Ladies and gentlemen, thank you for standing by, and welcome to Telefónica's January to March 2014 results conference call. At this time, all participants are in the 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 Eguirón, Head of Investor Relations. Please go ahead, sir.
Good afternoon, and welcome to Telefónica conference call to discuss January-March 2014 results. I'm Pablo Eguirón, 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 unaudited. This presentation may contain announcements that constitute forward-looking statements, which are not guarantees of future performance and involve risk and uncertainties. And 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 Telefónica's Investor Relations team in Madrid by dialing the following telephone number, 34914828700. Now, let me turn the call to Mr. Ángel Vilá, who will be leading this conference call.
Thank you, Pablo. Good afternoon, and welcome to Telefónica's first quarter 2014 conference call. Today with me is José María Álvarez-Pallete, Chief Operating Officer. So during the Q&A session, you will have the opportunity to address to us any questions you may have. Telefónica has released today a strong set of results based on the execution of the management priorities established for 2014. Topline delivered positive year-on-year organic growth for the fourth 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 the best figure in a first quarter since 2011, despite higher CapEx, asset disposals, and FX effects. Debt reduction of EUR 2.7 billion in the quarter allowed for a significant improvement of leverage metrics to 2.3 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. Therefore, we reiterate our full-year outlook, dividend included. Please now turn to slide three for a quick review of our financial performance. Reported year-on-year change reflected a negative Forex impact, mainly due to implicit Venezuelan devaluation to $10.70 bolivars per US dollar, Argentinian peso, and Brazilian real depreciation versus the euro, along with the deconsolidation of Telefónica Czech Republic since 1st of 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. 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 million with an EPS of EUR 0.15 per share. In organic terms, sales were up 1.5% year-on-year and reached over EUR 12.2 billion, while OIBDA grew 0.5% year-on-year and exceeded EUR 3.9 billion with a margin of 32.1%. Finally, net debt was reduced to EUR 42.7 billion at the end of March or EUR 41.9 billion, including post-closing events. In the next slide, let me stress again that free cash flow generation has been the strongest for a first quarter in the last three years, achieving EUR 339 million or EUR 333 million before spectrum payments.
Let me also remark the positive absolute year-on-year change in free cash flow of EUR 800 million in the quarter, continuing the improved trend initiated in 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 five, 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 those of Q1 2013 and leading to a penetration of 30%, nine 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 in a remarkable 81% year-on-year increase of homes passed, a 90% growth of connected homes, and a high single-digit growth of Pay TV accesses. All this, along with low prepaid smartphone penetration, represents a massive opportunity for future growth. In slide six, 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 differential diversification.
Hispam, Hispanoamérica, was the main contributor to growth. 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 percentage points 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 if 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% of investments devoted to growth and transformation, which resulted in approximately two times the number of homes passed with fiber year-on-year and 10 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 IT, 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 decommissioned approximately 80 applications this quarter, and more than 35% of our servers are virtualized at the end of March. Moving to slide number eight, let me highlight the progresses made in digital services.
Regarding the consumer area, we are gaining market share in the Pay TV businesses in our main markets, reinforcing our positioning in Spain 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 Yaap, the brand of the digital financial services to be launched in the coming months in Spain by the JV established with CaixaBank and Santander. In the B2B area, Telefónica signed a machine-to-machine deal with JCDecaux to bring urban connectivity in Europe and Latin America and was chosen as partner in Europe by Tesla, an industry leader of in-car telematics. Finally, we also made strategic investments creating Axonix, the first mobile advertising exchange platform owned and powered by a mobile operator, and acquiring eyeOS that enables Telefónica to offer an open-source desktop virtualization service.
Moving on to Spain in slide number nine. Our convergent offer, Movistar Fusión, continued to gain momentum, reaching 3.2 million 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 customers' 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 Fusión towards a more sustainable revenue model through the continued improvement in our services lifetime, thanks to Fusión churn, which is notably lower compared to standalone services.
