening our balance sheet and improving leverage ratio.
Thank you very
you. There'll be a short We'll now move to our first question from Georges Oridonco from Citi. Please go ahead.
Yes. Good afternoon and thank you for taking the questions. I have two questions both on leverage. When I look on slide 18 on the net debt to EBITDA ratios that you show, I believe that the denominator of around 1,000,000,000 includes Irish and Czech EBITDA and Venezuela at the category rate for 9.5 out of the 12 months. So that number is likely to come down materially in the coming quarters.
And at the same time, you're already in the process of acquiring digital plus and e plus. And you've also been linked with other acquisitions, including a very chunk of money in Brazil. So my first question is whether the 2.35x ceiling is a firm target or a medium term aspiration that you may deviate from for a couple of years. And my second question is around your funding options. Based on comments last quarter, I believe you can another €3,000,000,000 of hybrid at most.
So, is there a firm commitment to maintain the $0.40 cash dividend and would you roll out using your equity as a source of funding for M and A? Thank you very much.
Hi, Georgios. Thank you for the questions. This is Angel. The ratio of 2.30 times net debt to EBITDA is calculated as in our tradition with 12 months rolling OIBDA. This excludes the Chesky telephonic at Czech Republic OIBDA because the company was deconstructed from beginning of this year, but for the ratio calculation, we have done going backwards, adjustment.
And we have taken telephonic and Czech Republic out of this calculation. Going forward, we have few pending impacts on debt. On the one hand, we have the sale of Ireland, which we are expecting to close in the second quarter. And this would reduce debt in EUR 780,000,000. This does not include a deferred payment in addition of 1,000,000.
And then at the time of closing the Plus acquisition, we would have a Telefonica to pay 1,000,000,000. This is, including Both our share of the rights issue in Telefonica Deutschland and second acquiring a stake of Telefonica Deutsch from VPN, this 1,000,000,000 would increase our debt. But as we announced when we when we announced the transaction, we are going to issue a mandatory convertible for around 1 third of such figure So if we were to do the pro form a from the 42.7 that we have closed in the quarter, we exclude Ireland we include the acquisition of ePlus and then the issuance of the mandatory convertible, the figure would be around 44.5 and would be clearly, below the 2.35 times net debt to EBITDA once you include the plus or EBITDA that we would consolidate. With this, we maintain our target of less than 2.35 times net debt to OIBDA and below 1000000000 for year end and we still have plenty of options, non organically, but also we expect to generate substantial free cash flow between now and the end of the year. With respect to the high rates, I think it was your second question.
We have now outstanding 1,000,000,000. Our issuance of hybrids is motivated by 2 reasons. 1 is to support strategic decisions like M and A or like increasing investments as we are seeing this year or to protect from negative non organic events as we have seen with the benefit for that evaluation. There would be a limit from rating agencies up to 1,000,000,000. We have outstanding 4.2 And at this stage, in the short term, we are not planning any further issues.
I would like to highlight though that the last issuance of hybrids, the cost of such have been within the range that we have for senior debt in spite of these instruments being 2 notches rated below senior.
Thank you, Julius. Next question please.
Certainly. Our next question now comes from Giovanni Matlowski of UBS. Please go ahead. Mr. Monty, your line is open.
Please go ahead.
Can you hear me? Can
you hear me? Yes, we can.
Okay, hi. Sorry. A couple of questions. Could you share with us some thoughts about your view on the the potential evolution of the Spanish market following the operational volume by Voda. Do you expect any momentum in the mobile market dynamic?
Coming from this deal? And secondly, if you can share with us any update regarding the regulatory review, yeah, fix it up the market campaign. Thank you.
Okay.
Thanks for your question. Thinking, taking the taking your first question of the transaction being announced by Vodafone acquiring we do think that, we are especially well prepared for a potential market consolidation. We think it's always positive. I think it's part of the business game. I think that in the longer term, a market with bigger players, integrated players like could be the case of Vodafone on a, should evolve in a healthier competition because it will be infrastructure play based and therefore margins are going to be similar and therefore the average blended ARPU, the customers is going to be convergent.
