Nine Months Financial Results

23rd Oct 2008 15:30



Telefónica O2 Czech Republic - 2008 Nine Months Financial Results

October 23, 2008

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

"I am glad to say that after nine months of 2008 we are on track to meet the full year guidance. We were able to deliver growth while keeping the costs under control and maintaining the profitability. In today's environment we will continue with the strategy of staying close to our customers, which is the key driver of our future performance," says 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.

  9M and 3Q 2008 Group Highlights1

	9M 2008	3Q 2008
Group business revenues	CZK 47.9 bn. (+2.4%)	CZK 16.8 bn. (+5.0%)
CZ Mobile service revenues	CZK 24.2 bn. (+4.3%)	CZK 8.2 bn. (+2.2%)
OIBDA	CZK 21.5 bn. (+0.5%)	CZK 7.2 bn. (-0.5%)
OIBDA margin	44.9% (-0.9 p.p.)	43.0% (-2.4 p.p.)
Operating income	CZK 11.9 bn. (+12.3%)	CZK 4.1 bn. (+6.7%)
Net Income	CZK 9.0 bn. (+18.5%)	CZK 3.2 bn. (+18.4%)
CAPEX	CZK 4.2 bn. (-10.1%)	CZK 1.7 bn. (-7.3%)
CAPEX/Revenues	8.6%	10.3%
Net gearing2	-17.7%2
Group Headcount	9,201 (-2.0%)
CZ mobile registered customers	5,187 ths. (+4.4%)
- of which contract	2,429 ths. (+12.4%)
ADSL accesses	608 ths. (+11.6%)
O2 TV customers	108 ths.
Fixed telephony accesses	1,892 ths. (-11.3%)
SK mobile registered customers	413 ths.

  Consolidated Financial Statements

Revenues, operating costs and OIBDA

Consolidated revenues reached CZK 48.1 billion in 9M 2008, up 2.1% yoy and CZK 16.8 billion, up 5.0% yoy in 3Q alone. Consolidated business revenues grew 2.4% yoy to CZK 47.9 billion in 9M 2008 and by 5.0% to  CZK 16.8 billion in 3Q. Fixed business revenues went down 1.2% in the first nine months 2008, but recorded a 7.5% yoy growth in 3Q alone. Revenues in the Czech mobile business went up 3.7% and 2.1% in 9M and 3Q 2008. Total consolidated operating costs reached CZK 27.6 billion in 9M 2008, up by 5.2% yoy and 8.7% in 3Q alone. Consolidated OIBDA thus amounted to CZK 21.5 billion in 9M 2008, up by 0.5% yoy while it went down slightly by 0.5% to CZK 7.2 billion in 3Q alone. OIBDA margin (OIBDA over Business revenues) reached 44.9% and 43.0% in 9M and 3Q 2008 compared to 45.8% and 45.4% in the same periods of 2007. The Slovak operation diluted OIBDA margin by close to 2.5 p.p. in 9M 2008. 

 

Depreciation and Amortization

Consolidated depreciation and amortization amounted to CZK 9.7 billion in 9M 2008, resulting in a decline of 11.0% yoy.

 

Operating Income, Income before tax and Net income

Consolidated operating income and consolidated income before tax went up by 12.3% yoy and 13.4% yoy respectively both reaching CZK 11.9 billion in 9M 2008, on the back of growth in OIBDA and continuing decrease in consolidated depreciation and amortization. Consolidated net income amounted to CZK 9.0 billion, up by 18.5% yoy in 9M 2008 with an 18.4% growth to CZK 3.2 billion in 3Q alone.

CAPEX 

Total consolidated CAPEX amounted to CZK 4.2 billion in 9M 2008, down 10.1% and to CZK 1.7 billion in  3Q alone. Similarly to the previous quarters of 2008 CAPEX was spent on selective basis in the growth areas of the business. In the Czech Republic investments were directed towards increasing mobile broadband and GSM networks capacity and coverage, ADSL and IPTV capacity increase, fixed access network improvement and information systems upgrade. In Slovakia we continued in GSM network rollout and systems deployment. By the end of September 2008, more than 850 BTS were put in operation and Telefónica O2 Slovakia thus fulfilled the license conditions.