At the end of April, underpinned by our differential assets, we further increased the value of our offer and revamped Fusión packages, including Movistar TV high-quality content in all packages with no price increase. Leveraging the Fusión 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 Telefónica España financials. Revenue recovery trend accelerated in the quarter, with year-on-year decline easing sequentially 370 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 U.K. We continued 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, two 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 quarter amounting to EUR 24 million. To review Telefónica Deutschland, please turn to slide number 12. LTE 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 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 O2 Blue All-in portfolio for consumers, as well as O2 Unify for Business. Mobile service revenue year-on-year performance stabilized, though affected by a combination of lower SMS volumes, tariff renewals, and weaker prepaid dynamics. I would like to highlight the lower weight of SMSs over data revenues. Up to March, this represented 28% of data revenues, 9 percentage points lower than a year ago. At the same time, OIBDA and OIBDA margin evolution reflect intensified commercial activities 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. Let me also remark the success of Vivo Tudo, capturing 4 million customers in just two months. In the fixed business, our turnaround strategy continues focused 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 São 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 three years, and increased contribution of non-SMS data sales growing by 42% year-over-year. Finally, profitability showed limited erosion year-over-year, thanks to strong cost discipline and despite more intense commercial activity. Turning to slide 15, let me summarize our operations in Hispanoamérica 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 a strong revenue year-over-year acceleration. During the quarter, Telefónica Hispanoamérica recorded a healthy revenue expansion on new revenue sources, with non-SMS data revenue up 43% year-over-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-over-year and gradually increasing their revenue weight. Finally, despite higher network and commercial expenses, OIBDA posted a solid year-over-year growth, leading to a slight improvement in profitability on strict cost control and efficiency efforts. On a per country overview in slide 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-over-year. In Chile, let me highlight that excluding regulatory effects, year-over-year growth has been the highest in the last four years, delivering the benefits of better commercial volumes captured in recent quarters. Moving to slide 17, in Peru, revenue and OIBDA year-over-year growth trend remains strong, with increased profitability year-over-year.
In Mexico, we posted an outstanding acceleration in revenue year-over-year performance this quarter, taking the benefits of our strong network and the reshaped 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. Finally, in Venezuela and Central America, increased volumes remained as the main growth driver, with data and voice traffic strongly up year-over-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 billion after Venezuelan bolivar FX impact, or EUR 5 billion when factoring in post-closing events. These efforts translate into a reported net debt figure below EUR 43 billion, and leverage rate show at 2.3 times, both within the target range.
In achieving such figures, we have offset the negative effect of Venezuelan bolivar implicit devaluation with new hybrid issues, the closing of Telefónica 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 EUR 6 billion raised year to date. In parallel, we are smoothing our maturity profile by prepaying EUR 2.3 billion of higher coupon financings at holding level, mainly maturing in 2015. On top of that, we maintain an ample liquidity cushion at EUR 22 billion, 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 2, reduction held mainly in EUR and Czech koruna with lower cost on average within the deleveraging process. To recap, we've had a strong start of 2014, increasing customer value and network differentiation while improving financials. Our organic top line and OIBDA accelerated year-over-year, with profitability almost flat. At the same time, we posted a very solid free cash flow generation, the strongest Q1 since 2011. Finally, we made a step forward in debt reduction, strengthening our balance sheet and improving leverage ratio. Thank you very much for your attention. We are ready to take your questions.
Certainly. Thank you, sir. Ladies and gentlemen, if you'd like to ask a question at this time, please press star one on your telephone keypad. To cancel your question, please press star two. Once again, that's star one to register a question and star two to cancel. We would kindly ask you to ask a maximum of two questions per participant. If possible, we recommend you not to use your cell or hands-free phone. There'll be a short silence while questions are being registered. We'll now move to our first question from Georgios Ierodiaconou 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 EUR 18.5 billion includes Irish and Czech EBITDA and Venezuela at the CADIVI rate for nine and a half out of the 12 months. That number is likely to come down materially in the coming quarters. At the same time, you're already in the process of acquiring Digital+ and E-Plus, and you've also been linked with other acquisitions, including a very chunky one in Brazil. 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. My second question is around your funding options.
Based on comments last quarter, I believe you can issue another EUR 3 billion of hybrids at most. Is there a firm commitment to maintain the EUR 0.40 cash dividend, and would you rule out using your equity as a source of funding for M&A? Thank you very much.
Hi, Georgios. Thank you for the question. This is Ángel. The ratio of 2.30 times net debt to OIBDA is calculated as in our tradition with a 12 months rolling OIBDA. This excludes the Telefónica Czech Republic OIBDA, because the company was deconsolidated from beginning of this year. For the ratio calculation, we have done going backwards adjustment, and we have taken Telefónica Czech Republic out of this calculation. Going forward, we have a 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 million. This does not include a deferred payment in addition of EUR 70 million. At the time of closing the E-Plus acquisition, we would have, as Telefónica, to pay EUR 4.1 billion.
