30/07/2003
Speakers: David Varney (Chairman, mmO2 plc), Peter Erskine (CEO, mmO2 plc)
We are proud of the results of our first full year of trading as an independent company. In a few minutes I will ask Peter to address the company's financial and operational performance in some detail.
This has been a year of considerable achievement for mmO2. We have undertaken major challenges in branding, operational restructuring, asset disposal, and product innovation. We have demonstrated leadership in mobile data communications across all our territories.
We have delivered against our own targets, and we have been rewarded with continuing improvement in financial and operational performance, good customer growth, and strong revenues. Our balance sheet is healthy, and we are securely positioned to build on our strengths going forward.
The challenges in the mobile data market are considerable. Among them is the rapid pace of change in the telecommunications sector. Over the course of the past year, we have exerted a positive impact on some of the factors driving those changes. Increased competition, consolidation in the market, the ongoing threat of regulation - all these have significant impact on our business, and we have met them head on.
In some instances, we have had to adapt our strategy and our operations to market realities. We have taken some difficult decisions - notably with the sale of our business in the Netherlands, and with the exceptional impairment charges taken in the second half of the year.
In each instance, we have been well served by an approach that adheres to principles but remains committed to innovative solutions at every level.
During the year, the Group has made good progress in strengthening its corporate responsibility practices. We recognise that corporate accomplishment is measured not only on the annual profit and loss statement, but in the way that a company relates to the wider community.
At mmO2, we take our responsibilities to our many communities with utmost seriousness and are committed to adding value to them, not only through our commercial activities but through active engagement with them. We are committed to building and maintaining a reserve of community and social influence, protecting the invaluable asset of our reputation, and managing the risks attendant to it. We recognise these as the key drivers in improving the long-term sustainability of shareholder value.
Over the past year, we have undertaken a range of initiatives to advance that cause. We have put in place detailed monitoring systems to measure our impact on society. We have instituted ethical procurement policies and recycling schemes. We are actively seeking to implement solutions to protect and educate potentially vulnerable customers. We have established a Corporate Responsibility Advisory Council to serve as an external check on our policies and practices. We launched "Can Do in the Community," a programme that focuses on finding ways to put our technology and skills to greater societal use. We have conducted a major review of our approach to diversity and human rights.
We developed a set of Business Principles that articulate the way we work, and how we behave, in the marketplace. We have just published our first independently verified Corporate Responsibility Report.
All these steps reflect our belief that corporate responsibility is not a separate department, co-existing alongside others, but is deeply embedded throughout the company - in our procedures, our day-to-day practices, our strategies and our attitudes.
We are delighted that our efforts have been rewarded through external recognition and inclusion in some of the main sustainability indices and funds. These include the Dow Jones Sustainability and the FTSE4Good indices, and the new UK Business in the Community Corporate Responsibility Index.
At mmO2, we are committed to the highest levels of compliance with best practice in corporate governance.
During the year, we took steps to add depth to the Board of Directors with a number of new appointments. In January, we were pleased to welcome David Chance to the Board. David served as deputy managing director at BskyB and brings expertise in subscription-based technology services, customer management and content development. In April, we further strengthened the Board with the addition of David Arculus, the chairman of Severn Trent, as a non-executive director and three new Executive Directors - they are Dave McGlade, the CEO of O2 UK, Rudolf Groeger, the CEO of O2 Germany, and Kent Thexton, O2's Chief Data and Marketing Officer.
We extend a warm welcome to each of them. Already we are the beneficiaries of their professional insight and expertise.
And now I'll hand over to Peter.
Thank you David, Ladies and gentlemen, good morning.
mmO2's first year of independence coincided with some of the most challenging times for the telecommunications industry. Few sectors in recent years have experienced as much change, and as much uncertainty as ours. But change and uncertainty also create opportunities.
Our strategy at the time of our demerger from BT in November 2001 was straightforward - to deliver long-term superior shareholder value by improving operational performance and establishing leadership in mobile data.
In the 20 months since, we have delivered strong results on those early commitments. We have achieved significant improvement in the underlying financial and operating performance of our principal businesses. We are reporting clear growth in customers, in revenue and cash flow, and a near doubling of underlying earnings.
Highlights of the year include the enormously successful roll-out of the O2 brand across all our territories, the restructuring of our business operations within the UK and Germany, the securing of a 3G licence in Ireland, and robust growth in mobile data services.
