OPERATIONAL HIGHLIGHTS:
– Telefónica Europe met its 2008 financial targets at the top end of guidance:
– 5.9% year-on-year growth in revenues (vs. guidance of 4% – 7%)
– 4.7% year-on-year growth in OIBDA (vs. guidance of 2% – 6%)
– Total customer base up 9% to 46 million
– Best selling device iPhone tops 1 million sales in UK
– O2 outperforms UK market yet again in difficult economic times with over 10% growth in both revenues and OIBDA
– Customer satisfaction riding high – churn continues to fall to record levels while J.D. Power and Associates name Telefónica O2 UK #1 network operator in mobile pre- and post-pay, fixed and mobile broadband
– Telefónica O2 Germany returns to positive revenue growth
– Marked improvement in overall performance across Telefónica Europe Group
Matthew Key, Chairman & Chief Executive of Telefónica Europe, commented:
“Telefónica Europe has met its 2008 financial targets at the top end of our yearly guidance in spite of highly competitive markets and in extremely difficult economic conditions. Delivery of six per cent year-on-year revenue growth and five per cent growth in OIBDA in the current market conditions demonstrates an extremely strong performance. This is further evidence of the resilience of the telecoms sector, although there is no room for complacency as our industry is by no means immune. It is critical that we continue to deliver propositions and services that add real value to our 46 million customers across Europe in these market conditions.
The UK business turned in yet another outstanding performance with double digit year-on-year growth and net mobile additions in the year up 45.3% reaching 1,087,866. In Q4 we added 499,000 fixed and mobile customers and ended 2008 with a total customer base approaching 22 million (including Tesco Mobile), representing growth of 7.5% year-on-year.
This great performance in the UK was fuelled by four key areas:
· Number one in customer satisfaction – evident in lowest ever churn levels;
· Our SIM-only Simplicity tariff, which accounted for approximately a quarter of new consumer contracts and now represents over 10% of our consumer postpay base;
· The success of our products at the top end of the market, including Blackberry and iPhone;
· The success of our broadband proposition where sales in 2008 accelerated four-fold to a customer base of more than 340,000 while delivering high levels of customer satisfaction that resulted in being named as No. 1 supplier by JD Power in fixed and mobile broadband.
Our businesses in Germany, Ireland and Czech Republic also reported robust year-end results. Telefónica O2 Germany, in particular, has turned its fortunes around and, in 2009, will build on a fourth quarter that saw it return to service revenue growth and deliver OIBDA margins that are on a par with the UK. This was a fitting end to a year in which we focused on putting in place the foundations of the business to achieve a balanced approach between growth and profitability in the German telecommunications market. Telefónica O2 Ireland weathered a steadily worsening economic environment and strong competition to record significant improvements in year-on-year trends. We recorded net additions of 14,589 in the fourth quarter to total 81,561 net additions in the year. The total customer base stood at 1.7 million at the end of December, 5.0% higher than a year ago. Telefónica O2 Czech Republic hit its annual guidance and achieved a positive turnaround in its fixed-line business.
While our results appear to be bucking economic trends, we remain concerned about the current trading environment which has resulted in an overall smaller market. In times like these, execution becomes even more critical in offering customers services and propositions that they value. I believe the telecoms sector can help fuel economic recovery, provided the right regulatory framework is given. We call upon politicians, regulators and the industry to work together to ensure the regulatory clarity that will favour investments in R&D and new infrastructure.”
FINANCIAL HIGHLIGHTS
TELEFÓNICA EUROPE:
– Telefónica Europe increased its total mobile base in 2008 by 2.9 million lines, to reach 41.2 million mobile customers at the end of the year (+7.6% year-on-year).
– Telefónica Europe had a strong financial performance in 2008, with financial targets successfully achieved in a worse economic environment:
– Under guidance criteria, revenue growth in 2008 reached 5.9%[1] year-on-year, within the 4%-7% announced guidance, and reflected a more balanced contribution from the different businesses:
– Total revenue for Telefónica O2 UK had a strong 10.6% year-on-year growth in local currency in 2008, outperforming the mobile market on a leading contract churn rate and focused commercial approach around Simplicity and iPhone.
– In the fourth quarter of 2008 Telefónica O2 Germany returned to positive year-on-year growth in mobile service revenues (+0.7%) in a very competitive environment. The business ended the year with a total revenue growth of 1.5% year-on-year with the foundations of the business on track and a new commercial approach set in the last quarter of the year.
– The businesses in the Czech Republic, Slovakia and Ireland were particularly active in the fourth quarter of the year, reinforcing improving trends for the future.