Free Cash Flows

In 9M 2008, the Groups' free cash flows amounted to CZK 12.6 billion, down by 3.5% yoy. Cash generated from operating activities went down by 10.9% to CZK 14.7 billion, driven mainly by increase in income tax paid due to higher net income and the CZK 2 billion payment related to the dispute with T-Mobile. In 3Q 2008, the company received more than 50% of the proceeds from the real estate sale which was booked in 2Q 2008. This partially compensated higher cash outflow related to higher CAPEX accounted for in 4Q 2007 but paid in 9M 2008 and resulted in 37.5% decline of net cash used in investing activities.  

Cash and Debt levels

On 9 July the company repaid its 5 years domestic bonds of CZK 6 billion and the group's consolidated financial debt (long-term and short-term) thus amounted to CZK 3.4 billion on 30 September 2008, down from CZK 9 billion at the end of June 2008. The amount of cash and cash equivalents and short term financial investments reached CZK 16.7 billion at the end of 3Q 2008 up from CZK 15.1 billion at the end of 2Q. In 3Q, Telefónica O2 continued to accumulate cash for dividend payment (CZK 16.1 billion in total) which was made on 8 October 2008, i.e. in 4Q. Proceeds from the sale of the real estate portfolio contributed significantly to the cash generation in 3Q. Combination of the cash and debt balances resulted in net leverage of minus 17.7% and gross leverage of 4.5% compared to minus 0.4% and 11.2% at 31 December 2007. 

Czech Republic Overview

The Company's activities in the third quarter of 2008 continued to focus on new and enhanced products and services in the growth areas, while protecting the traditional business. 

CZ Mobile Segment Overview3 

Total business revenues in the mobile segment increased by 3.7% yoy in 9M 2008 to CZK 25.1 billion with  a 2.1% growth to CZK 8.6 billion in 3Q alone. Mobile service revenues went up 4.3% yoy to 24.2 billion in 9M 2008 and by 2.2% to CZK 8.2 billion in the quarter.

Revenues from voice services (monthly fees, traffic and interconnection) increased in total by 2.0% yoy to  CZK 18.6 billion in 9M 2008. 

The total number of registered mobile customers increased by 4.4% yoy to 5,187 thousand at 30 September 2008. The total number of contract customers reached 2,429 thousand at the same date, up by 269 thousand yoy, representing 12.4% growth following the active prepaid to contract migration strategy. Net adds of contract customers amounted to 60 thousand in 3Q 2008 and contract customers accounted for 46.8% of the total customer base at the end of September 2008, up from 45.7% at 2Q08 and 43.5% a year ago. 

The number of prepaid registered customers decreased by 1.7% yoy to 2,758 thousand at the end of September 2008 and decreased by 59 thousand in 3Q 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  2,282 thousand at 30 September 2008, down by 6.6% yoy. 

The blended monthly average churn rate reached 1.6% in 9M 2008 and 3Q 2008, flat compared to 9M 2007, and 0.3 p.p. higher compared to 3Q 2007. 

Revenues from monthly fees increased by 8.8% yoy to CZK 5.7 billion in 9M 2008, driven by a 12.4% yoy growth in the contract customer base. In 3Q alone, this category of revenues went up 8.1% yoy to CZK 2.0 billion. 

Traffic revenues decreased 1.0% yoy to CZK 8.9 billion in 9M 2008 and 6.1% in 3Q alone, on the back of decrease in roaming abroad revenues. Average MOU per subscriber improved to 120 minutes in 9M 2008,  up from 115 minutes in the same period of 2007 (120 minutes in 3Q 2008 compared to 117 minutes in 3Q 2007).  The growing number of contract customers generating higher average traffic per customer and the attractiveness of tariffs designed to stimulate traffic, which were well received by customers were the key drivers behind that growth. By the end of September 2008, some 140 thousand customers subscribed for one of the O2 Neon tariffs, the flat rate based tariffs introduced in May.

Interconnection revenues (incoming traffic and roaming visitors) amounted to CZK 4.0 billion in 9M 2008, down  by 0.4% yoy, while they decreased 0.5% in 3Q alone driven mainly by decrease in revenues from roaming visitors due to the reduction in EU termination rates.

In 9M 2008, blended monthly ARPU4 reached CZK 519 compared to CZK 523 in 9M 2007 (CZK 524 in 3Q 2008 compared to CZK 540 in 3Q 2007). Contract monthly ARPU reached CZK 854 in 9M 2008, compared to CZK 915 in 9M 2007 (- 6.7% yoy), while it was CZK 846 in 3Q 2008, down from CZK 916 in 3Q 2007. 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 decreased by 1.9% yoy to CZK 242 in 9M 2008 from CZK 247 in 9M 2007 (CZK 256 and CZK 246 in 3Q 2007 and 3Q 2008).

