Telefónica O2 Germany

First half operating review

In a more challenging trading environment, Telefónica O2 Germany continued showing positive mobile service revenue growth up to June 2009 (excluding MTR reductions from April), whilst also being the main contributor to OIBDA growth for Telefónica Europe. This was the result of the Company having already set the foundations for the business, as well as its renewed product portfolio progressing in the market.

Telefónica O2 Germany’s mobile customer base reached 14.9 million at the end of June, 2009 (+10.0% year-on-year). The new and simpler core product portfolio (“O2o”, “O2 Mobile Flat2, “O2 Inklusivpaket”) is gaining traction in the O2 exclusive channels, with partners also playing an important role. As a result, 734,192 new mobile customers were added in the first half of 2009, with a quarter-on-quarter increase of 38.8% to 426,723 net additions in the second quarter of 2009. 257,513 contract customers were added in the first half and 139,288 in the second quarter, showing a healthy increase of 17.8% over the previous quarter. At the end of June, the contract segment represented 48.4% of the base.

It is also worth highlighting that the churn rate for the second quarter, at 1.8%, is showing a 0.3 percentage point reduction over the previous quarter on the back of better behaviour of the prepay and contract segments. Churn for the first half of 2009 stood at the 2.0% level (+0.2 percentage points, year-on-year).

Traffic carried in the first half of 2009 remained broadly flat year-on-year at 11,375 million minutes, with quarter over quarter trends improving on the back of the new propositions launched in the quarter (+1.4% in the second quarter, year-on-year).

Voice ARPU declined 13.3% year-on-year to 11.1 euros in the first half of the year (-13.9% in the second quarter), mainly as a result of mobile termination rate cuts from April (-19%), the migration process to new value tariffs throughout 2008, as well as the increase of customers from partner brands in the base.

Data ARPU reached 4.7 euros in the first half of the year (-3.7% year-on-year and -2.4% year-on-year in the second quarter), mainly due to the impact on SMS usage from the introduction of better value tariffs and flat rate voice promotions, which is not fully compensated by the strong growth of mobile broadband customers in the base.

As a result, total ARPU in the first half was down 10.6% year-on-year to 15.8 euros (-10.8% year-on-year in the second quarter).

O2 DSL customer base reached 253,429 at the end of June, after adding 38,646 new customers in the first half of 2009 (21,751 in the second quarter). Telefónica Deutschland reported 1.5 million ULL lines in total at the end of June (+43.6% year-on-year).

Revenues totalled 1,781 million euros in the first half of 2009 (+1.9% year-on-year; +0.2% in the second quarter). This performance was driven by continued growth from the fixed and DSL businesses whilst the mobile business in terms of service and hardware revenue declined year on year (impacted by MTR cuts and SIM-only uptake). Mobile service revenues declined 0.4% year-on-year in the first half of the year to total 1,402 million euros (-1.2% in the second quarter). Excluding the impact from MTR reduction in April, mobile service revenues would have grown +0.9% year-on-year in the first half and +1.2% year-on-year in the second quarter (+0.6% year-on-year in the first quarter). Data revenues also continued its positive contribution to mobile service revenue growth (+7.6% year-on-year in the first half, showing an acceleration in the second quarter to +8.2%, year-on-year), mainly backed on non P2P-SMS data revenue growth (+33.0% year-on-year in the first half; +40.1% in the second quarter) driven by continued success of mobile broadband “Surfsticks”.

Wholesale fixed broadband business contributed to revenues with 218 million euros in the first half of the year, +8.3% year-on-year, while for the second quarter they grew +1.7% year-on-year.

Operating income before depreciation and amortization (OIBDA) recorded a very strong performance in the first half of 2009, showing a 26.7% year-on-year growth to 432 million euros, with a solid 29.0% year-on-year increase in the second quarter. As a result, OIBDA margin improved by 4.8 percentage points to 24.3% in the first half of the year, with a better performance in the second quarter of 2009 (+5.7 percentage points year-on-year to 25.7%). This evolution is driven by the increased own mobile network coverage, improved distribution network, enhanced profitability of the fixed broadband wholesale business, as well as the new commercial approach introduced in the fourth quarter of 2008, which significantly reduced acquisition and retention costs.

Operating cash flow (OIBDA-CapEx) amounted to 77 million euros in the first half of 2009, a significant improvement compared to the negative 16 million euros registered in the same period of the prior year, with a year-on-year decrease in CapEx of 0.7%.