Telefónica O2 Czech Republic - 2007 Full Year Financial Results

Telefónica O2 Czech Republic, a.s. is pleased to announce its audited financial results for the fiscal year 2007. These results are consolidated and prepared according to International Financial Reporting Standards and fully include the Slovak operation.

" I am pleased that the group's results for 2007 confirmed the turnaround in trends seen already in 2006. Growth of consolidated revenues continued to be driven by improving performance of the fixed line segment and a solid growth of mobile operation in the Czech Republic. Presented results proved that our strategy to focus on growth areas as broadband, ICT and convergent services and together with the expansion in Slovakia was successful. At the same time, the group managed to maintain its efficiency in operational and capital expenditures, while absorbing the negative impact of Slovak startup. This resulted in OIBDA margin well above the average compared to peers in CEE region. These results are fully in line with our targets communicated at the beginning of the year and allow the Board of Directors to propose a dividend payment of CZK 50 per share,"said Salvador Anglada, Chief Executive Officer and Chairman of the Board of Directors of Telefónica O2 Czech Republic, when commenting on the operator's financial results.

> 5% market share in Slovakia at 2007 year end

2007 actual performance on upper range of 2006 guidance base

2008 guidance- Revenue[3]growth of 2% to 4%, OIBDA[4]growth of 0% to 2%, CAPEX around CZK 9 billion, including Slovakia

2007 dividend of CZK 50 per shareto be proposed to the AGM

Consolidated Financial Statements

Revenues, operating costs and OIBDA

Consolidated revenues (business and recurring revenues) reached CZK 63 billion in 2007, up 2.8% yoy and CZK 15.9 billion in 4Q alone, up 1.4% yoy, while consolidated business revenues grew 2.6% yoy to CZK 62.5 billion in 2007 and 1.5% yoy in 4Q 2007 to CZK 15.8 billion. In line with the previous three quarters of the year, the domestic mobile business was the key driver of this growth. Business revenues in the domestic fixed segment were flat in 2007 compared to 2006, confirming the trend seen from the beginning of the year. The contribution of the Slovak operation to consolidated revenues was still not material in 4Q 2007. Reported 2.8% growth of consolidated revenues was on the upper range of guidance for 2007 (1% - 3% revenues growth). Total consolidated operating costs reached CZK 35.7 billion in 2007, up by 4.7% yoy, while decreasing 5.4% yoy to CZK 9.5 billion in 4Q alone. Re-branding costs and staff restructuring costs incurred in 4Q 2006 were the main reasons for OPEX year-over-year decline in 4Q 2007. Consolidated OIBDA thus amounted to CZK 28 billion in 2007, up by 0.5% yoy, while OIBDA in 4Q reached CZK 6.6 billion, up 14.7% yoy. OIBDA margin (OIBDA over Business revenues) reached 44.8% in 2007 and 41.7% in 4Q 2007, compared to 45.8% and 36.9% in the comparable periods of 2006. Despite the decrease in Group OIBDA margin in 2007, largely due to dilution of Slovak operation (approx. 2 p.p. in 2007), it still remains in high level. Moreover, TelefónicaO2 Czech Republic group met its financial target for OIBDA [5], which decreased 0.4% yoy in 2007, in the middle of the narrow range communicated (-1% - 0%).

Depreciation and Amortization

Consolidated depreciation and amortization amounted to CZK 14.4 billion in 2007, a decline of 13.8% yoy.

Operating Income, Income before tax and Net income

Consolidated operating income and consolidated income before tax went up by 21.8% yoy and 23.5% yoy to reach CZK 13.6 billion and CZK 13.5 billion respectively in 2007, on the back of the decrease in consolidated depreciation and amortization and low amount of financial expenses. Consolidated net income amounted to CZK 10.4 billion and CZK 2.8 billion, up by 29.5% yoy and 138% yoy in 2007 and 4Q alone. Decrease in deferred tax expense resulting from lower income tax rates in 2008 to 2010 positively affected income tax expense in 4Q 2007.