And therefore, I think that is going to be more sustainable. I think that, those transaction of these transactions explains part of the aggressiveness of the market in terms of ono in the last month because they were very eager to increase their size before this potential acquisition. And we do not think this market consolidation is over. And therefore, I think that we should be prepared for potentially more in market consolidation, not just in Spain, but overall Europe, because we think that there are too many networks, too many players in Europe and the 40 to those cents. I think that this is part of our strategy that we are prepared for that, that we have been preparing our company for that, namely in Spain.
And I think that in the long run, it should drive to a healthier competition and to a more sustainable market and to, better commercial prospects, based on infrastructure products for the consumers. And your second question was about the, the fixed, the fixed regulation in Spain, but I didn't understand basically 2 words we were referring. You were referring to the midstream of the to the unbundling. I didn't catch your question.
In the review by the set of modularities in Spain for the wholesale access market, what should be market number 2 to if I remember, when they choose the public education, before the beginning of December, I want to just understand what are your expectations, especially as we relate again, big letters of sale access fees for fiber and the fast broadband. Thank you.
Okay. Okay. Understood. I think that you're referring to the big consolidation on the markets in Spain, number 4, and number 5. We think that the the pre consultation period has clarified, the fact that mobile, like, surge competitive pressure on fixed as well.
And therefore, with enough conditions in different areas, and therefore, with enough, different pleasures and operators and cable operators. So the integration should explain part of that evolution as well. This new infrastructure competition, which should now start to be regulated, is we think is the only way to generate growth and competition in the future. So we we have reasons to believe that the new rule should go into the right direction. Too soon to say, we expect this new final decision by the end of the year.
And I think this is not going to be affecting 2014 yet, but we think it's going into the right direction.
Thank you, Giovanni. Next question, please.
Our next question comes from Mandeep Singh of Redburn. Please go ahead.
Hi, thank you for taking the question. I just wanted to say also when people are asking questions, there's a very big echo, so I'm quite different to hear the questions. I don't know if it's a technical problem. Wanted to let you know that. My question is really about Spanish, Spanish, revenue and margin dynamics.
Obviously, we've seen this quarter improvement in the rate of rig line and Spanish revenues, strong commercial activity. So can you sort of talk to us about the improvement in revenue trends, that consensus forecast and how sustainable that is or how consistent that is with high-40s margins. If is it a cost of better revenue going to be lower margin? Thank you.
Yes, sure. Thanks for the question. I think that you have the 2 effects that you were mentioning, in this quarter. First of all, we have an OED margin that is 46.9 or 45.3, excluding one off, namely the Towers 1 off. If you compare that with the first quarter of the previous year, which where the margin was 47%, we have a drop off, excluding one off of 1.6%.
The explanation of that drop, which I think, is more comparable first quarter versus first quarter. Is explained by several factors. First, we have a better performance on revenues and therefore that has a positive effect on OIBDA, which is in the neighborhood including fixed amount of 2.9 percentage points. Then you have that we have been more aggressively investing in the commercial effort and that range 4.4 percentage points of the evolution of the margin. Therefore, the impact of the margin should be judged upon the most more aggressive commercial effort that we have been doing next question would be, why are you being more aggressive now and not a year ago?
First, because we see the macroeconomic situation of Spain improving, we see now value in the market We see now probably that, is worth to be captured. And that explain why we're having why we're having having this quarter some record figures of commercial activity. Namely TV gross adds, for example, have been multiplied almost by 3 times. Mobile contract has increased by 9 percentage points, fiber gross adds, products has increased by 75% and handset upgrades, 12%. Next question should be, then what's the impact on revenues?
