Telefónica O2 Czech Republic - 2008 First Quarter Financial Results

21.4.2008

Telefónica O2 Czech Republic, a.s. is pleased to announce its unaudited financial results for the first quarter of 2008. These results are consolidated and prepared according to International Financial Reporting Standards and fully include the results of Telefónica O2 Slovakia.

"I am pleased that the group's revenues performance for the first quarter of 2008 was supported by continuing growth of our mobile segment. Our strategy in the fixed line business focusing on growth areas of broadband, IPTV and convergent services resulted in 28% growth of ADSL and IPTV customers compared to the same period last year. At the same time we were able to maintain healthy profitability level while absorbing the impact of the start up costs of our Slovak operation," 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.

1Q 2008 Group Highlights[1]

Consolidated Financial Statements

Revenues, operating costs and OIBDA

Consolidated revenues reached CZK 15.4 billion in 1Q 2008, up 1.5% yoy, while consolidated business revenues grew 1.6% yoy to CZK 15.3 billion. The Czech mobile business with 6.1% business revenues growth was the key driver of this performance. Business revenues in the domestic fixed segment went down 5.9% yoy in 1Q 2008. Total consolidated operating costs reached CZK 8.8 billion in 1Q 2008, up by 6.3% yoy. Consolidated OIBDA thus amounted to CZK 6.7 billion in 1Q 2008, down by 4.5% yoy. OIBDA margin (OIBDA over Business revenues) reached 43.8% in 1Q 2008 compared to 46.6% in 1Q 2007. The Slovak operation diluted OIBDA margin by close to 3 p.p. in 1Q 2008.

Depreciation and Amortization

Consolidated depreciation and amortization amounted to CZK 3.4 billion in 1Q 2008, a decline of 12.7% yoy.

Operating Income, Income before tax and Net income

Consolidated operating income and consolidated income before tax went up by 5.4% yoy and 7% yoy to reach CZK 3.4 billion in 1Q 2008, on the back of the decrease in consolidated depreciation and amortization. On top of that the financial income positively contributed the consolidated income before tax and net income. Consolidated net income amounted to CZK 2.4 billion, up by 5.4% yoy.

CAPEX

Total consolidated CAPEX amounted to CZK 806 million in 1Q 2008, down 1% yoy. 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 on GSM network rollout and systems deployment. Low CAPEX is mainly a result of a delay in investments which had been planned for 1Q 2008. Therefore CAPEX evolution in the first quarter does not represent the expected investments to be made in the rest of the year. We maintain our full year guidance for Group CAPEX of around CZK 9 billion.

Free Cash Flows

In 1Q 2008, the total amount of the Groups' free cash flows amounted to CZK 3.6 billion, down by 11.1% yoy. Operating cash flows went down 0.6% yoy to CZK 5.3 billion due to the decline in OIBDA and higher tax paid, while net cash used in investing activities increased 36.4% yoy to CZK 1.6 billion.

Cash and Debt levels

The group's consolidated financial debt (long-term and short-term) amounted to CZK 9.3 billion on 31 March 2008, up by 0.5% compared to the end of December 2007. The amount of cash and cash equivalents and short term financial investments reached CZK 13.4 billion at the end 1Q 2008. This resulted in net leverage of minus 4.9% and gross leverage of 10.9% compared to minus 0.4% and 11.2% at 31 December 2007.

CzechRepublicOverview

The Company's activities in the first quarter of 2008 continued to focus on new and enhanced products and services in the growth areas. These include broadband based services, IT and comprehensive customer solutions in the fixed segment. In the mobile segment Telefónica O2 continued to focus on voice traffic stimulation and marketing of its mobile data services. 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[3]

Total business revenues in the mobile segment increased by 6.1% yoy in 1Q 2008 and amounted to CZK 8.2 billion.

Revenues from voice services (monthly fees, traffic and interconnection) increased in total by 4.9% yoy to CZK 6 billion in 1Q 2008.

The total number of registered mobile customers increased by 6.6% yoy to 5,159 thousand at 31 March 2008. The total number of contract customers reached 2,306 thousand, up by 340 thousand yoy, representing 17.3% growth following the active prepaid to contract migration strategy. Contract customers accounted for 44.7% of the total customer base at the end of March 2008, up from 40.6% a year ago.

The number of prepaid registered customers decreased by 20 thousand yoy (0.7% yoy) to 2,853 thousand at the end of March 2008, while it decreased by 29 thousand in 1Q 2008 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 2,451 thousand at 31 March 2008, down by 6.2% yoy.

The blended monthly average churn rate reached 1.7% in 1Q 2008, down from 2% in 1Q 2007.

Revenues from monthly fees increased by 9.3% yoy to CZK 1.9 billion in 1Q 2008, driven by a 17.3% yoy growth in the contract customer base.

Traffic revenues increased by 3.8% yoy to CZK 2.9 billion in 1Q 2008, on the back of 14.5% growth in outgoing traffic volumes. Average MOU per subscriber improved to 117 minutes in 1Q 2008, up from 109 minutes in 1Q 2007, 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.