CAPEX

Total consolidated CAPEX amounted to CZK 7.8 billion in 2007, up 20.1% yoy driven mainly by CAPEX related to start up in Slovakia. CAPEX in the Czech Republic was largely related to increasing the capacity and coverage of the GSM network, ADSL and IPTV rollout, fixed access network improvement and information systems upgrade. CAPEX in Slovakia was spent to GSM network rollout and systems deployment (billing, collection, call center, etc.). Despite the 20.1% growth in CAPEX in 2007 compared to 2006, the actual CAPEX amount of CZK 7.8 billion was well below the original target from the beginning of the year of around CZK 9 billion, but also below the guidance updated in 3Q 2007 (5 to 10% below CZK 9 billion). This confirms the Group's effort to focus on efficient CAPEX spending into the growth areas.

Free Cash Flows

In 2007, the Group confirmed its ability to generate strong free cash flow. The total amount of the Groups' free cash flows amounted to CZK 18.3 billion in 2007, down by 0.7% yoy. Operating cash flows went down 2.3% yoy to CZK 23.9 billion due to negative impact of lower D&A non-cash adjustment and higher tax paid that was partly offset by working capital improvement, while net cash used in investing activities decreased 5.7% yoy to CZK 5.6 billion.

Cash and Debt levels

The group's consolidated financial debt (long-term and short-term) amounted to CZK 9.3 billion on 31 December 2007, down by 1% compared to the end of December 2006. The amount of cash and cash equivalents and short term financial investments reached CZK 9.6 billion at 2007 year end. This resulted in net leverage of minus 0.4% and gross leverage of 11.2% compared to 2.1% and 10.6% at 31 December 2006.

CzechRepublicOverview

The Company's activities in the last quarter of 2007 continued to focus on new and enhanced products and services in the growth areas. These include broadband, IPTV and data services, IT and comprehensive customer solutions in the fixed segment. In the mobile segment Telefónica O2 continued to focus on improving of the attractiveness of voice packages with the aim of increasing voice traffic. The company also focused on marketing of its portfolio of mobile data services which enable 100% availability of data connection within a single tariff independent of technologies. In addition, the Company continued to encourage prepaid to contract migration with the aim of developing the ARPU potential of these customers.

CZ Mobile Segment Overview [6] [7]

Total business revenues in the mobile segment increased by 4.4% yoy and 1.7% yoy in 2007 and 4Q 2007 alone and amounted to CZK 32.6 billion and CZK 8.3 billion respectively.

Revenues from voice services (monthly fees, traffic and interconnection) increased in total by 4.9% yoy to CZK 24.3 billion in 2007.

The total number of registered mobile customers increased by 5.4% yoy to 5,126 thousand at the end of December 2007. The total number of contract customers reached 2,244 thousand, up by 369 thousand yoy, representing 19.7% growth following the active prepaid to contract migration strategy. Contract customers' net adds amounted to 83 thousand in 4Q 2007. Contract customers accounted for 43.8% of the total customer base at the end of 2007, up from 38.5% at the end of 2006.

The number of prepaid registered customers decreased by 108 thousand yoy (3.6% yoy) to 2,882 thousand at the end of 2007, while it increased by 76 thousand in 4Q 2007 alone. Under the methodology, which defines a prepaid customer as generating revenue in the last 3 months, the number of mobile active prepaid customers amounted to 2,536 thousand at 31 December 2007, down by 3.9% yoy.

The blended monthly average churn rate reached 1.5% in 2007, the same as in 2006, while it went up to 1.5% in 4Q 2007 alone from 1.4% in 4Q 2006.

Revenues from monthly fees increased by 10.9% yoy to CZK 7.1 billion in 2007 and by 11% to CZK 1.9 billion in 4Q alone, mainly as a result of the 19.7% yoy growth in the contract customer base.

Traffic revenues increased by 3.5% yoy to CZK 11.9 billion in 2007, on the back of 21.7% growth in outgoing traffic volumes. Average MOU per subscriber improved to 117 minutes in 2007, up 14.7% yoy, mainly due to the growing number of contract customers generating higher average traffic per customer and attractiveness of tariffs designed to stimulate traffic which were well accepted among the customers. Average MOU reached 122 minutes in 4Q 2007 alone up from 109 in 4Q06.