I we have been improving, the rate of decline of revenues to 8.2% compared with 9% at the end of the last year. But if you were to exclude handsets and regulation, the impact will be that our current revenue growth will be 7.1% compared with 9.6%. So we are trying to accelerate the, the revenue trends in Spain because now we see value This is having an impact on OIBDA, but I think that now that these new customers are going to be flowing through our accounts, this impact should be more limited because we keep working on the efficiency, initiatives, namely in Spain, but also at the level of the group. And therefore, we think that, this level of revenues at the at the group level, but namely in Spain is much more sustainable this quarter than a year ago. So we will keep going.
We think that, that you will see that you will have seen that in Spain, we launched a new, Fusion proposition for the existing customers in April. As we speak, we are having record number of sales, in terms of, of TV ads and, we are basically getting back to the figures of Puxi onna when we launched Puxi on initially. So we have reasons to believe that the market on the integrated player and namely on our TV and fiber proposition is paying off. So we will keep going. And we think it's the right thing to do.
Thank you, Mandeep. Next question, please.
Certainly. Our next question comes from Matthew Robilliard from Exane BNP Paribas. Please go ahead.
Yes, good afternoon. Thank you very much. Question on Brazil on fixed, actually. I'm intrigued by your product wireless that you launched a few quarters ago and seems to be doing quite well. And I wonder, is that just an add on to your mobile strategy in Brazil?
Or is that the beginning of something a bit bigger where you want to be more present in the fixed business in regions outside of Sao Paulo? Clearly in the world where convergence is going to increase even though it's not there yet in Brazil, but also where you could have synergies from a network point of view. I guess the question is, what is your fixed line strategy in Brazil, apart from Sao Paulo? And does this product Is this product the beginning of something? And then a second question about spectrum auctions also in Brazil.
It seems that the regulator and certainly the government seems quite intent on having that go through in August. And I just wanted to know what as your view on the spectrum auction? Thank you.
Thanks for your questions. I mean, on the fixed wireless position outside Sao Paulo in, in Brazil, it's a it's a standalone strategy. So we we are not just bundling that. We have mobile product. And therefore, it needs to make the numbers in terms of margin by itself.
So we are not the subsidizing or perhaps subsidizing one product to the other. We are monitoring that very closely in terms of churn and in terms of subscriber acquisition costs. And it's paying off. We are taking advantage of the commercial applarity distribution that we have in Brazil and also the brand outside Sao Paulo. So it makes sense.
It's, it's generating good results. But we need to judge this strategy, not together or jointly with the with the mobile strategy, but by itself, for the time being, so it's not a bundled product so far. And in terms of, in terms of the spectrum auction in Brazil, too soon to say, I mean, we are monitoring very closely that. So if you were to ask us, if we need that for 4G this year. The answer is no.
We are developing and launching aggressively our 4G proposition in Brazil in the spectrum that we have but we need to be very, very careful. The final rules are expected for July with the minimum prices included. And also, there are uncertainties about what are they going to be the clean off, of the cost of a cleanup of the migration of TV broadcaster in some of those cities. So still too soon to say, it's still too much of uncertainty. But as you might imagine, we are monitoring very closely.
Thank you, Matthew. Next question please.
Thank you. Our next question comes from Justin Funnel of Credit Suisse. Please go ahead, sir.
Thank you. Yes, just on Fusion, I think you mentioned the ARPU is and that's flat. I'm not sure. Can you tell us what the ARPA infusion had been doing year on year in prior quarters? Had it been falling year on year and it's now sort of essentially the year on year trends are improving or was it the other way around at ARPU being growing and it's come down to flats?
I presume it's the first, but if you could clarify. Secondly, in Brazil, I think the breakup of telco that may be coming in June gives you an opportunity to go back and have discussions with CADE about your stake in in TI. Have you got any thoughts at this stage as to whether you'll be able to retain the 15% or is it sort of simply way too early?
Hi, Justin. This is Angel. I'll take the second question regarding the telco demerger in June. The demerger is a possibility that is contemplated in the shareholder agreement And this can be requested by any by any shareholder. We have not taken as Telefonica any decision in this respect.
