Telefónica O2 Germany GmbH & Co OHG operating review

The business traded strongly in the quarter, with mobile net additions of 568,374 customers, a 52.0% increase on the same quarter last year and a 6.0% rise over the previous quarter. In the first half, the mobile customer base grew by 1.1 million (2.1 times the same period last year), taking the total mobile customer base to 13.6 million (+17.5% vs. June 2007). The Tchibo Mobile brand added 35,456 customers in the second quarter, while the Fonic brand added 96,097 customers to end June with a base of 416,436. Partner channels, including HanseNet, Tchibo and Fonic, had a strong quarter and recorded 264,372 mobile net additions, totalling 501,031 additions for the first half of the year.

A total of 292,389 net contract customers were added in the quarter, 53.0% higher than the second quarter of 2007 and 42.3% higher than the previous quarter, driven by promotions around O2 branded tariffs such as Genion S/M/L/XL tariffs and “Inklusivpakete” minute bundles, as well as partner branded tariffs, leading to a net gain of 497.900 customers in the first half of the year to reach a contract customer base of 6.7 million (+16.8% year-on-year). Contract customers made up 49.6% of the total mobile base at the end of the first half (49.9% in June 2007), reflecting the growth of the prepay base and the introduction of the new Fonic brand. A total of 275,985 net prepay customers were added during the second quarter, leading to a net gain of 606,468 customers in the first half to give a prepay base of 6.8 million customers at the end of June (+18.1% year-on-year).
 
Churn was slightly higher year-on-year in the quarter at 1.8%, mainly driven by prepay, with contract churn broadly stable at 1.4% on the back of higher upgrade activity to retain high value customers. Quarter on quarter, churn rates were stable across segments, leaving the blended churn for the first half of 2008 at 1.7%, a slight improvement over the same period of the previous year.

MoU grew by 8.5% year-on-year in the second quarter to reach 145 minutes in the first half (+11.2% year-on-year), driven by new prepay promotions and flat rate propositions such as Genion L/XL.

Total ARPU in the quarter was 15.8% lower than the same quarter last year, as a result of the changing customer base mix, customer migrations to new tariffs, market competition and the termination rate cut of nearly 10% in 2007. ARPU trends in the second quarter were broadly similar to the first quarter across segments, leading to a total ARPU of 17.7 euros for the first half, a decline of 14.7% year-on-year. Contract ARPU for the first half was 29.5 euros (-15.1% year-on-year) while prepay ARPU was 6.0 euros, a decline of 10.9% year-on-year.

Data ARPU was 6.5% lower than the second quarter last year due to the higher number of lower spending prepay users in the base and a shift from SMS to voice usage with the introduction of flat rate voice promotions. For the first half data ARPU was 4.8 euros (-4.7% year-on-year). Non-SMS revenues grew at 22.5% year-on-year in the first half while SMS volumes grew 12.6% year-on-year.

O2 DSL acquired 40,658 customers during the second quarter to add 90,689 customers in the first half of the year, reaching a total customer base of 165,389. Telefonica Deutschland reported 1.1 million ULL lines in total at the end of June (338,801 lines in June 2007).

Despite the ongoing pricing pressure in the German telco market, revenue growth accelerated in the second quarter vs. the first quarter to 3.8% year-on-year. For the first half, revenues totalled 1,749 million euros, growth of 2.7% year-on-year.

Mobile service revenue for the second quarter was down 1.4% compared to the same period last year, due to the ongoing optimising behaviour of customers which was partially offset by the acceleration in customer growth (+17.5% in the first half vs. +16.3% in the first quarter). Over three quarters of contract customers who are likely to migrate to new tariffs have already done so, and the remainder are expected to have moved by the end of the year. For the first half, mobile service revenues totalled 1,407 million euros, down 1.1% year-on-year.

Revenues from wholesale fixed broadband customers increased 52.2% year-on-year in the second quarter to reach 201 million euros in the first half (+45.0% year-on-year).

Operating income before depreciation and amortization (OIBDA) for the second quarter increased 82.3% year-on-year compared to the same period in 2007, which included one-off charges for restructuring (96.5 million euros). On a like for like basis , OIBDA declined by 8.2% year-on-year, reflecting the significant increase in mobile and DSL customer additions, partly offset by lower staff and administrative costs.  OIBDA for the first half totalled 341 million euros, growth of 31.6% year-on-year; while on a like for like basis3 OIBDA declined by 4.1%. OIBDA margin in the second quarter was 19.9%, an increase of almost 1 percentage point over the first quarter, resulting in a first half margin of 19.5% (20.9% in the first half of 2007 on a like for like basis3).

CapEx amounted to 357 million euros for the first half with Operating Cash Flow (OIBDA-Capex) amounting to -16 million euros for the first half, mainly as a result of the acceleration of the wireless network rollout, which is in line with our network investment plans.