Peter Erskine, Chairman & Chief Executive of O2, commented:
“We are pleased that the strong momentum in all O2’s businesses has been maintained within the Telefonica Group. Across O2, now including the Czech Republic, we added 699,000 mobile customers, taking the total mobile customer base to 32.794 million, 16% higher than last year.

In the UK we added 359,000 net new customers, growing the base by 14% year on year. We were particularly pleased by another robust performance in the contract market with a record number of upgrades, driven by our O2 “Treats” initiative, resulting in a continued improvement in contract churn.
   
In Germany we added 330,000 net new customers in the quarter taking the total base to over 10 million, representing 27% year on year growth. This growth was maintained in an increasingly competitive market which, along with termination rate cuts, contributed to lower ARPU, but the strength of the brand and a range of new propositions continued to attract high-value customers to O2, with 43% of net connections in the quarter on contract. Our Tchibo joint-venture continued to perform well, adding 68,000 customers.

In the Czech Republic Eurotel added 19,000 net new customers, growing its customer base 9% year on year. Contract customers accounted for 35% of the total base at the end of the quarter, compared to only 26.5% at the end of March 2005, driven by a successful pre-pay to contract migration strategy. In our fixed line business, the total number of ADSL lines stood at 338,000 at the end of the quarter and last month we announced this had increased to 350,000.”

Key performance indicators for the three-month period ended 31 March 2006:

Service revenue (at constant currency):

• O2 UK net service revenue grew by 16.6% year-on-year;
• O2 Germany service revenue grew by 12.5% year-on-year;
• O2 Ireland service revenue grew by 6.9% year-on-year;
• Eurotel service revenue grew by 6.1% year-on-year.

Average revenue per user (12 month rolling ARPU):

• O2 UK blended ARPU £269 (Q4 2005: £267; Q1 2005: £267)
• O2 Germany blended ARPU €320 (Q4 2005: €332; Q1 2005: €356)
• O2 Ireland blended ARPU €552 (Q4 2005: €550; Q1 2005: €544)
• Eurotel blended ARPU CZK6,127 (Q4 2005: CZK6,117; Q1 2005: CZK6,209)

First quarter operating review

O2 UK

First quarter net service revenue grew by 17% year on year, driven by continued strong customer and ARPU growth. The year on year comparison also reflected Easter falling in April when last year it fell in March. The quarter saw intense competition in the market, particularly in the contract segment, but the business continued to perform well and achieved 29% growth in total gross additions year on year.

A total of 359,000 net new customers were added in the quarter, taking the base to 16.340 million, 13.6% higher than at the same time last year. This excludes the Tesco Mobile customer base, which exceeded one million customers at the end of 2005.

The major promotions in the quarter were O2 Treats and Business Unlimited. O2 Treats offered customers bundles of free texts, voice minutes or value added services after 6 months as an O2 customer to reward loyalty, while Business Unlimited introduced unlimited calls to any O2 mobile when on a business tariff.

A total of 184,000 net new contract customers were added in the quarter, over half the total, driven by higher gross additions as well as lower churn. At the end of the period contract customers made up 34.8% of the total base, compared to 34.1% in the same period last year. The level of contract upgrades was well ahead of the first quarter last year. 12 month rolling contract ARPU of £517 was flat compared to the previous quarter, but £2 ahead of the first quarter last year. 12-month rolling churn fell to 25%, compared to 31% for the same period last year, reflecting the continued focus on rewarding customer loyalty. 

A total of 175,000 net new pre-pay customers were added in the quarter, again due to higher gross connections. 12 month rolling pre-pay ARPU of £139 was £4 higher than the first quarter last year and £3 higher than the previous quarter.

O2 UK’s blended 12 month rolling ARPU of £269 was £2 higher than the first quarter last year, and £2 higher than the previous quarter, 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 accounted for more than 55% of total gross connections in the quarter. Customer acquisition costs (SAC) were stable for both contract and pre-pay connections.

Quarterly monthly minutes of use were up 14% year on year to 162 minutes a month, driven by propositions such as O2 Treats and Talkalotmore, which offered free off peak minutes for pre-pay customers topping up £15 or £30 per month.

12 month rolling data ARPU of £79 was £11 higher than the same period last year and £1 higher than the previous quarter. The number of non-SMS data users grew over 50% year on year.

In addition O2 UK launched a number of new products and services during the quarter, aimed at acquisition and retention of customers and revenue growth. These included:

• Launch of ebay on i-mode, enabling users to search auctions, view all their ‘My eBay’ features including ‘items I am bidding on’, ‘items I am selling’ and ‘items I have won’, as well as place bids;
• Launch of Ireland pre-pay roaming bolt on. This offers standard pre-pay rates to make a call or send a text message to anywhere in the UK when roaming on O2 Ireland’s network. There is no charge to receive a call. O2 is the first UK operator to offer this kind of tariff to its pre-pay customers;
• Launch of the BlackBerry 8700g handheld, a  new premium device from RIM featuring a new, faster Intel processor, and enhanced display and phone features;
• Launch of Euro Top-up. Customers can now purchase a pre-pay top up voucher when abroad from one of eight partner networks in Europe and use this voucher to top up their own O2 phone.