Although we have seen that some of our partners have been making some statements, but they have not, made any formal indication to us on this. The Brazilian CADE rulings, which are public on their web page, and we have also made some public statements on them. Could be somehow or partially facilitated by the merger. But Again, I want to stress that we have not taken any decision on on this. For the time being, of course, we would have no problem to maintain our 14.8% stake.
We have no presence on the board of Telecom Italia, and we have never had any influence on Brazilian matters when it comes to telecom italia. Attractions of such a potential consolidation remain the same. We have very good performance. And as I was saying before in the presentation, we continue to grab more than 60% market share of the net adds quarter after quarter in Brazil. The market is clearly attractive, both our betitors have been posting presenting the results recently and one can see that the market is doing nicely.
We continue to be strong believers in market consolidation benefits, for the market and for the citizens in the markets where that could take place. And if anything, I was seeing in the previous conference call that lots of stars need to get aligned, maybe some stars are starting to align But, but still, many things would still have to happen for a consolidation to take place.
Okay. Take the ARPU position. We are tracking that quarter over quarter. Fusion is still a bit a very young product, but so far, the ARPU is pretty stable. And we are starting to have the first layers of pushing on customers with their contract maturing, the ARPU, sorry, the churn of those customers are significantly lower than the churn of the customers that have a one single product.
So from both sides, I think that, we can already say that, to years after or even half after the launching of Fusion that it has been a successful product in terms ARPU stability in terms of churn reduction and intensive value creation. The customer mix of the Fusion customers continue to improve. 71% of gross adds, the recent gross adds are new or upsetting customers. It used to be 64%, a quarter ago. And it's significantly protecting our customer base because the lifetime of Fusion customer is much longer.
So from any metric ARPU or churn or subscriber acquisition cost, Fusion is is a good product. It's helping us to significantly encore the value for our revenues in Spain. And with the new value proposition, let me stress again that the figures that half of April are pretty promising. So with the new TV offer, I think, is going to be even better. It's also helping us on the mobile side.
We are, as of April figures, we are getting much closer to a stability on our customer base in the mobile in the contract mobile customer base. So in all metrics, Fusion is helping us significantly.
Certainly. Our next question comes from Louie Prote of Morgan Stanley. Please go ahead.
Yes, thank you. Two questions, please. The first is on Mexico. I wonder if you could give us some figures on the impact from the lower termination rates applied to America Movilas, how that will benefit Telefonica from the second quarter? And also, when these termination rates go with the new legislation.
What is the upside there, not just from a direct impact, but also from the indirect implications in terms of your potential increase in market share? And second question is on Venezuela. Excuse me, on the exchange rate, you are using to consolidate earnings from that country and cash flows. You are now moving CCAT 1, but we are already seeing a few bunch of companies that have moved to CCAT II closer to 50 Bolivares per dollar. What are your thoughts there, is there any need to move there?
Is there liquidity enough in either kick at 1 or kick at 2 or where are your plans? Thank you.
Hello, Luis. This is Angel. I will take the question on Venezuela. In Venezuela, we have currently 3 exchange rate systems. 1 is called FinCOIx, which is the old Caribbean at 6.3 polyverse $2.
The second one is SCCAT 1, which is the one that we are using for our accounts, which has periodic auctions, And at the end of March, it was a 10.7 dollars, $40, which is how we have accounted. And then the 3rd system is called CCAT to, which is, at least, also has several, periodic auctions and these at this stage is closer to 40 something or 50. The volumes that the authorities have been telling publicly that they would expect to go through these systems. The first system, which is the old Calibodies and coex, It's supposed to be around 2 thirds to 70% of the volume of transactions. This we cannot access is for basic items like medicines, food, education, and very basic services and products.
The second one, which has been explicitly stated that is the one to apply to to industries like telecoms. The CCAT 1, the 10.70 at this moment is going to have a volume of around 20 5% to 30% of the transactions. And then the CCAR 3, the CCAR 2, sorry, has very little liquidity and it's going to be something around 5% to 8% of the total volume. This one has been, for instance, according to Brazil and regulation, the one to apply to consumer goods companies like the ones that you must be thinking that have been recently reporting on Sika-two. So first, Regarding the volume that the different systems have.