Interconnection revenues amounted to CZK 1.3 billion in 1Q 2008, up by 1.4% yoy.

In 1Q 2008, blended monthly ARPU [4]reached CZK 509, up from CZK 501 in 1Q 2007 (+1.6% yoy). Contract monthly ARPU reached CZK 853 in 1Q 2008, compared to CZK 910 in 1Q 2007 (-6.3% yoy). 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 0.9% yoy to CZK 237 in 1Q 2008 from CZK 235 in 1Q 2007.

Total revenues from value added services (including SMS, MMS and content) increased by 9.4% yoy to CZK 1.2 billion as a result of the growing volume of SMS and MMS messages. In 1Q 2008, O2 customers sent and received in total 816 million SMS, up by 8.8% yoy.

Revenues from Internet and Data recorded a 12.5% yoy increase and reached CZK 503 million. The total number of data customers (GPRS, CDMA and UMTS flat rate) increased by 17.9% to 205 thousand at 31 March 2008. Data ARPU improved by 5.6% yoy to CZK 113 in 1Q 2008. Non-SMS data ARPU represented 43% of total data ARPU in 1Q 2008 compared to 41% in 1Q 2007 as a result of the growth in mobile data customers.

Equipment sales (including connection fees) decreased by 7.9% yoy in 1Q 2008 to CZK 325 million. Other business revenues reached CZK 115 million.

CZ Fixed Segment Overview[5]

Total business revenues in the fixed line segment went down by 5.9% to CZK 7 billion in 1Q 2008. Revenues from broadband, data and other value added telecommunication services accounted for 31.2% of business revenues in 1Q 2008 compared to 27.9% in the same period of 2007.

Revenues from traditional access decreased by 16.6% yoy to CZK 2.1 billion in 1Q 2008 on the back of 12.8% decline in the number of fixed telephony accesses, which amounted to 1,996 thousand at the end of March 2008, mainly as the result of the strong fixed to mobile substitution effect. However, the decline in fixed telephony accesses decelerated between 1Q 2007 and 1Q 2008. The net customers decrease reached 73 thousand in 1Q 2008 compared to 114 thousand in 1Q 2007. 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 and O₂ Duo Mobil) reached some 120 thousand at the end of March 2008.

Revenues from traditional voice services (voice traffic and interconnection) declined in total by 8% to CZK 2.2 billion in 1Q 2008. Revenues from voice traffic declined by 9.8% yoy to CZK 1.1 billion in 1Q 2008, as a result of lower voice traffic generated by our customers, which decreased at the same time by 16.1% yoy to 641 million minutes. Growth of revenues from broadband based services, value added services and IT services did not offset declines in traditional voice revenues.

Interconnection revenues went down 6.1% yoy in 1Q 2008 and amounted to CZK 1.1 billion driven by decrease in revenues from incoming voice which was not fully compensated by international transit traffic and an increase in the number of LLU.

Revenues from Internet & broadband increased in total by 9.7% yoy to CZK 1 billion in 1Q 2008 as a result of 16.7% growth in revenues from broadband based services (ADSL, IPTV and content) which more than offset continuing decrease in revenues from narrowband, confirming the company's strategy to focus on ADSL and IPTV based services and premium content.

Revenues from broadband services amounted to CZK 1 billion in 1Q 2008, up by 16.7% yoy. Of this, CZK 921 million represented revenues from retail broadband (up 20.5% yoy) and CZK 90 million from wholesale ADSL services (down 11.8% yoy). The total number of ADSL accesses (retail and wholesale) reached 587 thousand at 31 March 2008, compared to 502 thousand a year ago (up 16.9% yoy). The total number of O₂ TV's customers increased to 87 thousand at the end of 1Q 2008, representing 14 thousand net adds in 1Q 2008.

Revenues from data services decreased by 4.6% yoy to CZK 985 million as a result of 18.1% decline in revenues from leased lines, while revenues from data network services increased by 10.8% yoy as a result of the growth of IP Connect and IP VPN connections.

Revenues from IT services and business solutions reached CZK 365 million in 1Q 2008, 40.9% up yoy, and were also contributed by revenues from recently acquired Deltax Systems. Equipment sales amounted to CZK 104 million, down by 1% yoy due to the lower number of units sold and special discount offers. Other business revenues went up by 16.3% yoy to CZK 171 million.

Slovakia

In 1Q 2008, the key activities in Slovakia continued to focus on marketing of company's postpaid offer, promotion of attractive prepaid tariffs with the aim to further expand the customer base and improve the customer mix, and customer care enhancement. In March, Telefónica O2 Slovakia introduced a new offer for the sole traders, entrepreneurs and small businesses. "Always More Convenient" feature allows for automatic adjustment of tariffs reflecting the actual usage level of client in particular billing period, resulting in more advantageous rates at higher usage level and savings when client calls less, respecting the seasonality of the business. These commercial efforts should lead to increase in customers' activity in terms of network usage.

