O2 UK operating review

Total revenues in the last quarter of 2007 were €1,877 million, an increase of 7.8% year on year in local currency compared to the same period of last year. For the full year total revenues were €7,403 million, an increase of 18.7% year on year in local currency compared to the 11 month period to 31 December 2006. On a like for like basis total revenue growth was 9.5% year on year. Service revenue for the quarter was €1,702 million, an increase of 9.7% year on year in local currency compared to the same period last year, driven by continued strong customer and ARPU growth, while for the full year, service revenue amounted to €6,790 million (+10.3% year-on-year in local currency and on a comparable basis).

Operating income before depreciation and amortisation (OIBDA) for the quarter was €503 million, a decrease of 4.9% year on year in local currency compared to the same period of 2006. OIBDA included additional personnel reorganisation and other non recurring charges in the quarter of €20.5 million mostly related to the IT and Technology function to capture efficiencies in the future. Excluding this charge in the quarter, OIBDA would have been flat in local currency. OIBDA for the full year totalled €1,923 million, an increase of 8.7% in local currency compared to the 11 month period to 31 December 2006. On a like for like basis, OIBDA grew 1.0% year on year in local currency. Excluding all personnel reorganisation charges for the year OIBDA was 10.7% ahead in local currency compared to the 11 month period to 31 December 2006 and on a like for like basis it was 2.8% ahead in local currency.

Guidance for the full year 2007 was accomplished ¹ , with growth of 18.6% year on year in revenues (vs. guidance of 15% - 18%) and 10.6% year on year growth in OIBDA (vs. guidance of 9% - 12%).

OIBDA margin in the fourth quarter was 26.8% (27.8% excluding personnel reorganisation and non-recurring charges), compared to 30.3% in the same quarter in 2006. This margin dilution was due to costs associated with the launch of O2 Broadband, increased retention and reduced national roaming revenues from 3. OIBDA margin for the year was 26.0%, while excluding personnel reorganisation charges it was 26.4%.

The business once again outperformed the market, with gross additions in the quarter around 22% higher than the same period in 2006. The market continues to be competitive, especially in the prepay segment, with increasing prepay to contract migration, where O2's simplicity tariff, offering a SIM only postpay tariff with a 30 day notice period, has proved highly successful.

O2 UK added a total of 483,000 net mobile customers in the quarter (the highest in the market), an increase of 63.8% year on year, and 749,000 customers in the year, taking the total base to 18.4 million (excluding Tesco Mobile) representing growth of 4.2% year on year.

A total of 276,000 net contract customers were added in the quarter, more than double the figure for the fourth quarter 2006 and an all time record, reflecting the success of the iPhone in addition to a strong underlying performance in traditional handsets. For the full year 591,000 contract customers were added to reach a base of 6.8 million (+9.5% year on year).

At the end of the period contract customers made up 37.0% of the total base, compared to 35.3% at the same time last year. Quarterly monthly contract ARPU of €61.0 was up 1.2% in local currency compared to the fourth quarter last year, due to increased minutes of use and adoption of non-voice services, while the ARPU for the year was €63.2 (+1.1% year on year in local currency). Average monthly contract churn fell to 1.5% in the quarter, from 1.9% in the fourth quarter last year. Churn for the year was 1.7%, down from 1.9% in 2006.

The number of prepay customers increased by 207,000 during the quarter, while for the year the prepay base grew by 158,000 to reach 11.6 million. Quarterly monthly prepay ARPU of €18.0 was 4.1% higher in local currency than the fourth quarter last year, while the ARPU for the year was €18.2 (+4.0% year on year in local currency).

As a result, O2 UK's blended monthly ARPU of €33.9 was 4.4% higher than the fourth quarter last year in local currency, while ARPU for the year was €34.4 (+3.6% year on year), reflecting the increased proportion of contract customers in the base, customer adoption of new products and services, and the continued growth in both data and voice ARPU. On a customer level elasticity continues to be above 1.

Quarterly monthly minutes of use were up 9.8% year on year at 197 minutes a month, driven by propositions such as "Call Freedom", while minutes of use for the year were 190 (+10.6% year on year).

Quarterly monthly data ARPU of €11.1 was 9.1% higher in local currency than the fourth quarter last year, driven by growth in text message volumes, up 21.0% in the quarter, as well as increasing usage of a range of non-SMS services where revenues grew by 43.7% year on year in local currency. Data ARPU for the year was €11.0 (+8.2% year on year). The new "unlimited" data bolt-on proved successful with customers, with 59,000 customers taking this product from launch in October until the end of the year.

O2 UK's  broadband service had rolled out to 833 exchanges by the end of the quarter, giving its broadband network a population coverage of 52%, with 71,000 broadband customers at the end of 2007. The base has since grown to over 100,000 to date.

¹ 2006 base reported figures include eleven months of O2 UK (consolidated since Feb.06). 2007 guidance assumes constant exchange rates as of 2006, and exclude changes in consolidation. OIBDA excludes other exceptional revenues/expenses not foreseeable in 2007. Personnel reorganisation and Real Estate Programs are included as operating revenues/expenses, except for those decided after guidance was set at the beginning of the year (redundancies in O2 UK). For comparison, the equivalent other exceptional revenues/expenses registered in 2006 are also deducted from reported figures.