And second, regarding the regulation that we have in Venezuela, we are reporting in full agreement with our auditor, which by the way is an agreement between the big 4 auditing firms for all the companies operating in Venezuela, we are operating at Secat 1. Also, as you would imagine, given the situation and evolution of the country, we continue to explore potential alternatives to invest our liquidity and protect it from inflation. And some of those alternatives that we are looking would be closer to CCAT 1 and to CCAT 2 And hopefully, we may be able to reach some success on this in the future, but we're still not there.
Risk taking your question about Mexico. First, two things. Since the reform was announced initially, several things started to happen. The most recent events are that, you know, that, they'll tell American what will have been declared, preponder and pleasures, and therefore, they are subject to significant asymmetry. The levels of asymmetry is the things that this under discussion and also other elements of the regulation.
This regulation is has been submitted to the Senate and to the Congress in Mexico. And therefore, it's going to be debated in the very, very short run. The level of asymmetry that have been announced initially are significant and could allow if those were finally the levels to be applied. To significantly have an impact on the all net tariffs of the Mexican markets. Which, again, could create a significant movement towards, opening some close systems of customers like namely the ones of Delta because we would have we could become competitive in terms of the interconnection cost compared with the owner tariff.
Too soon to say because the this, the the detailed regulation is gonna be, under discussion of, in Mexico in the next few weeks, we hope, but potentially very relevant for the Mexican market. The results that we are getting so far, in this first quarter from our Mexican units have no impact of that yet. And therefore, it's totally dependent on the evolution our own effort with the current regulation. But we think that if this regulation was to crystallize, there is a significant upside because competition was significantly enhanced in the Mexican Mark.
Thank you, Luis. Next question please.
Certainly. Our next question comes from Ivan Neil of BBVA. Please go ahead.
Hello. Good afternoon, everybody. Just 2 on Spain for my part. I don't know if you could share share with us the cost of your new commercial strategy in Spain, that is the content cost of pulling TV in your subscriber base and maybe also the cost of the CapEx of migrating all of your Fusion subscribers to fiber? And maybe the second one is, what is the reason behind not extending the fiber agreement which Astell?
And just going to those 13,000,000 homes by your own?
Well, in terms of, we will not detail the cost the commercial strategy in terms of, of the content because, it's sensitive commercial information. We we I tried to advance in a previous question that, This represents 4.4 percentage points of OIBDA, reconciliation, so to say. But we cannot go farther than that, namely on the content side because it's a pretty sensitive, issue as, as you know. In terms of the cost of migrating customers, I mean, to, to fiber customers. Again, too too detailed.
The information is not, it's not, the thing we should do, but let me tell you that, if we were able to migrate entirely our copper customers in one specific central switch to the copper to fiber customers, the cost of maintaining a fiber network is significantly lower than the ones of maintaining a covered ones. So we are going to try to accelerate that as much as we can. And it is true that in the meantime, it has an overlapping effect, but it is more than compensated by the fact that churn on fiber is significantly, significantly lower than churn on a on on a DSL. And in terms of the fiber agreement with, just tell, I mean, is open to commercial discussion, as you might imagine, but we are accelerating. We cannot wait for orders.
And therefore, we'll keep going. Our aim is to double the home pass this year and we are executing. So who knows what's going to happen in the Spanish market? In the meantime, cannot wait, we need to keep going.
Thank you, Ivan. Next question, please.
Our next question comes from Frederic Boulan from Nomura. Please go ahead.
Hi, good afternoon. Thanks for the question. Firstly, if you could elaborate a follow-up on the question on Ono initially, if you could could it make you revisit your current sense on fiber wholesale, especially with Orange, and do you think Vodafone Ono could emerge as a competitor on high street broadband wholesale access. And secondly on Fusion, you now have 2 sort of the base, broadband base upgraded. What do you think is the plan from here?
Do you finding it harder to grow from current levels the April product refresh? And how do you think competitors will what they will do if you manage to push this product to the majority of your of your broadband base? Thank you.