During 1Q 2008, Slovak subsidiary booked provision related to uncollected receivables of initial base of post paid customers ultimately impacting Group OIBDA level.

As expected and previously reported, part of the customers acquired in initial launch campaign in Q1 2007 were using the service irregularly, resulting in limited activity level. In line with its general commercial terms, Telefónica O2 Slovakia deactivated these customers in the course of Q1 2008 resulting in 449 thousand registered prepaid customers at the period end under reporting standards comparable with other Slovak mobile operators. At the end of March 2008, number of contract customers reached 74 thousand and total customer base 523 thousand. Under the criterion taking into account the revenue generating transactions in the last 3 months, the number of mobile active prepaid customers amounted to 213 thousand. Telefónica O2 Slovakia continued rollout of its own network infrastructure and as of the end of March 2008 the company was able to capture already 65% of customer generated traffic over its network.

Group Operating Expenses

Total Group operating costs (including the Slovak operation) amounted to CZK 8.8 billion in 1Q 2008, up by 6.3% yoy.

Supplies expenses grew by 3.8% yoy to CZK 4 billion in 1Q 2008. Interconnection costs increased by 7.5% yoy to CZK 2.7 billion due to interconnection charges recorded in Slovakia and higher activities in transit business in the Czech Republic. Cost of goods sold went down by 6% yoy to CZK 766 million. Other supplies increased by 1.1% to CZK 478 million.

Personnel costs, including headcount reduction costs, amounted to CZK 1.8 billion in 1Q 2008, up 2.2% yoy. The total number of Group employees (including Deltax) reached 9,314 at 31 March 2008, down 2% yoy. Telefónica O2 Czech Republic headcount went down by 6.3% yoy to 8,609.

The cost of external services increased in total by 8.4% yoy and reached CZK 2.7 billion in 1Q 2008. Marketing and sales in total went down by 4.9% yoy to CZK 697 million. Network & IT repairs and maintenance decreased by 7.5% yoy to CZK 618 million in 1Q 2008. Rentals, buildings and vehicles costs reached CZK 530 million, up by 35.9% yoy while utilities supplies increased by 22.6% yoy to CZK 260 million on the back of price increase. Other external services including consultancy fees, call centers and other external services went up 22.8% yoy to CZK 571 million.

Taxes, comprising taxes other than income tax, fees and provisions increased by 64% yoy to CZK 328 million mainly as a result of bad debt provisions created in Slovakia.

Outlook for the rest of 2008

In the fixed line business the Company's effort will continue to focus on slowing down of the fixed lines cancellation rate. 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. 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 Deltax Systems 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 mainly in the support functions. Commercial 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 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.

We maintain our full year guidance for 2008. In 2008 we expect Group revenues [6]to grow by 2 to 4% and OIBDA [7]to grow 0% to 2% compared to 2007. CAPEX is expected to be around CZK 9 billion in total.

Attachment

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

Consolidated balance sheet and income statement.doc

97 kB (DOC)

Contact for further information:
MARTIN ŽABKA
Press Spokesman
tel: +420 800 163 342 (800 1 MEDIA)
e-mail: public.relations.cz@o2.com
http://www.cz.o2.com

About Telefónica O2 Czech Republic

Telefónica O2 Czech Republic, a.s., is the first integrated operator in the Czech Republic, formed on 1 July 2006 by the merger of the leading fixed line operator, ČESKÝ TELECOM, a.s., and the strongest mobile operator, Eurotel Praha, spol. s r.o., into a single telecommunications organization. The organization is now operating more than seven million lines, both fixed and mobile, making it one of the world’s leading providers of fully converged services.

Telefónica O2 Czech Republic offers the most comprehensive portfolio of voice and data services in this country. Special attention is paid to the exploitation of the growth potential, particularly in the data and Internet sector. Telefónica O2 Czech Republic operates the largest fixed and mobile network including a 3rd generation network, CDMA (for data) and UMTS, enabling voice, data and video transmission. Telefónica O2 Czech Republic also runs the largest network of WiFi hotspots in the country.

About Telefónica O2 Europe

Telefónica O2 Europe comprises mobile network operators in the UK, Ireland and Slovakia, along with integrated fixed/mobile enterprises in Germany and the Czech Republic - all of which use ‘O2’ as their consumer brand. Telefónica O2 Europe also owns 50% of the Tesco Mobile and Tchibo Mobilfunk joint venture businesses in the UK and Germany respectively, and has 100% ownership of Be, the UK´s leading fixed broadband provider. Additionally, the group includes the Isle of Man fixed/mobile operator, Manx Telecom.

Telefónica O2 Europe, part of the Telefónica group, is headquartered in Slough, UK, and has more than 40 million mobile and fixed customers.

About Telefónica

Telefónica is one of the world’s largest telecommunications operators by market capitalisation. Its activities are centred mainly on the fixed and mobile telephony businesses, while its broadband business is the key growth driver underpinning both.

It operates in 24 countries and its customer base exceeds 228 million globally. Telefónica’s growth strategy is focused on the markets in which it has a strong foothold: Spain, Europe and Latin America.