O2 Germany

Service revenue grew by 13% at constant currency in the first quarter, driven by the continued growth of the customer base, which partly offset continued ARPU weakness in the German market. The termination rate cut in December 2005 reduced first quarter service revenue by over 4%.  Since the September ’05 quarter O2 Germany has seen a trend of declining blended ARPU, although recently this has begun to stabilise, on a monthly basis. The future direction of this trend should be clearer in the next 3 to 4 months of trading.

In this competitive environment, O2 Germany continued to trade well with gross additions at the same level as the first quarter last year. A total of 330,000 net new customers were added in the quarter, taking the base to 10.099 million, 27% higher than at the same time last year. Contract customers comprised 51% of the total base at the end of the quarter, compared to 55% at the same time last year, reflecting the rapid growth of the prepaid customer base. The Tchibo Mobile customer base grew to almost 660,000 by the end of the quarter.

O2 Germany added a total of 142,000 net new contract customers in the quarter.  12 month rolling contract ARPU of €500 was €8 lower than the previous quarter, and €23 lower than the same quarter last year. This reflected the impact of the approximately 17% termination rate cuts in December 2004 and 2005, as well as increasing competition in the German market and the introduction of new customer offers. These new propositions enabled O2 to continue to drive contract customer acquisition and retention, and stimulate voice and data usage. Minutes of use for contract customers grew by 15% year-on-year, and were 7% ahead of the previous quarter. Contract SAC and churn remained stable.

A total of 188,000 net new pre-pay customers were added in the quarter. 12 month rolling pre-pay ARPU of €122 was €8 lower than the previous quarter and €11 lower than the first quarter last year, reflecting the impact of the termination rate cuts, increasing competition, the growth in multiple SIM ownership and the consequent lower minutes of use. Pre-pay SAC was stable while churn moved up around 3 percentage points.

Blended 12 month rolling ARPU remained the highest in the German market, at €320, down from €332 in the previous quarter and €356 in the same quarter last year. This trend reflected the ongoing impact of the termination rate cuts, the higher proportion of pre-pay customers in the total base, and the increasingly competitive market environment. Termination rate cuts reduced 12 month rolling ARPU in the quarter by approximately €14.

Quarterly monthly minutes of use grew by 5% year on year, to 127 minutes, driven by new propositions such as Genion flat rate, offering unlimited calls from the homezone to German fixed and O2 mobile numbers. O2 Germany now has a total of 3.7 million Genion customers, with 67% of all new postpay customers opting for Genion.

12 month rolling data ARPU was €74, broadly flat on the previous quarter and €5 lower than the same period last year. Non-SMS data users grew 30% compared to the same period last year.

In addition O2 Germany launched a number of new products and services during the quarter, including:

• Launch of TV Select. Available through O2 Active, TV Select contains an extensive collection of video clips covering news, weather, the Bundesliga (Germany’s Football First Division), comedy, the popular press and TV series, including over 25 TV programmes from ProSieben, Sat.1, N24 and MTV. Episodes of the popular "Verliebt in Berlin" programme are available to view in advance on the day of transmission from 12 noon;
• Launch of the Xda neo. The Xda neo improves on its predecessor the Xda mini, the most successful model in the Xda series to date. The Xda neo has additional functions such as WLAN connectivity, a 2-mega pixel camera, increased memory and the latest Windows Mobile 5.0 operating system;
• Launch of Microsoft Direct Push on the Xda neo. O2 Germany is the first mobile network operator in Germany to offer the Direct Push business solution which automatically synchronises e-mails and other data such as addresses and contacts between the Xda neo and Microsoft Outlook;
• Launch of the Business Mobile Pack, offering a free GPRS/UMTS laptop card to business customers taking a 24-month contract on the Business Profi tariff.

O2 Ireland

Service revenue grew by 7% at constant currency in the first quarter, driven by both a higher customer base and growing ARPU.  The termination rate cut of RPI minus 11% in January impacted first quarter service revenue growth by approximately 2%.

In a competitive market O2 Ireland traded well with gross additions in the quarter up 10% compared to the same period last year. While the total customer base fell by 9,000 during the quarter, reflecting the regular rise in inactivity on the pre-pay base after the Christmas period, O2 Ireland ended the quarter with 1.593 million customers, 3.9% higher than at the same time last year.