This is including both our share of the rights issue in Telefónica Deutschland, and second, acquiring a stake of Telefónica Deutschland from KPN. This EUR 4.1 billion would increase our debt, as we announced when we announced the transaction, we are going to issue a mandatory convertible for around one third of such figure. If we were to do the pro forma from the EUR 42.7 that we have closed in the quarter, we exclude Ireland, we include the acquisition of E-Plus, the issuance of the mandatory convertible, the figure would be around EUR 44.5 and would be clearly below the 2.35 times net debt to OIBDA, once you include the E-Plus OIBDA that we would consolidate. With this, we maintain our target of less than 2.35 times net debt to OIBDA and below EUR 43 billion for year-end.
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 hybrids, I think it was your second question, we have now outstanding EUR 4.2 billion. Our issuance of hybrids is motivated by two reasons. One is to support strategic decisions like M&A or increasing investments, as we are seeing this year, or to protect from negative non-organic events, as we have seen with the Venezuela devaluation. There would be a limit from ratings agencies up to EUR 7 billion. We have outstanding EUR 4.2, at this stage, in the short term, we are not planning any further issuance.
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 two notches rated below senior.
Thank you. Next question, please.
Certainly. Our next question now comes from Giovanni Montalti of UBS. Please go ahead. Mr. Montalti, your line is open. Please go ahead.
Can you hear me?
Yes, we can.
Okay. Hi. Sorry. Couple of questions. Could you share with us some thoughts about your view on the potential evolution of the Spanish market following the acquisition of ONO by Vodafone? Do you expect an improvement on the mobile market dynamics coming from this deal? Secondly, if you can share with us any update regarding the regulatory review of the fixed access market in Spain. Thank you.
Okay. Thanks for your question. Taking your first question about the transaction being announced by Vodafone acquiring ONO. 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 plus ONO, should evolve in a healthier competition because it will be infrastructure play base. Therefore, margins are going to be similar. Therefore, the average blend, the ARPU, the customers is going to be convergent. Therefore, I think it's going to be more sustainable.
I think that those transaction or this transaction specifically 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. We do not think this market consolidation is over. 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. Therefore, it makes total sense. I think that this is part of our strategy, that we are prepared for that we have been preparing our company for that, mainly in Spain. 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.
Your second question was about the fixed regulation in Spain, I didn't understand basically to what we was referring. You were referring to the bitstream or to the unbundling. I didn't catch your question.
In review by the telecom authority in Spain for the wholesale access market. If I remember well, it should be market number 2. If I remember well, they should publish a public consultation before the beginning of December. I want to just understand what are your expectations, especially as it relates, again, to regulated wholesale access fees for fiber and fast broadband. Thank you.
Okay. Understood. I think that you're referring to the pre-consultation on the markets in Spain, number 4 and number 5. We think that the pre-consultation period has clarified the fact that mobile exerts competitive pressure on fixed as well, and therefore with enough conditions in different areas, and therefore with enough different alternative players and operators and cable operators. The integration should explain part of that evolution as well. This new infrastructure competition, which should now start to be regulated, we think is the only way to generate growth and competition in the future. 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.
Certainly. Our next question, which now 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 it's quite difficult to hear the questions. I don't know if there's a technical problem, but just wanted to let you know that. My question is really about Spanish revenue and margin dynamics. Obviously, we've seen this quarter an improvement in the rate of decline in Spanish revenues, strong commercial activity. Can you talk to us about the improvement in revenue trends that consensus forecasts and how sustainable that is, or how consistent that is with high 40s margins, and if the cost of better revenue is going to be lower margin? Thank you.
Yeah, sure. Thanks for the question. I think that you have the two effects that you were mentioning in this quarter. First of all, we have an OIBDA margin that is 46.9 or 45.3, excluding one-off, namely the towers one-off. If you compare that with the first quarter of the previous year, where the margin was 47%, we have a drop, 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 our OIBDA, which is in the neighborhood, including fixed mobile, of 2.9 percentage points. You have that we have been more aggressively investing in the commercial effort, and that drains 4.4 percentage points of the evolution of the margin.