Total revenues from value added services (including SMS, MMS and content) increased by 8.3% yoy to   CZK 3.6 billion in 9M 2008 (+4.6% yoy in 3Q alone) as a result of continuing growth in SMS and MMS messages volumes. In 9M 2008, O2 customers sent and received in total 2,427 million SMS, up by 8.0% yoy. 

Revenues from Internet and Data recorded an 8.1% yoy increase and reached CZK 1.6 billion in 9M 2008  (+ 5.6% yoy to CZK 556 million in 3Q alone). The total number of data customers (GPRS, CDMA and UMTS flat rate) increased by 19.0% to 217 thousand at 30 September 2008 with 5 thousand net additions in 3Q alone.  Data ARPU improved by 2.6% yoy to CZK 113 in 9M 2008 with a 0.5% yoy decline to CZK 112 in 3Q. As a result of the growth in mobile data customers non-SMS data ARPU represented 43.6% of total data ARPU in 9M 2008 and 45.7% in 3Q 2008 compared to 42.9% and 45.5% in the same periods of 2007. In line with its strategy to capitalize on customers, Telefónica O2 announced a significant expansion to 3G network coverage, which will now include another 20 to 30 towns in the Czech Republic. The company expects that over the next two to three years, more than 70% of the population in the Czech Republic will be covered. 

CZ Fixed Segment Overview5 

Total business revenues in the fixed line segment went down by 1.2% to CZK 22.1 billion in 9M 2008 but increased 7.5% to CZK 7.9 billion in 3Q alone. The strong performance in 3Q was driven by improvement in traditional business (fewer decline of fixed telephony accesses and contribution from universal service). The company expects ICT to contribute more to fixed revenues in 4Q this year and to be among the key drivers to achieve full year guidance. 

Revenues from traditional access decreased by 16.2% yoy to CZK 6.1 billion in 9M 2008 (down by 16.4% in  3Q) on the back of 11.3% decline in the number of fixed telephony accesses, which amounted to 1,892 thousand at the end of September 2008. However, net losses of fixed telephony accesses improved by 33.9% yoy in 9M 2008. In 3Q 2008, the net lines decrease reached 45 thousand compared to 58 thousand in 2Q08 and  74 thousand in 1Q 2008. This is a result of improvement in 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 190 thousand at the end of September 2008.

Revenues from traditional voice services (voice traffic and interconnection) declined in total by 2.2% to  CZK 6.7 billion in 9M 2008, but went up by 1.6% in 3Q 2008. Revenues from voice traffic declined by 7.8% yoy to  CZK 3.2 billion in 9M 2008, as a result of lower voice traffic generated by our customers, which decreased at the same time by 13.8% yoy to 1,760 million minutes. In 3Q alone, voice traffic revenues decreased 7.0% yoy and traffic went down by 11.8% yoy. Interconnection revenues went up by 3.3% to CZK 3.6 billion in 9M 2008  (+ 9.6% yoy in 3Q alone) driven mainly by higher revenues from international transit traffic and an increase in the number of ULL, which more than compensated decrease in revenues from incoming voice.

With the aim to further enhance its ADSL service and to improve market share on fixed broadband, the company significantly improved its ADSL offer in 3Q. Telefónica O2 increased the speed of its O2 Internet ADSL service by up to four times, with no changes in price. The basic speed has been upgraded to 8 Mb/s with a premium speed of 16 Mb/s. Revenues from Internet & broadband increased in total by 6.8% yoy to CZK 3.1 billion in 9M 2008 (+4.0% in 3Q alone) as a result of 11.5% growth in revenues from broadband based services (ADSL, IPTV and content) confirming the company's strategy to focus on ADSL and IPTV based services and premium content. Revenues from broadband services amounted to CZK 3.0 billion in 9M 2008, of which CZK 2.8 billion represented revenues from retail broadband (up 14.8% yoy) and CZK 253 million from wholesale ADSL services (down 15.5% yoy). The total number of ADSL accesses (retail and wholesale) reached 608 thousand at 30 September 2008, compared to 545 thousand a year ago (up 11.6% yoy). Retail ADSL accesses went up 14.3% yoy to 552 thousand in this period. The total number of O2 TV's customers increased to 108 thousand at the end of 3Q 2008. 