O2 Ireland added a total of 10,000 net new contract customers in the quarter. 12 month rolling ARPU of €1,075 was €32 higher than the first quarter last year and €2 higher than the previous quarter.

Pre-pay 12 month rolling ARPU was €360, up €2 on the same period a year ago and flat compared to the previous quarter.

Blended ARPU of €552 was reduced by approximately €10 due to the termination rate cut, but was still €8 higher than the same quarter last year and €2 higher quarter on quarter, reflecting the continuing strength of both voice and data usage trends.

Quarterly monthly minutes of use increased by 7% year on year, although compared to the previous quarter they were broadly flat.

12 month rolling data ARPU was €115, €7 higher than the first quarter last year and €2 higher than the previous quarter. Non-SMS data users grew by 28% year on year.

In addition O2 Ireland launched a number of pricing initiatives during the quarter. These included:

• In February 2006, O2 became the first operator in Ireland to announce the abolition of roaming charges in Northern Ireland and the UK. O2 eliminated roaming charges for all customers (pre-pay, pay monthly and business) between the Republic of Ireland and Northern Ireland, and for business customers between Ireland and the UK.
• Launch of 1 cent weekends. From midnight on Friday to midnight on Sunday, pre-pay customers on the Speak Easy tariff can call and text other customers on the O2 network for only 1c.

Cesky Telecom / Eurotel

Mobile service revenue grew by 6% at constant currency in the quarter, driven by growth in the customer base, up 8.5% year on year to 4.695 million. A total of 19,000 net new customers were added in the quarter. Growth in the contract segment was particularly pleasing, up 43% year on year, and contract customers accounted for 35% of the total customer base at the end of the first quarter, compared to only 26.5% at the end of March 2005. This growth was achieved through acquisition of new customers as well as marketing campaigns focused on pre-pay to contract migration, which also accounted for most of the decline in the pre-pay base compared to the same period last year.

A total of 97,000 net new contract customers were added in the quarter. 12 month rolling contract ARPU of CZK13,252 was CZK2,746 lower than the same period last year, and CZK727 lower than the previous quarter, mainly due to the effect of migrations from the pre-pay base and the high penetration levels in the Czech mobile market. 

The pre-pay base declined by 78,000 in the quarter, as a result of customers migrating to contract tariffs. 12 month rolling pre-pay ARPU of CZK2,900 was CZK192 lower than the first quarter last year and CZK30 lower than the previous quarter.

12 month blended ARPU was CZK6,127 in the first quarter, CZK82 lower than the same period last year, but CZK10 higher than the previous quarter.

12 month rolling data ARPU was CZK1,253, an increase of CZK131 compared to the first quarter of last year and CZK29 higher quarter on quarter.

Quarterly monthly minutes of use continued to grow, reaching 96 minutes in the quarter, up 16% compared to the same period last year.

In fixed line, total business revenues fell by 5.5% year on year to CZK7.5 billion, as a result of a decline in traditional voice services, which was not fully offset by an increase in broadband revenues. Revenues from broadband services amounted to CZK576 million in the first quarter of 2006, up 48% year on year.

A total of 64,000 net ADSL connections were added in the first quarter, compared to 26,000 net additions in the same period last year, driven by a new marketing campaign promoting increased broadband speeds. The total number of ADSL lines stood at 338,000 at the end of the quarter.

O2 Airwave

During the quarter Airwave concluded the contract negotiations to equip all Fire and Rescue Services across England with a resilient and secure voice and data communications service. In the last 12 months Airwave has won new contracts worth over £1 billion and more than 200 public safety organisations now use the network. The Scottish and Welsh Ambulance and Fire and Rescue Services are expected to finalise contract negotiations in the near future.

Outlook

The outlook for the group is unchanged from the targets announced on 1st March 2006.¹

• O2 UK
  O2 UK’s service revenue growth is expected to be in the range 6% - 9% for the 11 months ended December 2006. OIBDA margin is expected to be stable.
• O2 Germany
  O2 Germany’s service revenue growth is expected to be the low double digits for the 11 months ended December 2006. OIBDA margin is expected to be stable.
• Capital expenditure
  Capital expenditure for the O2 group is expected to be in the range €2.0 – €2.3 bn for the 11 months ended December 2006.

¹ 2006 guidance assumes constant exchange rates as of 2005, and excludes changes in consolidation. Operating Income before D&A excludes other exceptional revenues/expenses not foreseeable in 2006. For comparison, the equivalent other exceptional revenues/expenses registered in 2005 are also deducted from reported figures. Guidance for O2 Group does not include Ceský Telecom and Telefónica Deutschland, and guidance for O2 Germany does not incorporate Telefónica Deutschland. For O2, the fiscal year corresponds to the February-December period.

Quarterly KPI's (3 month period to 31 March 2006) Download full announcement - PDF (73Kb)