– Under guidance criteria, OIBDA rose 4.7%2 in the year, meeting the 2%-6% guidance. In 2008 the OIBDA margin stood at 29.2%, broadly unchanged from 2007 in like-for-like[2] terms, as efficiency measures taken in 2007 and 2008 pay off, as well as more focused commercial activity.
– Operating Cash Flow (OIBDA-CapEx) grew 6.7% year-on-year in like-for-like2 terms, despite increased investment in Germany.
RESULTS BY REGIONAL BUSINESS UNITS
TELEFÓNICA EUROPE:
Telefónica Europe had a strong performance in 2008, despite a worse economic environment and changing patterns in customer behaviour. With the markets being affected unequally, the main common strength across Telefónica Europe has been the delivery of new propositions that anticipated customer needs in the current environment.
At the end of December 2008, Telefónica Europe total customer base reached 45.8 million (+9.0% year-on-year). Mobile customer net additions for the year were 2.9 million, reaching a total mobile customer base of 41.2 million at the end of December (+7.6% year-on-year), with good performance in both contract and prepay segments across the markets. The fourth quarter saw 0.7 million net additions, 28.1% less than in the same period of 2007, as the businesses adapted their commercial strategies to the new market environment.
Revenues in 2008 showed resilient year-on-year growth of 5.9% on a like-for-like basis[3] to reach 14,308 million euros, leveraging Telefónica O2 UK’s solid year-on-year total revenue growth of 10.6% in local currency, as well as building on positive year-on-year growth at Telefónica O2 Germany, with mobile service revenue positive in the fourth quarter. Reported revenues for the year showed a decline of 1.0%, while for the fourth quarter they were down 1.7% year-on-year, mainly impacted by sterling/euro depreciation in the period and the exclusion of Airwave.
Operating income before depreciation and amortization (OIBDA) in 2008 recorded a significant 4.7% year-on-year growth on a like-for-like basis[4], totalling 4,180 million euros, mainly driven by revenue growth and a more focused commercial approach, with the restructuring measures taken in the fourth quarter of 2007 already showing benefits. On a reported basis, OIBDA in 2008 showed a year-on-year decline of 16.0%, reflecting the proceeds from the disposal of Airwave in the second quarter of last year (1,296 million euros), and the weaker sterling/euro exchange rate. In the fourth quarter, OIBDA increased 34.0% year-on-year, mainly due to restructuring charges taken in the same period of 2007, as well as 60 million euros registered in the fourth quarter of 2008 as a result of an additional application of provisions made in respect of potential contingencies deriving from the past disposal of shareholdings, once these risks had dissipated or had not materialized, being the total amount for 2008 174 million euros.
OIBDA margin of 29.2% in 2008 was comparable to 2007 (-0.3 percentage points) on a like-for-like basis2, while for the quarter was 30.6%, 0.6 percentage points higher than in the same period of 2007 on a like-for-like basis2.
CapEx for the year was 2,072 million euros, a year-on-year increase of 2.9% on a like-for-like1 basis. operating cash flow (OIBDA-CapEx) in 2008 totalled 2,108 million euros, a significant increase of 6.7% year-on-year on a like-for-like2 basis.
TELEFóNICA O2 UK
Telefónica O2 UK outperformed the market in 2008 in all main financial and operating metrics despite the worse economic environment, with a balanced approach in the growth-efficiency equation that helped to sustain its leadership position.
It is also noteworthy that Telefónica O2 UK has topped the list of fixed and mobile broadband internet service providers (ISPs) in the UK for customer satisfaction, according to a recent report by JD Power and Associates, as well as leading on customer satisfaction for the overall mobile business among the mobile network operators. The marketing firm conducted two customer satisfaction studies based on five factors that drive overall satisfaction with the provision of mobile and fixed broadband: i) performance and reliability; ii) billing; iii) cost; iv) customer service/technical support; and v) offerings/promotions.
Net mobile additions in the year reached 1.1 million (+45.3% year-on-year), ending December 2008 with a total mobile base of 19.5 million lines (which excludes Tesco Mobile), with a 5.9% year-on-year growth. In the fourth quarter of the year, Telefónica O2 UK recorded net mobile customer additions of 390,365.
After adding 798,690 contract customers in 2008 (+35.2% year-on-year), at the end of December contract customers made up 39.1% of the total base (37.0% in December 2007). This reflects the focus on higher value customers across various segments, market leading churn levels, as well as the strength of propositions such as Simplicity, the iPhone (3G), mobile broadband, and the continued prepay to contract migration. In the fourth quarter, contract net additions totalled 177,116.
A total number of 289,176 prepay customers were added in 2008, a year-on-year growth of 82.7% to reach 11.9 million customers. In a seasonally strong quarter, prepay customers grew by 213,249, with new propositions also being introduced in the quarter, such as prepay mobile broadband, and prepay iPhone.