Thanks for the question. On the implications for the overall market and mainly for one of some of our competitors. I mean, too soon to say, We, we, we think that, it's gonna take a while for this transaction to be, to be completed. And in the meantime, a lot of things are happening in the Spanish market. Some of our competitors are trying to accelerate to our convergent products, others are more worried and might consider alternative of selling or or merging.
So to soon to say what's gonna be the response of, for, of other players, believe me, too soon to say. Are we open to, part ship, for sure. I mean, but, we don't know what, what's gonna be the strategic options that, all the plays are gonna be considered in thing. And in terms of Fusion, I mean, we think that, again, I mean, they'll the fact that we have been that we we have now 71% of the customers that come into Brazil, that are either an upsell or our new customers indicates that there's still room to go. And namely on this TV, on the TV effort that we are doing, just by launching this new Fusion with TV included for the existing customers and migrating some of those customers from the existing product to fiber is creating an amazing impact commercially speaking in the last 2 weeks.
We intend to keep going. You should expect from us another commercial move in the coming weeks, in order to try to accelerate and to incentivize the markets also in other segments of the market. So we still think that through Fusion, and through adding more value on the converged product, we still have significant room to go And we think that this could contribute significantly, to revenue stabilization, to finally revenue stabilization for Telefonica in Spain. So we have a significant expectation for the next months, around Fusion and around Spanish revenues.
Thank you, Frederic. Next question please.
Certainly. Thank you. Our next question now comes from Nick Brown of Goldman Sachs. Please go ahead.
Thanks. Two questions, please. Firstly, how should we think about your priorities for non organic strategic options now? Do you think you need more content, more fixed line presence, or do you think there's further opportunities to participate in mobile consolidation in some of your other markets like Brazil. Secondly, assuming the EPlus deal was approved, how can you respond to the increased threat from rival convergence bundles in Germany?
Do you think wholesaling fiber will be enough? Thanks.
With respect to the first question of priorities, for a nonorganic growth. We are happy with the scale that we have. So have had, you know, no ambitions to go beyond the current footprint where we are present. And Yes, we have been, we continue to be acting on two fronts. One is to be looking for stronger positions in the markets where we operate.
And this clearly, we are trying to achieve BA in market consolidation DC market consolidation can be mobile consolidation can also be fixed to mobile conversion consolidation or can include, content components as we have seen with the recently announced offer that we made for digital class in Spain that was accepted by Prisa. And the second line that we continue to work is, on optimizing our portfolio assets in those markets where we may deem it interesting To be consolidated like what we did in Ireland, we may contemplate those options if there is interest for some of our assets.
Taking your question about the German market. First, let me state that we are not seeing in the general market, as we speak today, a a move to what converged, total converged, convergent proposition to the customers. And, therefore, with, the transaction that is currently subject to approval with any plus transaction and the agreement that we have in place, for for wireline and for a BDSLN, that warranties as a technological evolution, and therefore, we, we, we can be competitive. And if and if we are starting to get some traction on the wireline, revenues in Germany as well, we think that for the time being, we are prepared to face the situation of that market. In fact, I think that, the compliance transaction being approved we will become a significant player on the German market.
So so far, the answer is we are not seeing that trend happening in Germany. We will monitor that. But for the time being, the convergence strategy is depending on what the leader is in each one of the markets, and we don't see the leader of the general market so far now, moving the, aggressively to our total afford product. So for the time being, we don't feel this is a need.
Thank you, Nick. Next question, please.
Certainly. Thank you. Our next question comes from Jerry Dennis of Jefferies. Please go ahead.
Yes, good afternoon. Thank you for taking the questions. The first question just Spain, if I may. On a cleaned up basis, it looks as though in Spain net costs are sort of down. 5% year on year this quarter.