In April, we announced the sale of our Dutch business, O2 Netherlands, to Greenfield Capital Partners for €25 million - a business carried on the balance sheet at almost £1.4 billion. Selling O2 Netherlands was the right decision, enabling us to stem the ongoing value destruction and move forward.
Following the sale, we conducted additional year-end impairment reviews and as a result took exceptional impairment charges of £8.3 billion. Those charges comprise a £2.3 billion write-down of our UK assets, principally against Third Generation, or 3G, licences. They also include a £4.7 billion write-down of O2 Germany and £1.3 billion of goodwill relating to our Irish business. Partly, those write-downs stem from the acknowledgement that too much was paid for the licences at the peak of the market three years ago. Additionally, they reflect the altered conditions of the marketplace.
The write-downs leave us with a carrying value of around £10 billion, compared to almost £19 billion before the impairment. The charges and provisions for loss have no impact on the cash position of the Group and position us with a balance sheet that is based on clear and realistic assumptions about the growth potential of our business.
The charges will accelerate our progress to profitability, allowing us to become profitable sooner than we otherwise would have done.
Continued operational excellence is fundamental to our strategy. We are proud that each of our businesses - in the UK, Germany and Ireland - has improved dramatically over the year and has now matched or exceeded some of the highest levels of customer satisfaction, network quality, and cost efficiency.
Corporate Actions
During the past year the Group initiated a number of significant actions that improved performance and propelled growth. The comprehensive restructuring of our businesses in the UK and Germany involved both management and back-office operations as well as rationalisation of our retail stores. As a result, we reduced our employee base by over 2,000 which boosted our operating performance.
In the UK, we committed significant resources to improving the quality of our network, yielding numerous positive benefits for our customers. We are now experiencing our highest ever levels of network quality and, as a result, customer satisfaction has been rising steadily, and we are succeeding in attracting and retaining higher value customers.
The results are gratifying. During the year, our customer base, excluding O2 Netherlands, grew by 12 per cent to just over 18 million. In our core business, the UK market, we added approximately a million new customers, bringing the total to 12 million. This momentum has continued into the first quarter of this year, with a further 258,000 new subscribers. We also made significant progress in Germany, where in the last year our customer base grew by 25 per cent and our market share increased by over one percent. Since the year end we have now passed the important milestone of 5 million customers in Germany.
Mobile data services
The growth of mobile data services was one of the key strategic goals we identified at the demerger, and we are pleased to report real progress.
We predicted that mobile data - including interactive text services - would constitute 16 per cent of revenue in March 2003, and the actual number was 17.3 per cent - a significant increase over the previous year. That figure continues to rise and our goal is to achieve 25 per cent of revenues from data services by the end of 2004.
In the highly competitive text messaging market, we can rightly claim leadership. Across the Group more than 8.5 billion text messages were sent during the year and, in Britain, one in three mobile text messages is now initiated on an O2 phone.
In the spring of this year, we launched O2 Active, a mobile interface that significantly improves the customer experience and ease of use. The growing popularity of picture messaging and Java games and the continuing success of our interactive devices all testify to our continued commitment to innovation. Recently we have introduced trials of downloadable music and video services which have been well received in the consumer market.
In the business market we have introduced compelling new products, including the xda device and the BlackBerry where we are responsible for two thirds of all sales in Europe.
An important key to our success has been our innovative approach to the use of interactive mobile services in recent marketing campaigns. One highlight was the Big Brother 3 series, which generated more than 10 million premium rate text messages during the nine-week programme.
We continue to foresee exciting opportunities in the dynamic arena of mobile data, and we are committed to retaining our position as a mobile data leader in Europe.
I will turn now to our 3G, or Third Generation, market. We strongly believe in the benefits that a high-speed 3G network will bring to our customers and we remain committed to developing it. We do not, however, anticipate 3G becoming a significant commercial reality until late 2004 or 2005. For this reason, we took the decision to delay our launch of 3G in the UK until the second half of 2004.
Over the past year, GPRS services have taken off. A significant factor was the introduction of colour-screen handsets and other media rich products. The existing GPRS network will provide reliable nationwide coverage and the ability to roam internationally to some 26 countries. We now have nearly three quarters of a million 'active' GPRS customers, up from 200,000 at the end of last December.