Interconnection revenues amounted to CZK 5.3 billion in 2007, up by 0.6% yoy. Excluding the impact of the reclassification, this category of revenues would increase 0.2% yoy.

In 2007, blended monthly ARPU[8]reached CZK 524, up from CZK 511 in 2006 (+2.5% yoy), while it reached CZK 540 in 4Q 2007 alone compared to CZK 528 in 4Q 2006. Contract monthly ARPU reached CZK 907 in 2007, compared to CZK 989 in 2006 (-8.3% yoy) and CZK 906 in 4Q 2007 (CZK 982 in 3Q 2006). The main reason for the lower contract ARPU is the dilution caused by customer migration from the prepaid to the contract segment. Prepaid monthly ARPU increased by 3.3% yoy to CZK 247 in 2007 (CZK 255 and CZK 248 in 4Q 2007 and 4Q 2006 respectively).

Total revenues from value added services (including SMS, MMS and content) increased by 3.6% yoy to CZK 4.6 billion as a result of the growing volume of SMS and MMS messages. In 2007, O2 customers sent and received in total 3,082 million SMS, up by 7.8% yoy.

Revenues from Internet and Data recorded a 15.6% yoy increase and reached CZK 2 billion. The total number of data customers (GPRS and CDMA) increased by 14.3% to 192 thousand at 31 December 2007. Data ARPU improved by 2.8% yoy to CZK 111 in 2007. Non-SMS data ARPU represented 43% of total data ARPU in 2007 compared to 41% in 2006 as a result of the growth in CDMA and GPRS customers. Data ARPU as % of blended ARPU remained stable in 2007 compared to 2006 at about 21%.

Equipment sales (including connection fees) decreased by 1.9% yoy in 2007 to CZK 1.5 billion. Other business revenues decreased by 48.2% yoy to CZK 157 million.

CZ Fixed Segment Overview [9] [10]

Total business revenues in the fixed line segment went down by 0.2% to CZK 29.6 billion in 2007 and by 1.1% yoy to CZK 7.3 billion in 4Q alone, driven by the healthy growth of revenues from broadband Internet based services, value added services and IT services, which in total almost offset declines in traditional voice revenues. Revenues from broadband, data and other value added telecommunication services accounted for 28.6% of business revenues in 2007 compared to 25.9% in 2006.

Revenues from traditional access decreased by 8.4% yoy to CZK 9.6 billion in 2007 and by 11.4% in 4Q 2007 alone. The total number of fixed telephony accesses amounted to 2,069 thousand at the end of 2007, down by 13.9% yoy mainly as the result of the strong fixed to mobile substitution effect. However, the decline in fixed telephony accesses decelerated during 2007. The net losses decreased to 66 thousand in 4Q 2007 from 114 thousand in 1Q 2007, 81 thousand in Q2 2007, 72 thousand in Q3 2007 and 135 thousand in 4Q 2006. This is a result of improving the number of gross adds and lower number of disconnections following the Company's effort to enhance the quality of fixed lines via broadband and bundled offers. Total number of customers subscribed for one of the bundled products(O₂ Duo, O₂ Trio, O₂ Duo Mobil a O₂ Internet Komplet)reached close to 100 thousand at the end of 2007.

Revenues from traditional voice services (voice traffic and interconnection) declined in total by 6.0% to CZK 9.1 billion in 2007 and only 0.4% yoy in 4Q 2007 to CZK 2.3 billion. Revenues from voice traffic declined by 17.1% yoy to CZK 4.6 billion in 2007 and by 7% to CZK 1.1 billion in 4Q alone, as a result of lower voice traffic generated by our customers, which decreased at the same time by 19% yoy to 2,702 million minutes.

Interconnection revenues went up 8.7% yoy in 2007 and amounted to CZK 4.6 billion driven by higher international transit traffic and an increase in the number of LLU. Excluding the impact of the reclassification, this category of revenues would increase 8.8% yoy.