In previous quarters, that trend has been at the order of sort of minus 20% Obviously, we understand how there was a ramp up in commercial investments. But obviously, going forwards, content costs could be running at high level as well. So how should we think about the progression in the net cost base going forward is minus 5% for example, the sort of level that you were deemed acceptable going forwards? And then secondly, related to Brazil, if I may. Obviously, there was a very heavy commercial investment there as well this quarter, but broadband net adds were negative, albeit very fractionally negative.
And I think local management commented that competition was pretty fierce. In the last quarter. So I wonder whether you could please just describe what's sort of going on in the Brazilian fixed broadband market and how we might expect that to evolve going forward? Thank you.
Thanks for your question. Taking the 1 on the first one on the Spanish cost evolution and the trend, of course, reduction. Year on year, the comparison it's harder because some of the initiatives that we started to put in place 3 years ago, like the voluntary employee retirement plan and the handset subsidy reduction and others, the year on year comparisons start to fade away. And therefore, it basically those are there to stay, but, in order to improve, we we need more. What are and and now we need to face this situation in which we do see value in investing more commercially and therefore, for the next few quarters, if we see this, on top of the table, we will do the same.
We'll keep investing in the market because value there. And therefore, the commercial cost is also going to be, there to stay, probably, namely on the content side. What we are doing is we are preparing the 2nd wave of cost reduction in Spain, which includes a channel optimization. We are in the number of stores that we have, the ones that are, more efficient than the others. We are investing in the most efficient ones.
We are going to be trying to close some the others. And, we are aiming, we aim to reduce, in the neighborhood of 10 to 15% the points of sale that we have. And on top of that, we are significantly increasing, the activity through our online channel, and therefore, that should also help to increase productivity. On top of that, we are in sourcing all the activities that we can that we can this is going to have another impact in terms of margin. And finally, remember that we have put in at the level of the group at 1,000,000,000 Initiative in terms of basically generating savings at the level of the group both in OpEx and CapEx and Spain being one of the largest unit is one of the is going to be one of the most favored unit as well.
So basically summarizing some of the Biocock initiative that we started to take 2 years ago, 3 years ago are there to stay. And therefore, that provides caution in terms of the sustainability of the existing margins. The commercial cost will keep going if we keep seeing value and we do see value for the time being. And we are already working on the 2nd wave of optimization in Spain that allow us to think that this 5% should be improved. How much we don't we don't guide.
And then on the on the Brazilian situation, well, it's true that we we have been having a slight negative net adds in the broadband market, but the commercial costs overall are related to the overall of the market and we have been posting a huge, a significant performance in terms of, in terms of contract net adds at also the launch of Evotuto, I mean, which commercially requires significant the pro the co performance, the weak performance on free on fixed broadband is due to seasonal effects. We have lower number of business days and the summer vacation period as well. But nevertheless, we you should also take into consideration the fact that now we are running Sao Paulo as an integrated regions, which means that we are for every demand that we have for every customer in terms of a broadband access, depending on where he's sitting, we serve him through a 4G or through a 3 d increased proposition or through fiber or through ADSL. So, and that's why you should start measuring the total amount of broadband customers that we have in Sao Paulo because now we are treating the region as a whole. Independent of the nature of the access that we are providing the customer with.
Thank you, Jerry. Next question, please.
Certainly. Thank you. We'll now move to our next question, which comes from Will Milner of Arete Research. Please go ahead.
I just on the in the UK market, obviously, the accounting for the handset sales there, looks like it's still having quite a big impact, on the growth trends. And I just wondered if you could clarify if there are any other markets where you're accounting for handsets in the same way. And I guess I've probably got half an eye on Spain and the big reversal in equipment sales, which have been falling, but are now growing, healthily again. So that's the first one. And then secondly, just on the digital plus acquisition that you announced yesterday or earlier this week.
Could you just sort of walk us through why, you're confident that deal should get clearance from the various regulating competitive bodies. It does sort of seem to leave you a very high share of pay TV in the Spanish market.
Okay. Thanks for your questions. The first one on which other markets we are accounting in a similar way to the O2 refresh is in Germany in which the My Handy product is accounted in a similar way. And from the O2B first. This is the only one that I'm, I'm, I might able to remember right now.