Revenues from data services decreased in total by 3.7% yoy to CZK 2.9 billion in 9M 2008 as a result of 17.3% decline in revenues from leased lines to CZK 1.3 billion, while revenues from data network services increased by 11.5% yoy to CZK 1.6 billion as a result of the growth of IP Connect and IP VPN connections. 

Other revenues (ICT, equipment sales and other business revenues) went up in total by 45.9% to CZK 3.2 billion in 9M 2008 driven mainly by revenues from universal service, which amounted to approximately CZK 960 million in 3Q.

Slovakia

In September 2008, Telefónica O2 Slovakia launched the new customer proposition O2 Fér (O2 Fair) with the aim of boosting the customer growth. O2 Fair is a simple tariff which unifies prepaid and contract rates and offers SIM-only products without handset subsidy. After one month, the proposition was well received by the market and resulted in an increased number of requests for mobile number portability. 

Number of registered customers in Slovakia reached 413 thousand as at 30 September 2008. Using the 3-months customer activity recognition criteria, the number of active customer reached 277 thousand (of which 199 thousand were prepaid), up 10.8% yoy driven by growth in contract customers. This confirms the stabilisation of the customer base after deactivations of inactive customers in 1Q and 2Q. 

Revenues of Telefónica O2 Slovakia more than tripled in the first nine month of 2008 compared to the same period in 2007 as a result of improving the customer mix. Following the effective measures put in place in 2Q, Telefónica O2 Slovakia experienced improvement in its credit management which led to a decrease in bad debt provisions.

Telefónica O2 Slovakia continued to rollout its own network infrastructure and by the end of the period the company put in operation more than 850 BTS and thus fulfilled the license conditions. Its network currently covers close to 90 percent of population, which is nearly 2-times more than required by the license and enables to capture some 80% of customer generated traffic on its network.  

 

Group Operating Expenses

Total Group operating costs (including the Slovak operation) amounted to CZK 27.6 billion in 9M 2008, up by 5.2% yoy with an 8.7% growth to CZK 9.8 billion in 3Q alone. 

Supplies expenses grew in total by 6.2% yoy to CZK 13.4 billion in 9M 2008 with a 17.4% increase in 3Q alone. Interconnection costs increased by 7.9% yoy to CZK 8.9 billion in 9M 2008 and by 11.5% in the quarter driven by higher cost for international transit (in line with higher transit revenues) and costs incurred in Slovakia. Cost of goods sold went down by 5.0% yoy to CZK 2.3 billion. Other supplies increased 12.5% to CZK 2.3 billion in  9M 2008 and by 63.6% yoy in the quarter largely due to costs associated to the universal service, which amounted to approximately CZK 660 million in 3Q.

 

Personnel costs, including headcount reduction costs, amounted to CZK 5.3 billion in 9M 2008, down 0.4% yoy, while they decrease 0.9% yoy in 3Q alone despite inclusion of Deltax (which was not consolidated in 2007) and higher number of employees in Slovakia. The total number of Group employees reached 9,201 at 30 September 2008, down 2.0% yoy. Telefónica O2 Czech Republic headcount went down by 4.4% yoy to 8,486 at that day. 

The cost of external services increased in total by 5.0% yoy and reached CZK 8.2 billion in 9M 2008 with  a 0.6% growth in 3Q alone. Marketing and sales in total went down by 4.1% yoy to CZK 2.3 billion. Network & IT repairs and maintenance decreased by 7.3% yoy to CZK 1.8 billion in 9M 2008 as a result of continuing efficiency improvement. Rentals, buildings and vehicles costs reached CZK 1.6 billion, up by 19.1% yoy mainly due to higher rental and service costs related to the movement into the new headquarters and rental costs incurred in Slovakia, while utilities supplies increased by 22.0% yoy to CZK 686 million on the back of electricity price increase and impact of the Slovak operation. Other external services including consultancy fees, call centers and other external services went down 15% yoy to CZK 1.2 billion in 9M 2008 with an 8.5% decrease in the quarter.

Taxes, comprising taxes other than income tax, fees and provisions increased by 42.8% yoy to CZK 740 million. Provisions for bad debts booked in Slovakia in 1Q and 2Q were the key driver for this growth, while in 3Q their amount significantly decreased which resulted in only 7.2% growth of this cost category in 3Q.