The impact of the margin should be judged upon the more aggressive commercial effort that we have been doing. The 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 value that is worth to be captured, and that explain why we have been having this quarter some record figures of commercial activity. Namely, TV gross adds, for example, have been multiplied almost by three times. Mobile contract has increased by nine percentage points. Fiber gross adds has increased by 75%, and handset upgrades, 12%. Next question should be, what's the impact on revenues? We have been improving the rate of decline of revenues to 8.2%, compared with 11.9% at the end of last year.
If you were to exclude handsets and regulation, the impact would be that our current revenue growth would be 7.1%, compared with 9.6%. We are trying to accelerate the revenue trends in Spain because now we see value. This is having an impact on our 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. We think that this level of revenues at the group level, but namely in Spain, is much more sustainable this quarter than a year ago. We will keep going. We think that you would have seen that in Spain, we launched a new Fusión proposition for the existing customers in April.
As we speak, we are having record number of sales in terms of TV adds, and we are basically getting back to the figures of Fusión when we launched Fusión initially. We have reasons to believe that the market on the integrated player, and namely on our TV and fiber proposition, is paying off. 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 Mathieu Robillard 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, fixed wireless, that you launched a few quarters ago and seems to be doing quite well. 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 São Paulo? Clearly, in a world where convergence is going to increase, even though it's not there yet in Brazil, also where you could have some synergies from a network point of view. I guess the question is, what is your fixed line strategy in Brazil apart from São Paulo, and is this product the beginning of something? 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. I just wanted to know what was your view on this spectrum auction. Thank you.
Thanks for your questions. On the fixed wireless proposition outside São Paulo in Brazil, it's a standalone strategy. We are not just bundling that with our mobile product, and therefore, it needs to make the numbers in terms of margin by itself. We are not just subsidizing our product, subsidizing one product to the other. We are monitoring that very closely in terms of churn and in terms of subscriber acquisition cost. It's paying off. We are taking advantage of the commercial capillarity distribution that we have in Brazil, and also the brand outside São Paulo. It makes sense. It's generating good results. We need to judge this strategy not together or jointly with the mobile strategy, but by itself for the time being. It's not a bundled product so far. In terms of the spectrum auction in Brazil, too soon to say.
We are monitoring very closely that. 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. We need to be very careful. The final rules are expected for July, with the minimum prices included. Also there are some uncertainties about what are they going to be the cost of cleanup of the migration of TV broadcasters in some of those cities. Still too soon to say. It's still too much of uncertainty. As you might imagine, we are monitoring very closely.
Thank you, Mathieu. Next question, please.
Thank you. Our next question comes from Justin Funnell of Credit Suisse. Please go ahead, sir.
Thank you. Yeah, just on Fusión, I think you mentioned the ARPU is EUR 70, and that's flat. I'm not sure. Can you tell us what the ARPU in Fusión had been doing year-over-year in prior quarters? Had it been falling year-over-year, and it's now essentially the year-over-year trends are improving, or was it the other way around? Had ARPU been growing and it's come down to flat? 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 TI. You got any thoughts at this stage as to whether you'll be able to retain the 15%, or is it just simply way too early?
Hi, Justin. This is Ángel. 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 shareholder. We have not taken, as Telefónica, 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, no. The Brazilian CADE rulings, which are public on their webpage, and we have also made some public statements on them could be somehow or partially facilitated by a demerger. Again, I want to stress that we have not taken any decision 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 competitors have been 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. If anything, I was saying in the previous conference call that lots of stars need to get aligned.
Maybe some stars are starting to align, but still many things would still have to happen for a consolidation to take place.
Okay. Take the ARPU on Fusión. We are tracking that quarter-over-quarter. Fusión is still a very young product, but so far the ARPU is pretty stable. We are starting to have the first layers of Fusión customers with their contract maturing. The churn of those customers are significantly lower than the churn of the customers that have one single product. From both sides, I think that we can already say that a year and a half after the launching of Fusión, that it has been a successful product in terms of ARPU stability, in terms of churn reduction, and in terms of value creation. The customer mix of the Fusión customers continue to improve. 71% of gross adds are The recent growth of our new or upselling customers, which used to be 64% a quarter ago.