But if there is any other, I will give you posted I think that the only one that, I can't remember now is in Germany with the my handy proposition. And in terms of, of, the digital plus offer that we have put on top of the table, we do things. 1st, the level of competition on the pay TV market now needs to be judged not just on the pay TV market itself, but also on who is competing for content and who is competing for content right now, taking into consideration nature of the Spanish market in which free to air TV has a significant market share. And on top of that, it's a significantly, content, consumer. I think that the market shares in terms of who's going to be able to compete for content should be judged more extensively.
And on top of that, now you have all the source of competition, namely through the over the top players and also some other competitors in Spain that are integrating themselves. So all proposal is that we think that the nature of the Spanish market is changing, structurally that the nature of the video market is globally worldwide is changing, as well as structurally. And this is a trend look at what's going on in the US market and in other markets in, in Europe. So we do think that we have reasons to believe that, the level of competition in the Spanish market is going to be preserved or even increased. But again, too soon to say this is a process that this is just starting.
It's going to take long. It's going to take approximately at least 12 months. We think So too soon to say, what's gonna happen. We intend to collaborate, intensively with, the anti authorities, and and we will see. But we think that we have, strong, arguments to put on top of the table.
Thank you, Will. Next question please.
Thank you. Our next question now comes from James Ratzer from New Street Research. Please go ahead.
Yes, good afternoon. Thank you very much indeed for taking the questions. Questions for you. So first one is just regarding the statement, you make about the Spanish business where you're seeing the back book repricing is now largely digested. I'm just trying to kind of cross check that against your Fusion ARPU, which you say is about I think would be about, including sales tax, which seems higher than most of your headline fusion price points.
So if you could just help me to match those two statements. That would be helpful. And then the second question was regarding the strategic outlook for your UK business. British Telecom yesterday, made a more formal announcement about their move into offering mobile services. And saying they hope to offer a kind of compelling proposition in the compute in the consumer segment, do you think you might need to can follow suit and do something to maybe reverse your sale of the fixed line business?
Or would you even consider actually selling O2 UK many thanks for the like.
Regard to the UK operation, I have to state that our UK operations are core. The UK mobile market is is improving. I know 2 UK has a strong position and a positive momentum in the market, so we are not contemplating divesting our UK operation.
In terms of your question about the ARPU at Fusion and how to reconcile that with the current offer, you need we are not providing detailed information on that, but I would strongly suggest to strongly suggest to include the fact that some of our customers inclusions have add ons. And therefore, the 70 or the commercial offer needs to be completed with the add on that each of the customers are choosing because we are putting in front of the catalog of potential add ons that they will that will be on top of the nominal price of the that they are, that they are considering. So the way to reconcile that, the, the nominal ARPU of the offer is considering the, the add ons and a significant increasing number of the customers that we are seeing now in the Spanish market are going not just to the basic offers, but with at least one of the add ons. Which proves that the Spanish recovery is starting to flow somehow through our commercial offer. And on top of that, that Fusion is not just the nominal offer, but potentially the the services that, consumers are adding on top of the basic offer.
Thank you, James. Next question please.
Our next question now comes from Akhil Dattani of JP Morgan. Please go ahead. Akhil, your line is open. Please go ahead. And it appears this call has stepped away from their phones.
We'll now move to our next question from saproitzimaki from Merrill Lynch. Please go ahead.
Yes, thanks. And just a very quick question. What is your current net cash balance in Venezuela and To what extent have you been able to repatriate funds at the CCAD 1 rate that you applied to the situation at the moment?
0s equivalent accounted at 10 point 70 Bolivars per dollar, and we have not been able to repatriate at this rate.
Thank you.
We have no further questions at this time, sir.
Okay. Thank you very much, and thank you for your participation. We certainly do hope that we have provided which we see useful insights for you. Should you still have other questions, we kindly ask you to contact our Investor Relations department in Madrid. Thank you very much.
Thank you. Telefonica's January to March 2014 Results Conference Call.