Revenues from Internet & broadband increased in total by 16.6% yoy to CZK 3.9 billion in 2007 (by 13.8% to CZK 1 billion in 4Q 2007) as a result of 34.3% growth in revenues from broadband based services which more than offset decreasing revenues from narrowband, confirming the company's successful strategy to focus on ADSL and IPTV based services and premium content.

Revenues from broadband services (ADSL, IPTV and content) amounted to CZK 3.7 billion in 2007, up by 34.3% yoy. Of this, CZK 3.3 billion represented revenues from retail broadband (up 40.3% yoy) and CZK 391 million from wholesale ADSL services (down 1.2% yoy). The total number of ADSL accesses (retail and wholesale) reached 570 thousand at 31 December 2007, compared to 470 thousand a year ago (up 21.3% yoy). The total number of O₂ TV's customers increased to 73 thousand at the end of 2007, representing 20 thousand net adds in 4Q 2007, up from 16 thousand in 3Q 2007. The successful take up of bundled products is the main driver for O₂ TV net additions improvement in 4Q.

Revenues from data services decreased by 6.2% yoy to CZK 3.9 billion, mainly due to a 12% decline in revenues from leased lines, while revenues from data network services increased by 1.1% yoy as a result of the growth of IP Connect and IP VPN connections.

Revenues from IT services and business solutions reached CZK 1.7 billion in 2007, 2.9 times higher than in 2006, as a result of growing activities in ICT and IT services for large corporate customers and Government. Equipment sales amounted to CZK 462 million, down by 22.1% yoy due to the lower number of units sold and special discount offers.

Slovakia

In line with the previous quarters, also in 4Q 2007 Telefónica O2 Slovakia successfully continued in setting its footprint on the Slovak market. The key activities focused on marketing of company's recently introduced postpaid offer, customer care enhancement and promotion of attractive prepaid tariffs with the aim to further expand the customer base and improve the customer mix via focus on postpaid customer acquisition. This leads to higher customer activity in terms of network usage with a positive impact on ARPU and financial performance. By the end of 2007, the total number of mobile registered customers in Slovakia was 565 thousand, of which majority is still represented by prepaid customers. Although some of the SIM cards are used as second or third SIM, the market share of active customers is more than 5%. Thus, the company overachieved its target set at the beginning of 2007. Also in 4Q 2007, TelefónicaO2 Slovakia continued to focus on further roll-out of its own network, which will allow for the gradual migration of the traffic from national roaming with positive impact on margins. By the end of 4Q, the company had in operation some 550 BTS, resulting in above 60% of the traffic captured by its network. The sales network comprised of 14 own brand stores, 16 franchises and about 3,500 point of sales at the end of 2007.

Group Operating Expenses

Total Group operating costs (including the Slovak operation) amounted to CZK 35.7 billion in 2007, up by 4.7% yoy, with a 5.4% decrease to CZK 9.5 billion in 4Q 2007 alone. As it was mentioned, decline in OPEX in 4Q 2007 compared to the same period of 2006 was to large extent driven by re-branding costs and staff restructuring cost incurred in 4Q 2006.

Supplies expenses grew by 10.9% yoy to CZK 17.1 billion in 2007 (+8.6% to CZK 4.5 billion in 4Q alone). Interconnection costs increased by 10.0% yoy to CZK 11 billion in 2007 (+14.4% to CZK 2.8 billion in 4Q alone) due to interconnection charges recorded in Slovakia, higher activities in transit business and growth in mobile traffic generated by customers in the Czech Republic. Cost of goods sold went up by 14.1% yoy to CZK 3.5 billion as a result of increased costs in Slovakia, while costs in the Czech Republic grew slightly. Other supplies increased by 10.4% to CZK 2.6 billion in 2007 due to increased sub-deliveries for ICT related projects, while this OPEX category decreased 19.4% yoy to CZK 562 million in 4Q alone.

Personnel costs, including headcount reduction costs, amounted to CZK 7.1 billion in 2007, almost the same amount as in 2006, however in 4Q 2007 alone, personnel costs went down 3.3% due to staff restructuring costs incurred in 4Q 2006. The total number of Group employees reached 9,221 at 31 December 2007, down 5.9% yoy. Telefónica O2 Czech Republic headcount went down by 6.2% yoy to 8,695.