It is worth highlighting the 1.3% market leading contract churn achieved in the fourth quarter down from the 1.5% in the first quarter, reflecting the correct commercial focus of the company alongside market leading customer satisfaction levels in the current environment (contract churn for the year went down from 1.7% in 2007 to 1.4% in 2008). Blended churn was 2.7% for the full year, down from 2.9% in 2007.
MoU showed a robust 9.1% year-on-year growth to reach 207 minutes in 2008, mainly due to an increasing number of prepay customers benefiting from propositions such as Unlimited, while contract customers were optimizing their voice bundle utilisation in the current environment. In the fourth quarter, MoU reached 213 minutes (+8.0% year-on-year).
Telefónica O2 UK’s total ARPU reached 30.0 euros in 2008, a 1.4% year-on-year growth in local currency as a result of improved customer mix. In the fourth quarter it was 1.7% down year-on-year in local currency, reflecting the declines in both contract and prepay voice ARPUs, being partially compensated by continued growth in data ARPU.
In 2008, contract ARPU showed a year-on-year decline of 2.1% in local currency, due to the continued migration process from prepay to contract and customer propositions, such as Simplicity, which better fit customers’ expectations in the current environment, as well as the continued optimising behaviour of customers when using voice bundles. Prepay ARPU for the year declined 0.6% over 2007 in local currency, again reflecting the above mentioned migration process and also increased uptake of prepay tariffs such as Unlimited.
Data ARPU had a very strong performance in 2008, with a year-on-year increase in local currency of 9.2% to 10.3 euros (+6.6% year-on-year in local currency in the fourth quarter), mainly driven by an increase in the number of mobile broadband connections (a new prepay proposition was launched in the fourth quarter), as well as the continued success of data bolt-ons. Non-SMS data revenues increased 55.4% year-on-year in local currency in the year.
Telefónica O2 UK’s DSL broadband service added 270,157 lines in 2008, and finished the year with market leading customer satisfaction numbers. The business had another strong quarter with 73,776 net additions, leaving the total broadband customer base at 340,866 lines at the end of December.
Revenues for the year were 7,052 million euros, an increase of 10.6% year-on-year in local currency. In the fourth quarter revenues grew by 10.4% year-on-year in local currency, an acceleration compared to the previous quarter (+8.7%), reflecting the different timing for handsets shipments compared to the previous year (which will not occur in the next quarter), as well as increased activity around the iPhone towards the end of the year. Mobile service revenue for the year totalled 6,435 million euros, an increase of 10.0% year-on-year in local currency, and in the fourth quarter showed a growth rate of 8.0% year-on-year in local currency, lower than in the third quarter due to declining voice ARPUs, being offset by customer growth and the mobile data business.
Operating income before depreciation and amortization (OIBDA) totalled 1,839 million euros in 2008, an 11.1% year-on-year growth in local currency (+9.1% on a like-for-like basis[5]), leveraging more focused commercial campaigns, ongoing efficiency savings and market leading contract churn. For the fourth quarter OIBDA rose 12.3% year-on-year in local currency, while on a like-for-like basis3 it was 8.1% higher.
OIBDA margin for the year was 26.1% (0.4 percentage points lower than in 2007 on a like-for-like basis3), as customer investments in the new DSL and mobile broadband propositions throughout the year were partially compensated by efficiency improvements. In the fourth quarter, margin was 27.3%, compared to 26.8% in the same quarter of 2007 (27.8% on a like-for-like basis3).
CapEx for the year amounted to 717 million euros (+0.1% year-on-year in local currency), with operating cash flow (OIBDA-CapEx) amounting to 1,122 million euros (+15.7% year-on-year on a like-for-like basis3).
[1] Assuming constant exchange rates and excluding the consolidation of Airwave in the first quarter of 2007.
[2] Assuming constant exchange rates and excluding the consolidation of Airwave in the first quarter of 2007. Capital gain from the sale of Airwave is also excluded, as well as gains related to the real estate sale in the Czech Republic, restructuring and similar charges and the result of the application of provisions made in respect of potential contingencies deriving from the past disposal of shareholdings, once these risks had dissipated or had not materialized.
[3] Assuming constant exchange rates and excluding the consolidation of Airwave in the first quarter of 2007.
[4] Assuming constant exchange rates and excluding the consolidation of Airwave in the first quarter of 2007. Capital gain from the sale of Airwave is also excluded, as well as gains related to the real estate sale in the Czech Republic, restructuring and similar charges and the result of the application of provisions made in respect of potential contingencies deriving from the past disposal of shareholdings, once these risks had dissipated or had not materialized.
[5] Excluding restructuring charges in 2007
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