It's significantly protecting our customer base because the lifetime of a Fusión customer is much longer. From any metric, ARPU or churn or subscriber acquisition cost, Fusión is a good product. It's helping us to significantly anchor the value for our revenues in Spain. With the new value proposition, let me stress again that the figures that we have from April are pretty promising. With the new TV offer, I think it's going to be even better. It's also helping us on the mobile side. As of April figures, we are getting much closer to stability on our customer base in the contract mobile customer base. In all metrics, Fusión is helping us significantly.
Thank you, Justin. Next question, please.
Certainly. Our next question here comes from Luis Prota 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 América Móvil, how that will benefit Telefónica from the second quarter. Also when these termination rates go to zero 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? The second question is on Venezuela, excuse me, and the exchange rate you are using to consolidate earnings from that country and cash flows. You are now moving to SICAD I, but we are already seeing a bunch of companies that have moved to SICAD II, closer to 50 bolívares per USD. What are your thoughts there? Is there any need to move there?
Is there liquidity enough in either SICAD I or SICAD II, or what are your plans? Thank you.
Hello, Luis. This is Ángel. I will take the question on Venezuela. In Venezuela, we have currently three exchange rate systems. One is called CENCOEX, which is the old CADIVI at 6.3 bolívares to USD. The second one is SICAD I, which is the one that we are using for our accounts, which has periodic auctions, and at the end of March, it was at 10.7 bolívares to USD, which is how we have accounted. Then the third system is called SICAD II, which also has several periodic auctions, and 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 CADIVI, the CENCOEX, is supposed to be around two-thirds to 70% of the volume of transactions. This we cannot access.
This 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 industries like telecoms. The SICAD I, the 10.70 at this moment, is going to have a volume of around 25%-30% of the transactions. The SICAD II has very little liquidity and is going to be something around 5%-8% of the total volume. This one has been, for instance, according to Venezuelan regulation, the one to apply to consumer goods companies like the ones that you must be thinking that have been recently reporting on SICAD II.
First, regarding the volume that these 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 Four auditing firms for all the companies operating in Venezuela. We are operating at SICAD I. 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. Some of those alternatives that we're looking would be closer to SICAD I than to SICAD II. Hopefully, we may be able to reach some success on this in the future, but we're still not there.
Luis, 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 Telcel, América Móvil, have been declared preponderant players, and therefore they are subject to significant asymmetry. The levels of asymmetry is the thing that is currently under discussion, and also other elements of the regulation. This regulation has been submitted to the Senate and to the Congress in Mexico, and therefore is going to be debated in the 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 closed ecosystems of customers, like namely the ones of Telefónica, because we could become competitive in terms of the interconnection cost compared with the on-net tariff. Too soon to say, because this detailed regulation is going to be under discussion in Mexico in the next few weeks, we hope. 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, therefore it's totally depending on the evolution of our own effort with the current regulation. We think that if this regulation was to crystallize, there is a significant upside because competition would significantly be enhancing the Mexican market.
Thank you, Luis. Next question, please.
Certainly. Our next question comes from Ivón Leal of BBVA. Please go ahead.
Hello. Good afternoon, everybody. Just two on Spain for my part. I don't know if you could 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 Fusión subscribers to fiber. Maybe the second one is, what is the reason behind not extending the fiber agreement with Jazztel and just going to those 13 million homes by your own?
Well, we will not detail the cost of the commercial strategy in terms of the content, because it's sensitive commercial information. I tried to advance in a previous question that this represents 4.4 percentage points of OIBDA reconciliation, so to say. We cannot go further than that, mainly on the content side, because it's a pretty sensitive issue, as you know. In terms of the cost of migrating customers, I mean, to fiber customers, again, to detail the information is not the thing we should do. Let me tell you that if we were able to migrate entirely our copper customers in one specific central switch to a fiber customer, the cost of maintaining a fiber network is significantly lower than the ones of maintaining a copper one. We are going to try to accelerate that as much as we can.
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 lower than churn on xDSL. In terms of the fiber agreement with Jazztel, it is open to commercial discussion, as you might imagine, but we are accelerating. We cannot wait for others. Therefore we will keep going. Our aim is to double the home passed this year, and we are executing. Who knows what is going to happen in the Spanish market. In the meantime, we cannot wait. We need to keep going.
Thank you, Ivón. Next question, please.
Certainly. Our next question comes from Frédéric Boulan from Nomura. Please go ahead.