Outlook for the rest of 2008

Following the presented results for the first nine months of 2008 the company reiterates its 2008 full year guidance range. Continuous deceleration of fixed accesses decline, growth in broadband, strong contribution of ICT revenues and higher contribution from Slovakia are the key drivers for 4Q to achieve Group's revenues6 growth between 2 and 4% in 2008 compared to 2007. Continuous strict financial discipline focused on efficient operation and lower dilution of Group's margin from Slovak operation will result in 0% to 2% growth in Group's OIBDA7. Group CAPEX is expected to reach some 5 to 10% below originally estimated CZK 9 billion. 

Attachment:

The consolidated balance sheet and income statement of Telefónica O2 Czech Republic prepared in accordance with International Financial Reporting Standards (all figures in CZK million).

Contacts

Martin Žabka Press spokesman Telefónica O2 Czech Republic, a.s. [email protected] t 800 163 342 (800 1 media)

About Telefónica O2 Czech Republic 

Telefónica O2 Czech Republic is a major integrated operator in the Czech Republic. It 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. The organization offers the most comprehensive portfolio of voice and data services in this country. It is paying special attention 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 is also a notable provider of ICT services.

About Telefónica O2 Europe

Telefónica Europe is a business division of Telefónica comprising mobile, fixed, and DSL operations in the UK, Ireland, the Isle of Man, Germany, the Czech Republic, and Slovakia. With the exception of Isle of Man, all the operating businesses use 'O2' as their consumer brand. Telefónica Europe also has 50% ownership of the UK and Irish Tesco Mobile and German Tchibo Mobilfunk joint venture businesses. Telefónica Europe is headquartered in Slough, UK, and has 43 million mobile and fixed customers.

INCOME STATEMENT	Jan - Sep 2008	Jan - Sep 2007
Business revenues	47,935	46,796
Other recurring revenues	168	305
Revenues	48,103	47,101
Internal expenses capitalized in fixed assets	298	394
Operating expenses	(27,586)	(26,219)
Other operating income/(expenses)	(16)	108
Gain on sale of fixed assets	828	35
Impairment of fixed assets	(87)	11
OIBDA	21,540	21,431
Depreciation and amortization	(9,680)	(10,874)
Operating Income	11,861	10,557
Net financial income (expense)	35	(66)
Income before tax	11,895	10,491
Income tax	(2,890)	(2,894)
Net Income	9,005	7,597
BALANCE SHEET	30.9.2008	31.12.2007
Non-current assets	85,238	94,192
- Intangible assets	8,359	8,485
- Goodwill	13,448	13,320
- Property, plant and equipment and investment property	63,071	71,809
- Long-term financial assets and other non-current assets	360	577
- Deferred tax assets	-	-
Current assets	28,017	19,032
- Inventories	734	853
- Trade and other receivables	10,453	8,548
- Current tax receivable	82	8
- Short-term financial investments	41	48
- Cash and cash equivalents	16,708	9,576
Non-current assets classified as held for sale	55	328
Total assets	113,310	113,552
Equity	75,711	82,792
Non-current Liabilities	6,704	9,018
- Long-term financial debt	2,838	3,062
- Deferred tax liabilities	3,147	3,353
- Long/Term Provisions	507	2,150
- Other long/term liabilities	213	452
Current Liabilities	30,895	21,742
- Short-term financial debt	539	6,207
- Trade and Other payables	10,844	11,080
- Current tax payable	152	870
- Short-term provisions and other liabilities	19,360	3,586
Liabilities assoc. with non-current assets classified as held for sale	-	-
Total Equity and Liabilities	113,310	113,552

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1 Comparative period 9 months and 3 months to 30 September 2007

2 Long and short term financial debt less cash and cash equivalents and short-term fin. investments over equity

3 Figures are shown net of inter-segment charges between fixed and mobile segment

4 Including inter segment revenues

5 Figures are shown net of inter-segment charges between fixed and mobile segment

6 In terms of guidance calculation, Revenues represent business revenues only

7 In terms of 2008 guidance calculation, OIBDA excludes other exceptional revenues/expenses not foreseeable in 2008. For comparison purpose, the equivalent other exceptional revenues/expenses registered in 2007 are also deducted from reported figures (the only unforeseeable expense deducted from 2007 OIBDA was the impairment charge).

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