In Germany, a significant step forward was the extension of our cooperative network sharing agreement with T-Mobile on the roll-out of 3G networks. This will enable O2 to launch 3G services at the same time, and with the same quality, as the market leader. Germany remains the largest market in Europe for mobile and represents a major opportunity to create substantial value for mmO2 shareholders.
In Ireland, we secured a 3G licence for €114 million, which is a realistic price. The roll-out of the network there is now underway. During the year, we also made significant progress on the rollout of the O2 Airwave digital radio system for public safety and emergency organisations. Airwave is a fully encrypted digital radio system that cannot be scanned or monitored by outsiders. Airwave handsets allow police officers in the field to communicate with one another securely with clear quality, allowing the police to keep one step ahead of criminals, and making Britain a safer place.
The business has a £2.9 billion 19-year contract with the Home Office to serve as the sole supplier of mobile radio services to all 53 police forces in England, Scotland and Wales.
The system has now been delivered to 16 forces, and is being used by 26,000 police and support staff. Our plans to complete the Airwave network by 2005 are on target.
Looking ahead, we foresee excellent opportunities to extend the Airwave technology to other public emergency services. The UK Government has recently invited tenders for the implementation of nationwide communications systems for the fire and ambulance services. We have submitted competitive bids for both.
At a time when there is heightened concern about national security and terrorist attacks, Airwave plays a vital role in the security and welfare of the nation. We anticipate that Airwave will become a significant contributor to Group revenues and profits. Without question, one of the most successful operational achievements of the year was the launch of the O2 brand. We are delighted that the brand has far exceeded our expectations for positive reception. It has won not just acceptance, but positive resonance, with customers across all our territories. We achieved total brand recognition levels of 80 per cent within 12 months - a higher rating than we ever reached with our legacy brands, which had been built up over many years.
It is notable that we established this brand profile without increasing our marketing expenditure, and through the use of innovative interactive, sponsorship arrangements with Big Brother, Arsenal, England Rugby, and, in our other territories, Bayer Leverkusen in Germany and the "You're a star" programme in Ireland.
Outlook
Going forward, we recognise there are significant and ongoing challenges in the marketplace. These include robust competition in all our territories and an uncertain economic climate.
Consolidation in the mobile communications market continues to be a driver of major change in the competitive European marketplace. In Germany, the closure of Quam and MobilCom's 3G operations reduced the number of long-term players from six to four. In Ireland, an offer to sell four 3G licences attracted only three bids. We anticipate that more industry consolidation will occur over the next few years as the number of players falls into line with realistic market prospects. In the UK, the number of competitors in the market has risen from five to six with the launch of 3 in March. Current market conditions are close to saturation, making conditions challenging.
Regulation continues to be an important feature of the commercial environment in which we operate. Even though our marketplace is highly competitive, we face the continuing threat of increased regulation, both on the national and pan-European level. To keep the wireless sector growing, we must maintain our vigorous campaign for relief from unnecessary and expensive government mandates. Our position on this has not wavered - we support rigorously open environments that sustain competition, innovation, and investment.
Our ongoing strategy is to focus on our customers, on making their experience rewarding, and on having the highest quality network to back it up. The way to do this is by offering a range of products and services that are easy to use, supported by a high level of service, and competitive, transparent pricing. As our strategy evolves, we are increasingly focussing resources on key customer segments with the goal of leading in our chosen sectors. We look to our mobile data position to help build customer differentiation. In addition, we have recently announced the formation of an innovative joint venture with Tesco to offer compelling propositions in the family market. This will launch in time for Christmas.
Our goal is to become an inseparable part of our customers' lives by knowing what is important to them, and by helping them use our devices to get it. To do so, we must have a clear understanding of what our customers want. We are therefore in the process of developing a new segmentation framework to ensure we understand the specific priorities of our customers. With this framework in place, we will be positioned to deliver a range of service packages that appeal to different customers.
We are not complacent. However, we are firmly positioned to deliver sustained progress. Our position is strong, and improving daily. We have the momentum, the brand, the lead in mobile data, and the financial controls to accomplish our goals.
The wireless industry has created a new communications marketplace that is altering our lifestyles, transforming the way we work and play, transact and interact, even saving lives. It is opening up opportunities that only a short time ago would have been unthinkable.
Our results demonstrate that we are firmly on track to take advantage of these opportunities. We have a long way to go, but we are on track. We will build on the momentum we have created.
Thank you, I will now hand back to you, David.
