TELMEX´s infrastructure, recognized worldwide for its leading-edge capabilities and broad connectivity, also benefits segments of the population that economic progress often leaves behind. We provide fundamental support for social programs like e-México and the Fondo de Cobertura Social (Fund for Social Coverage). Additionally, we recognize the needs of low-income segments of the population with products like the Multifon prepaid phone and public telephony.
Advances in technology and new applications have accelerated the evolution of communications. Companies in this sector now must be able to provide an integrated offering of services that satisfies all the communications needs of their customers easily and at competitive prices.
The technological changes under way also point to a convergence of various networks that not only will broaden and improve service offerings to customers but also help them achieve a more efficient, cost-effective operation.
At the same time that technology has advanced, customers' needs have grown more sophisticated. They demand solutions that better fit activities at home, at work, and in other aspects of busy lifestyles.
Staying at the forefront of these developments has turned TELMEX into a multiservice network where 90 percent of lines are broadband, able to transmit voice and data simultaneously. Complementing those services are new access functions at public sites through the incorporation of WiFi (Wireless Fidelity) technology and new commercial plans like Prodigy Móvil, available in more than 50 cities.
Our corporate customers are responding well to this technological progress. They are confident that TELMEX can support them in their daily operations through a wide portfolio of managed solutions that use our domestic and international infrastructure and enable customers to count on integrated, efficient and highly competitive communications.
In the residential market, Multifon offers prepaid cards as an alternative to monthly fees to more segments of the population. At year-end, this program enabled more than 1 million customers to access voice services and the Internet.
e-México is a program introduced by the Secretaría de Comunicaciones y Transportes (Ministry of Communications and Transportation) to broaden coverage of basic services in education, health, economic considerations, and government through an Internet access satellite network. In 2004, TELMEX was granted the contracts for the second and third stages of this program, which now connects 4 thousand Community Digital Centers in 3 thousand 200 communities.
Additionally, TELMEX will increase its participation of basic telephony services in more than 4 thousand rural communities in Mexico, benefiting low-income segments of the population in remote areas.
In 2004, TELMEX´s priority was to consolidate our presence as the leading telecommunications provider in Mexico at the same time we began to build a significant presence in major Latin American markets.
International Operations
We concluded the acquisition of AT&T Latin America assets, and we obtained control of Techtel and its affiliate Metrored in Argentina, and Chilesat in Chile. With these transactions, we began to operate in Argentina, Brazil, Chile, Colombia, and Peru.
In March 2004, we announced the intention to acquire the control of the Brazilian telecommunications company Embratel. That transaction was concluded in July. In December, the public offering for the rest of the common shares concluded, and our economic interest rose to 33.6 percent of Embratel´s capital stock and 90.25 percent of voting shares.
Given the significance of the Brazilian market, Embratel represents a fundamental part of the strategy in Latin America. To ensure an adequate financial structure to support the company's growth and technological upgrade, Embratel´s Board of Directors proposed a capital increase of 700 million dollars to strengthen its financial position and increase its future operating flexibility.
In the commercial sector, Embratel simplified the rate system, introduced simpler rate plans and focused its advertising campaigns on providing a clear message for customers. Winback programs were established in the residential market and for small and medium-sized businesses, and the area in charge of serving the corporate market was strengthened to serve customers better by integrating the service offerings of local voice, long distance and data.
Our efforts during 2004 were focused on restructuring and integrating these operations, which at year-end were generating revenue growth and positive cash flow. Today, all of our international operations are self-sufficient and offer the promise of growth.
In 2005, our efforts will be focused on consolidating the structure, management and commercial viability of Embratel. In addition to continuing the 2004 initiatives, we will develop new alliances with other TELMEX companies; particularly with Net Serviços de Communication and TELMEX do Brasil.
We concluded the acquisition of AT&T Latin America assets, and we obtained control of Techtel and its affiliate Metrored in Argentina, and Chilesat in Chile. With these transactions, we began to operate in Argentina, Brazil, Chile, Colombia, and Peru.
