Peter Erskine, Chief Executive of O2 plc, commented:
“The strong momentum in all O2’s businesses was sustained through the third quarter.   Across the group we added 1.75 million customers, taking the total base to 27.4 million, 18% higher than last year.  

We were particularly pleased by our performance in the UK contract market, where we added 274,000 net new customers, growing the base by 13% year-on-year.  We also saw a significant fall in both contract and pre-pay churn, driven by our O2 Rewards initiatives.
   
Our rapid customer growth continued in Germany, with 823,000 net new customers added in the quarter, and 32% year-on-year growth taking the total base to 9.77 million.  This growth was maintained in an increasingly competitive market, which contributed to lower contract ARPU, but the strength of the brand and a range of new propositions continued to attract high-value customers to O2.  Our Tchibo joint-venture added 153,000 customers.   

As we approach completion of the acquisition of O2 by Telefonica, all our businesses are performing well, and we look forward to maintaining momentum as part of Telefonica.“

Key performance indicators for the three-month period ended 31 December 2005:

Service revenue:

• O2 UK net service revenue grew by 12% year-on-year;
• O2 Germany service revenue grew by 17% year-on-year (at constant currency);
• O2 Ireland service revenue grew by 9% year-on-year (at constant currency).

Customer numbers:

• O2 added 1.75 million customers, taking the total base to 27.419 million
  -  O2 UK added 895,000 customers;
  -  O2 Germany added 823,000 customers;
  -  O2 Ireland added 32,000 customers.

Average revenue per user (ARPU):

• O2 UK blended ARPU £272 (Q2: £271; Q3 ’04/’05: £275)
• O2 Germany blended ARPU €338 (Q2: €349; Q3 ’04/’05: €370)
• O2 Ireland blended ARPU €572 (Q2: €572; Q3 ’04/’05: €564) 

Mobile data:

• Total SMS volume grew by 32% year-on-year to 5.05 billion.

Third quarter operating review

O2 UK

Third quarter net service revenue grew by 12% year-on-year, driven by strong customer growth.  A total of 895,000 net new customers were added in the quarter, taking the base to 15.981 million, 12.4% higher than at the same time last year.  This excludes the Tesco Mobile customer base, which grew to a million customers by the end of the quarter.

O2 UK’s blended ARPU of £272 was £3 lower than the third quarter last year, but £1 higher than the second quarter, with the quarter-on-quarter comparison reflecting the continued underlying ARPU growth no longer being offset by the impact of the September 2004 termination rate cut.

O2 UK’s own channels continued to account for more than 50% of total gross connections in the quarter.  The O2 “Rewards” initiatives, introduced at the start of the year to reduce churn, continued to show good results in both the pre-pay and contract markets.  Customer acquisition costs (SAC) were stable for both contract and pre-pay connections.

A total of 274,000 net new contract customers were added, driven by higher gross additions as well as lower churn.  The level of contract upgrades was well ahead of the same time last year, and 12-month rolling churn fell to 27%, compared to 30% for the same period last year.  Contract ARPU of £527 was £3 lower than the third quarter last year but £3 higher than the second quarter.

A total of 621,000 net new pre-pay customers were added in the quarter, again due to higher gross connections, as well as lower churn.  12-month rolling pre-pay churn fell to 29%, compared to 37% last year.  Pre-pay ARPU of £139 was the same as the third quarter last year and £2 higher than the second quarter. 

O2 Germany

Service revenue grew by 17% at constant currency in the third quarter, driven by the continued high level of net customer additions.  The termination rate cuts reduced third quarter service revenue by over 4%.  A total of 823,000 net new customers were added in the quarter, taking the base to 9.769 million, 32% higher than at the same time last year.  Contract customers comprised 51% of the total base at the end of the quarter, compared to 56% at the same time last year.  The Tchibo Mobile customer base grew to 593,000.

Blended ARPU remained the highest in the German market, at €338, down from €349 in the previous quarter and €370 in the same quarter last year.  This trend reflected the approximately €15 impact of the termination rate cuts, the higher proportion of pre-pay customers in the total base, and the increasingly competitive market environment. 

O2 Germany added a total of 278,000 net new contract customers in the quarter.  Contract ARPU of €514 was €9 lower than the previous quarter, and €25 lower than the third quarter last year.  This reflected the impact of the termination rate cuts, as well as the introduction of new customer offers.  In the increasingly competitive German market, these new propositions enabled O2 to continue to drive contract customer acquisition and retention, and stimulate voice and data usage.  Contract SAC and churn remained stable.

A total of 545,000 net new pre-pay customers were added in the quarter.  Pre-pay ARPU of €135 was €3 lower than both the second quarter and the third quarter last year, mainly reflecting the impact of the termination rate cuts.  Pre-pay SAC and churn remained stable.

O2 Ireland

Service revenue grew by 9% at constant currency in the third quarter, driven by both further customer growth and improving ARPU.  A total of 32,000 net new customers were added in the quarter, bringing the total base to 1.602 million customers, 5.7% higher than at the same time last year.  Blended ARPU of €572 was flat quarter-on-quarter, but €8 higher than in the same quarter last year, reflecting the continuing strength of both voice and data usage trends. 

Mobile data

Data as a proportion of service revenue increased to 27.0%, from 24.3% in the third quarter last year.  The total number of text messages sent by O2 customers grew by 32% year-on-year, to 5.05 billion.  Non-SMS data accounted for 14.3% of total data revenue and 3.8% of total service revenue.  There was a significant increase in the number of users of non-SMS data, with 40.3% of O2’s customers using these services during the quarter, compared to 30.5% in the same quarter last year.  

O2 Airwave

During the quarter Airwave won the contract to supply a National Fallback Service, which will provide enhanced levels of operational resilience within the Airwave network.  Airwave was also successful in its bid to equip all Fire and Rescue Services across England with a new resilient and secure voice and data communications service, and the company is now working with the customer to conclude the terms of the final contract.  The Scottish and Welsh Ambulance Service Trusts are scheduled to finalise their choice of communications solution in the near future.

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