The cost of external services increased in total by 3.7% yoy and reached CZK 10.9 billion in 2007, while they decreased 13.3% yoy to CZK 3.1 billion in 4Q alone. Marketing and sales in total went up by 14.0% yoy to CZK 3.6 billion due to marketing activities in Slovakia and increased sales expenses driven by a different sales channels mix. In the Czech Republic, marketing costs went down as a result of marketing activities related to re-branding in 2H 2006. Network & IT repairs and maintenance increased by 0.3% yoy to CZK 2.6 billion in 2007 (down 17.5% yoy to CZK 622 million in 4Q). Rentals, buildings and vehicles costs reached CZK 1.9 billion, up by 14.8% yoy while utilities supplies increased by 8.2% yoy to CZK 807 million on the back of price increase. Other external services including consultancy fees, call centers and other external services went down 15.2% yoy to CZK 2 billion in 2007 and down 46% to CZK 569 million in 4Q alone due lower consultancy costs in 2007 and re-branding costs incurred in 4Q 2006.

Taxes, comprising taxes other than income tax, fees and provisions decreased by 44.4% yoy to CZK 600 million mainly as a result of lower bad debt provisions in 2007 and higher inventory provision charged in 4Q 2006.

Outlook for 2008

In 2008, the Company's activities will continue to address the current trends and customers' needs in the highly competitive Czech telecommunication market, specifically in the areas of broadband, data, value added and ICT services and convergent products. At the same time, the Company will maintain a focus on revenue retention in traditional voice services in the both fixed and mobile segments.

In the fixed line business the Company's effort will focus on consolidation of past year performance. Similarly to 2007, slow down of the fixed lines cancellation rate remains among the top priorities also in 2008. The Company believes continuing enhancement of ADSL and IPTV value proposition will further increase the value of the fixed line proposition and eventually reduce churn. Broadband services will be the fundamental product of the bundles with the main focus on value proposition accompanied by quality of service, coverage expansion and on further customer care improvements. The Company will also continue to roll out its IPTV service, improve the provisioning and customer care and increase the attractiveness of the product. We see strong potential in the area of IT and integrated customer solutions primarily for corporate and government customers, where the Company will continue to focus its efforts in 2008. The acquisition of 100% stake in Deltax Systems, one of the most prominent Czech providers of ICT solutions in the Czech Republic, will further strengthen the Company's position on the fast growing ICT market. The strategy in the mobile segment continues to focus on ARPU sustainment via onward prepaid to postpaid migration and growing non-SMS mobile data and Internet revenues through broadband based services.

The Company will continue to support the gradual deployment of the Slovak operation including the development of systems, processes and network rollout to achieve a quality and customer experience equal to O2 in the Czech Republic while applying a cost conscious approach. Activities in Slovakia will primarily focus on the improvement of customer mix via increasing proportion of postpaid customers and acquisition of new ones with the aim to increase their activity.

The key strategic effort of the management is to further increase its position on the whole broadband market and also pay TV market in a highly competitive and changing Czech telecommunication market. The main aspects of financial management of the Telefónica O2 Czech Republic Group will remain focused on profitable growth, efficient CAPEX levels and strong free cash flows.

In 2008 we expect Group revenues [11] to grow by 2 to 4% and OIBDA [12] to grow 0% to 2% compared to 2007. CAPEX is expected to be around CZK 9 billion in total. In addition, the Group reiterates its medium term guidance for 2007 - 2010 communicated in February 2007.

The Board of Directors of Telefónica O2Czech Republic intends to propose at the Annual General Meeting which is to be held at the end of April 2008 a dividend payment of CZK 50 per share, i.e. a total dividend amount of CZK 16,104 million.This proposal is based on the Company's intention not to hold surplus cash balances in the current environment and is consistent with its investment strategy to lock its investments into the growing areas (broadband, mobile, business services and Slovakia).

Attachment:

The consolidated balance sheet and income statement of Telefónica O2 Czech Republic prepared in accordance with International Financial Reporting Standards.