Telefónica O2 Czech Republic operating review

At the end of June, the total fixed and mobile accesses of Telefonica O2 Czech Republic, including Slovakia, stood at 8.5 million, an increase of 0.5% year-on-year, as the growth in Czech mobile and broadband accesses offset the losses in the Czech fixed telephony business and the deactivation of inactive customers in Slovakia. The total number of customers currently subscribing to a bundled product in the Czech Republic amounted to 142,565 at the end of June 2008.

Fixed telephony accesses amounted to 1.9 million at the end of June, a decrease of 12.2% year-on-year, mainly as the result of fixed to mobile substitution. However, the trend in fixed telephony access net losses improved year-on-year from 80,306 in the second quarter last year to 73,568 in the first quarter of 2008 and 57,898 in the second quarter. For the first half, line net losses improved 32.7% year-on-year.

The total number of retail Internet broadband accesses reached 540,372 (+16.6% year-on-year) with 12,928 net customers added in the quarter and 30,983 in the first half. The total number of TV customers increased by 10,745 in the second quarter and by 24,753 in the first half to reach 97,918.

The total number of mobile customers in the Czech Republic increased by 6.0% year-on-year to reach 5.2 million at the end of June, mainly driven by the increase in the contract customer base which reached 2.4 million at the end of June (+14.1% year-on-year) with net additions of 63,577 in the quarter (125,159 in the first half). The prepay customer base was flat year-on-year at 2.8 million. Telefonica O2 Slovakia deactivated additional customers during the quarter due to limited activity levels, resulting in a closing base of 394,673 registered customers at the end of June 2008.

In the Czech Republic, churn reached 1.6% in the first half, stable year-on-year and 0.2 percentage points down quarter on quarter.

MoU in the second quarter grew by 2.4% year-on-year to reach 120 minutes in the first half of 2008 (+4.3% year-on-year), mainly due to the growing number of contract customers and tariffs designed to stimulate traffic.

Total mobile ARPU in the Czech Republic in the second quarter declined 1.1% year-on-year in local currency, reaching 20.5 euros for the first half (+0.4% year-on-year). Contract ARPU in the second quarter declined 6.1% year-on-year in local currency mainly due to the dilution caused by customer migration from the prepay segment. For the first half contract ARPU was 34.0 euros, a decline of 6.1%. Prepay ARPU in the second quarter decreased 3.2% year-on-year in local currency, reaching 9.8 euros in the first half (-1.2% year-on-year). Data ARPU increased by 5.6% year-on-year in local currency to 4.5 euros in the first half as a result of the growth in mobile data customers.

Revenues for Telefonica O2 Czech Republic in the second quarter were 0.6% higher year-on-year than in the same period of 2007 in local currency, leading to a 1.1% year-on-year increase in the first half to reach 1,236 million euros. The Czech mobile business continued to be the key driver, with service revenue growth of 4.1% year-on-year in the second quarter and 5.4% in the first half in local currency. Traditional fixed revenues for the first half fell by 10.3% year-on-year in local currency, with fixed Internet, broadband and TV revenues showing a 8.3% year-on-year growth in local currency.

Operating income before depreciation and amortization (OIBDA) in the second quarter increased 9.1% year-on-year in local currency, mainly due to the gain on the real estate sale  offsetting losses in Slovakia. For the first half OIBDA totalled 580 million euros, an increase of 3.2% in local currency year-on-year. On a like for like basis4, OIBDA would have declined by 1.3%, mainly as a result of losses in the Slovak business. OIBDA margin was 49.0% in the second quarter compared to 45.2% in the second quarter 2007, while for the first half margin was 47.0% compared to 46.0% in the first half last year. On a like for like basis , margin in the first half was 45.2% compared with 46.2% in the first half of 2007, with the Slovak operation being responsible for close to 3 percentage points margin dilution in the first half of 2008.

Capex amounted to 96 million euros in the first half resulting in an Operating Cash Flow (OIBDA-CapEx) for the first half of 484 million euros.