O2 Germany operating review

O2 Germany now includes Telefónica Deutschland and comparable 2006 figures have been restated on this basis. Total revenues in the fourth quarter were €929 million, a decrease of 0.3% year on year compared to the same period of 2006. For the full year total revenues were €3,541 million, an increase of 6.7% compared to the 11 month period to 31 December 2006. On a like for like basis, revenue declined by 1.9%.

Mobile service revenue for the quarter was €725 million, down 6.5% compared to the same period last year, reflecting the continued ARPU weakness in the German market and the impact of the approx. 10% termination rate cut in November 2007, partly offset by growth of the customer base. The termination rate cut reduced fourth quarter service revenue by 0.6%. Mobile service revenue for the year was €2,901 million, a year on year decrease of 5.1%.

Operating income before depreciation and amortisation (OIBDA) for the fourth quarter was €17 million, a decrease of 77.9% compared to the same period in 2006.  This included non-recurrent charges totalling €151 million, the majority of this reflecting the cessation of the national roaming contract with T-Mobile, along with additional personnel reorganisation charges to enable future efficiency savings. The restructuring programme commenced in the second quarter is progressing on schedule, with the majority of the 700 employees involved having left the business by the end of the year.

OIBDA for the full year  totalled €473 million, a decline of 18.9% compared to the 11 month period to 31 December 2006. On a like for like basis the decline was 24.2%. Excluding all one-off charges during the year (which totalled €247 million), OIBDA was 15.4% ahead of the same period last year with growth of 23.5% compared to the 11 month period to 31 December 2006.

O2 Germany guidance ¹ for the full year 2007 was partially met, with 6.7% year on year growth in revenues (vs. guidance of 7% - 10%) and 23.8% year on year growth in OIBDA (vs. guidance of 21% - 25%).

OIBDA margin in the fourth quarter was 1.8% and for the full year was 13.3%; excluding the personnel reorganisation and other charges it would have been 18.1% and 20.3% respectively.

The business traded well in the quarter, with gross additions up 63.3% year on year. Net additions in the quarter reached 303,000 customers, while for the full year they were 1.4 million, taking the mobile customer base to 12.5 million, 13.1% higher than at the same time last year. The Tchibo Mobile customer base grew by 81,000 to 1.18 million by the end of the quarter, while the Fonic brand added 129,000 customers to end the year with a base of 200,000.

O2 Germany added a total of 244,000 net contract customers in the quarter, with 756,000 for the full year. Quarterly monthly ARPU in the fourth quarter was €32.3, 17.6% lower than the same quarter last year. For the year contract ARPU was €34.1, 13.7% lower than 2006. This reflected the impact of the approx. 10% termination rate cut in November 2007, the level of competition in the German market and the migration of the existing customer base to new customer offers. The Genion S/M/L base reached 2.14 million customers at the end of the year.

A total of 369,000 prepay customers were added during the quarter, while 310,000 existing customers were also removed from the base after an analysis of the contribution of prepay customers to revenue generation. This resulted in net additions in the quarter of 59,000 customers, with 691,000 for the full year. On our 3 month active criteria the prepay base at the end of the year was 6.23 million. Using a 12-month active basis, in line with market practice, the prepay customer base would be 8.04 million, with the total customer base at 14.28 million. However, the key metric for the future is revenue, rather than customer market share.

Quarterly monthly prepay ARPU of €6.4 was 22.8% lower than the fourth quarter last year, reflecting the market factors mentioned above, while for the year prepay ARPU was €6.7, a decline of 23.5% compared to 2006.

Blended quarterly monthly ARPU in the fourth quarter was €19.4, 17.9% lower than the same quarter last year. Blended ARPU for the year was €20.4, a decline of 15.7% compared to 2006.

Blended quarterly monthly minutes of use grew by 3.7% year on year to 134 minutes, driven by new propositions such as Genion S/M/L/XL and new prepay offers. Minutes of use for the year were 131, an increase of 3.0% compared to last year.

Quarterly monthly data ARPU was €5.1, 12.8% lower then the fourth 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 tariffs. Data ARPU for the year was €5.1, 10.9% lower than 2006, although total data revenues were flat year on year with a 12.8% increase in non-SMS data.

O2 DSL had acquired 75,000 customers by the end of the quarter, with a strong order book of circa 50,000 which were not reflected in the net additions number for the quarter. Telefónica Deutschland reported 671,000 ULL lines in total at the end of December, from around 187,000 lines at the end of the fourth quarter in 2006. Equivalent ADSL lines in service reached 837,000 at the end of December, from 619,000 at the end of December last year.

¹ 2006 base reported figures include eleven months of O2 Germany (consolidated since Feb.06). 2007 guidance exclude changes in consolidation. OIBDA excludes other exceptional revenues/expenses not foreseeable in 2007. Personnel reorganization 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 Group). For comparison, the equivalent other exceptional revenues/expenses registered in 2006 are also deducted from reported figures.