Hi. Good afternoon. Thanks for the question. Firstly, if you could elaborate, just to follow up on the question on Ono initially, could it make you revisit your current stance on fiber wholesale, especially with Orange? Do you think Vodafone Ono could emerge as a competitor on high-speed broadband wholesale access? Secondly, on Fusión, you now have two broadband base upgraded. What do you think is the plan from here? Do you finding it harder to grow from current levels, hence the April product refresh? How do you think competitors, what they will do if you manage to push this product to the majority of your broadband base? Thank you.
Thanks for the question. On the Ono implications for the overall of the market, mainly for some of our competitors, too soon to say. We think that it's going to take a while for this transaction to be completed. In the meantime, a lot of things are happening in the Spanish market. Some of our competitors are trying to accelerate toward convergent products. Others are more worried and might consider alternative of selling or merging. Too soon to say what's going to be the response of other players. Believe me, too soon to say. Are we open to a partnership? For sure. We don't know what's going to be the strategic options that other players are going to be considering in Spain.
In terms of Fusión, we think that, again, the fact that we have now 71% of the customers that come into Fusión that are either an upsell or are new customers indicates that there's still room to go. Namely on the TV effort that we are doing. Just by launching this new Fusión with TV included for the existing customers and migrating some of those customers from the existing product to fiber is creating us an amazing impact, commercially speaking, in the last two 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 incentivate the markets also in other segments of the market.
We still think that through Fusión 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. Finally revenue stabilization for Telefónica in Spain. We have a significant expectation for the next months around Fusión and around Spanish revenues.
Thank you, Frédéric. 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 E-Plus deal is 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, our priorities for non-organic growth, we are happy with the scale that we have. We have no ambitions to go beyond the current footprint where we are present. Yes, 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 via market consolidation. This 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+ in Spain that was accepted by Prisa. The second line that we continue to work is on optimizing our portfolio of 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 German market, as we speak today, a move to what total convergent proposition to the customers. With the transaction that is currently subject to approval with the E-Plus transaction and the agreement that we have in place for wireline and for VDSL, and that warranties as technological evolution. We can be competitive, and in fact, 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 E-Plus transaction being approved, we will become a significant player on the German market. So far the answer is we are not seeing that trend happening in Germany.
We will monitor that, for the time being, the convergent strategy is depending on what the leader is doing in each one of the markets, and we don't see the leader of the German market so far now moving aggressively toward a total 4P product. 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 Dellis of Jefferies. Please go ahead.
Yes, good afternoon. Thank you for taking the questions. The first question is just on Spain, if I may. On a cleaned-up basis, it looks as though in Spain, net costs are down 5% year-over-year this quarter. In previous quarters, that trend has been of the order of minus 20%. Obviously, we understand how there was a ramp-up in commercial investments. Obviously, going forwards, content costs could be running at higher levels as well. How should we think about the progression in the net cost base going forwards? Is minus 5%, for example, the sort of level that you would deem acceptable going forwards? Secondly, related to Brazil, if I may. Obviously, there was a very heavy commercial investment there as well this quarter. Broadband net adds were negative, albeit very fractionally negative.
I think local management commented that competition was pretty fierce in the last quarter. I wonder whether you could please just describe what's 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 first one on the Spanish cost evolution and the trend of cost reduction. Year-over-year, the comparison is harder because some of the initiatives that we started to put in place three years ago, like the voluntary employee retirement plan and the handset subsidy reduction and others, the year-over-year comparison start to fade away. Basically, those are there to stay. In order to improve, we need more. Now we need to face this situation in which we do see value in investing more commercially, for the next few quarters, if we see this on top of the table, we'll do the same. We'll keep investing in the market because we see value there. 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 second wave of cost reduction in Spain, which includes a channel optimization. We are reviewing 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 of the others, we aim to reduce in the neighborhood of 10%-15% the points of sale that we have. On top of that, we are significantly increasing the activity through our online channel, that should also help to increase productivity. On top of that, we are insourcing all the activities that we can, this is going to have another impact in terms of margin.
Finally, remember that we have put in place at the level of the group a EUR 1.5 billion 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 units, is going to be one of the most favored units as well. Basically summarizing, some of the bulk of the initiatives that we started to take two years ago, three years ago, are there to stay, and therefore that provides a cushion 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. We are already working on the second wave of optimization in Spain that allow us to think that this 5% should be improved. How much, we don't guide.
