Telefónica O2 UK operating review

With a continued focus on capturing profitable growth, Telefonica O2 UK achieved very strong net mobile customer additions of 274,571 in the second quarter (over 8 times the second quarter of 2007), taking the total mobile base to 18.7 million (excluding Tesco Mobile) representing growth of 5.0% year-on-year. Net mobile adds in the first half reached 295,723 (+95.2% year-on-year).

A total of 137,596 net contract customers were added in the quarter, 80.8% higher than in the second quarter of 2007, driven by iPhone and strong traditional handset connections, along with improved churn. After adding 343,981 contract customers in the first half (+120.5% year-on-year), at the end of June, contract customers made up 38.3% of the total base (35.8% in June 2007), highlighting the mature prepay market and prepay to contract migration driven by SIM-only tariffs such as “O2 Simplicity”.

The number of prepay customers grew by 136,975 during the quarter (compared to declines of 42,240 in the second quarter 2007 and 185,233 in the first quarter of 2008) to reach a base of 11.5 million.

Churn continued to improve, with contract churn  falling to 1.4% in the quarter from 1.8% in the same period last year and 1.5% in the first quarter 2008, driven by retention activity and handset upgrades, which rose by over 10% year-on-year. Blended churn fell to 2.4% in the second quarter, from 2.8% in the second quarter of 2007 and 3.0% in the first quarter of 2008, leaving this figure for the first half of the year at 2.7%, flat year-on-year.
 
MoU in the quarter continued to grow, +10.4% year-on-year, with MoU in the first half of the year reaching 203 minutes (+10.2% year-on-year), stimulated by customer propositions such as “Unlimited” offering free on net calls.

Telefonica O2 UK’s total ARPU in the second quarter was 2.0% higher than the same period last year in local currency, reflecting the increased proportion of contract customers in the base, customer adoption of new products and services and the continued growth in data ARPU, with voice ARPU broadly flat. ARPU for the first half was 30.6 euros, representing year-on-year growth of 3.7% in local currency. The lower growth compared with the first quarter was mainly driven by lower contract ARPU (-1.0% year-on-year in the first half in local currency), as a result of migrations from prepay, the adoption of SIM-only tariffs and the optimizing behaviour of customers when using bundles in the current operating environment. Prepay ARPU grew by 3.6% in local currency in the first half of the year reflecting the focus on higher value customers taking one of the recently updated portfolio of prepay tariffs with free allowances of minutes, texts or both depending on how much the customer tops-up each month.

Data ARPU was 12.1% higher year-on-year in local currency than the second quarter last year, driven by growth in text message volumes (+41.4% year-on-year), as well as increasing usage of the mobile Internet, with growth in non-SMS revenues of 46.1% year-on-year in local currency. Data ARPU for the first half was 10.5 euros, year-on-year growth of 10.8% in local currency.

Telefonica O2 UK’s DSL broadband service registered 62,800 net additions in the quarter, and 123,510 in the first half, leaving the total broadband customer base at 194,220 at the end of June. With one of the highest satisfaction ratings, the service offers the highest average download speed and upload speeds of up to 1.4 Mbps. The broadband portfolio was also enhanced with the launch of mobile broadband during the quarter, which gives customers access to WiFi hotspots from The Cloud and BT Openzone as well as Telefónica O2’s HSDPA network, which covers 80% of the population.

Revenues in the second quarter grew by 11.1% year-on-year in local currency, a strong performance relative to the market. For the first half, revenues were 3,494 million euros, an increase of 11.8% year-on-year in local currency. Mobile service revenue for the quarter increased 10.0% year-on-year in local currency, driven by continued customer growth and resilient ARPU. For the first half mobile service revenue totalled 3,211 million euros, an increase of 11.4% year-on-year in local currency.

Operating income before depreciation and amortization (OIBDA) for the quarter rose 14.1% year-on-year in local currency, impacted by restructuring charges taken in the second quarter 2007. Excluding these charges, growth was 10.6% in local currency, with lower mobile acquisition costs  offset by increased retention spend, along with additional DSL and mobile broadband launch-related costs. For the first half, OIBDA totalled 881 million euros, growth of 13.7% year-on-year in local currency (+11.8% excluding restructuring charges). OIBDA margin was 26.4% in the quarter, compared to 25.6% in the same quarter in 2007 (stable on a like for like basis ) and for the first half margin was 25.2% (24.8% in the first half 2007, but stable on a like for like basis2), despite stronger commercial activity.

CapEx for the first half amounted to 362 million euros, with Operating Cash Flow (OIBDA-Capex) amounting to 519 million euros.