In March 2004, we announced the intention to acquire the control of the Brazilian telecommunications company Embratel. That transaction was concluded in July. In December, the public offering for the rest of the common shares concluded, and our economic interest rose to 33.6 percent of Embratel´s capital stock and 90.25 percent of voting shares.
Given the significance of the Brazilian market, Embratel represents a fundamental part of the strategy in Latin America. To ensure an adequate financial structure to support the company's growth and technological upgrade, Embratel´s Board of Directors proposed a capital increase of 700 million dollars to strengthen its financial position and increase its future operating flexibility.
In the commercial sector, Embratel simplified the rate system, introduced simpler rate plans and focused its advertising campaigns on providing a clear message for customers. Winback programs were established in the residential market and for small and medium-sized businesses, and the area in charge of serving the corporate market was strengthened to serve customers better by integrating the service offerings of local voice, long distance and data.
Our efforts during 2004 were focused on restructuring and integrating these operations, which at year-end were generating revenue growth and positive cash flow. Today, all of our international operations are self-sufficient and offer the promise of growth.
In 2005, our efforts will be focused on consolidating the structure, management and commercial viability of Embratel. In addition to continuing the 2004 initiatives, we will develop new alliances with other TELMEX companies; particularly with Net Serviços de Communication and TELMEX do Brasil.
Financial Results
In 2005, as in each of the previous four years, we held rates flat in Mexico. Along with high-quality service, this policy helps TELMEX maintain customer loyalty. In the last four years, the average price of our services has decreased more than 34 percent in real terms. The company will keep rates at their present levels during 2005.
Our revenues in Mexico, especially the ones related to voice services, have been affected by this rate policy in spite of higher traffic. At the same time, however, we have experienced a transition to generating growth through new services like high-speed Internet access, the integration and operation of managed networks, and value-added services. Together those services increased 13.9 percent in the year and allowed total revenues to increase in line with the country's inflation rate. We accomplished this transition while preserving our commitment to profitability. The operating margin increased 1.2 percentage points in 2004, reaching 35.2 percent thanks to the permanent efforts to increase our productivity.
The financial consolidation of the international operations increased revenues 12.9 percent. As we integrated the new companies, we were careful to keep operating costs and expenses under strict control without adversely affecting the financial structure of the company as whole. Net consolidated liabilities during the year only increased 1.077 billion dollars and operating cash flow was 4.8 percent higher than last year. This year we expect to make important investments in these subsidiaries and intensify our efforts in the commercial area.
Our social commitment is evident in Fundación TELMEX. 2004 was another year of intense work in supporting education, health, justice and culture in the country. Through the Education and Research Program, Fundación TELMEX granted 10,006 scholarships and donated 3,320 PC´s, 2,814 printers and 2,750 pairs of eyeglasses. Additionally, 28,406 surgeries and 475 transplants were performed through the Health and Nutrition Program. The Justice program granted 6,856 bail bonds to first-time offenders. Fundación TELMEX continued to support several cultural and sports activities and also assisted communities affected by natural disasters.
During this process of transforming TELMEX, we continue to focus on employee development and training. Throughout our history, the people of TELMEX have adapted to numerous technological changes by accelerating their introduction to benefit customers. Additionally, the continued focus on improving the company's processes has allowed us to increase productivity and reduce the impact of price decreases.
This year will be very important for TELMEX. Our business priorities are to strengthen our presence in Latin America and continue the transformation of the company in Mexico. The execution of these two important tasks will be fundamental for our continued development. Our goal is to increase the value of the company in the long term by working today to maintain desirable levels of profitability and cash flow at the same time; we are laying the foundation for higher organic growth. Today, as always, TELMEX´s interests in the countries in which we operate work hand-in-hand with those of customers, shareholders, and employees. For us, this is the most important form of convergence.
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