On the Brazilian situation, well, it's true that 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 significant performance in terms of contract net adds, and also the launch of Vivo Tudo which commercially requires significant effort. The weak performance on fixed broadband is due to seasonal effects. We have lower number of business days and the summer vacation period as well. Nevertheless, you should also take into consideration the fact that now we are running São Paulo as an integrated region, which means that 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 3G increased proposition or through fiber or through ADSL.
That's why you should start measuring the total amount of broadband customers that we have in São 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 William Milner of Arete Research. Please go ahead.
Thanks very much for taking the question. Just in the U.K. market, obviously the accounting for the handset sales there looks like it's still having quite a big impact on the reported growth trends. I just wondered if you could clarify if there are any other markets where you're accounting for handsets in the same way. 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. That's the first one. Secondly, just on the Digital+ acquisition that you announced yesterday or earlier this week, could you just walk us through why you're confident that deal should get clearance from the various regulatory and competitive bodies? It does seem to leave you a very high share of Pay TV in the Spanish market. Thanks.
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 than from the O2 Refresh. This is the only one that I'm able to remember right now. If there is any other, I will keep you posted. I think that the only one that I can remember now is in Germany with the o2 My Handy proposition. In terms of the Digital+ offer that we have put on top of the table, we do think several things. First, 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.
Who is competing for content right now, taking into consideration the nature of the Spanish market, in which free-to-air TV has a significant market share, and on top of that is a significant 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. On top of that, now you have other source of competition, namely through the over-the-top players and also some other competitors in Spain that are integrating themselves. Our proposal is that we think that the nature of the Spanish market is changing structurally, that the nature of the video market globally, worldwide, is changing as well structurally, and this is a trend. Look at what's going on in the U.S. market and in other markets in Europe.
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. Again, too soon to say. This is a process that is just starting. It's going to take long. It's going to take approximately at least 12 months, we think. Too soon to say what's going to happen. We intend to collaborate intensively with the antitrust authorities, and we will see. We think that we have strong arguments to put on top of the table.
Thank you, Will. Next question, please.
Certainly. 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. Two questions, please. The first one is just regarding the statement you make about the Spanish business, where you're saying the back book repricing is now largely digested. I was just trying to cross-check that against your Fusión ARPU, which you say is about EUR 70, which I think would be about EUR 85, including sales tax, which seems higher than most of your headline Fusión price points. If you could just help me to match those two statements, that would be helpful. The second question was regarding the strategic outlook for your U.K. business. British Telecom yesterday made a more formal announcement about their move into offering mobile services and saying they hope to offer a compelling proposition in the consumer segment.
Do you think you might need to follow suit and do something to maybe reverse your sale of the fixed line business? Would you even consider actually selling O2 UK? Many thanks. Bye-bye.
With regard to the U.K. operation, I have to state that our U.K. operations are core. The U.K. mobile market is improving, and O2 UK has a strong position and a positive momentum in the market, so we are not contemplating divesting our U.K. operation.
In terms of your question about the ARPU at Fusión and how to reconcile that with the current offer you need, we are not providing detailed information on that. I would strongly suggest to include the fact that some of our customers in Fusión have add-ons, and therefore the EUR 70 or the commercial offer needs to be completed with the add-ons that each of the customers are choosing. We are putting in front of them a catalog of potential add-ons that will be on top of the nominal price of the offer that they are considering. The way to reconcile that, the nominal ARPU of the offer, is considering the add-ons.
A significant increasing number of the customers that we are seeing now in the Spanish market are going not just with the basic offer, but with at least one of the add-ons, which proves that the Spanish recovery is starting to flow somehow through our commercial offer. On top of that Fusión is not just the nominal offer, but potentially the services that consumers are adding on top of the basic offer.
Thank you, James Ratzer. Next question, please.
Our next question now comes from Akhil Dattani of JPMorgan. Please go ahead. Akhil, your line is open. Please go ahead. It appears this caller has stepped away from their phone. We will now move to our next question from Sasu Ristimäki from Bernard Lynch. Please go ahead.
Thanks. 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 SICAD I rate that you apply to the situation at the moment? Thanks.
EUR equivalent accounted at 10.70 bolivars per USD. We have not been able to repatriate at this rate.
Understood.
Thank you. I think we have next.
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 with useful insights for you. Should you still have further questions, we kindly ask you to contact our investor relations department in Madrid. Thank you very much.
Thank you. Telefónica's January to March 2014 results conference call.