O2 Sees Fiscal Year Operating Results In Line With Co Guidance

LONDON -(Dow Jones)- O2 reaffirmed Tuesday its previous guidance that its operating businesses are continuing to deliver growth in revenue and EBITDA, and are expected to report full-year financial and operating results in line with the company's most recent guidance.

In the U.K., full-year net service revenue growth is expected to be in the range 12-15%, with slower growth in the second half reflecting the impact of the approximately 30% cut in termination rates in September, the loss of the BT contract, and the general competitiveness of the market.

The full-year EBITDA margin is expected to be stable on a like-for-like basis, with the reported margin reflecting the transfer to O2 U.K. at the start of the year of a substantial part of the O2 Online and Products O2 functions.

Chief Executive Peter Erskine said: "Approaching the end of the financial year, all our businesses continue to perform well, and we expect to report in May that we have achieved all of our 2004/05 targets, and delivered superior revenue and EBITDA growth."

"All our businesses will enter the next financial year with strong momentum in their markets, built on the power of the O2 brand, attractive and innovative propositions for our customers, and effective distribution," Erskin said.

"In the U.K., our aim this year was to maintain a stable EBITDA margin and to deliver strong service revenue growth. This was achieved, and we expect to report a stable EBITDA margin for the full-year on a like-for-like basis, and service revenue growth in the 12-15% range, well ahead of our forecasts at the start of the year," he said.

In Germany, "stong service revenue growth is expected for the full-year, driven by the continuing rapid growth in the customer base and stable ARPU," O2 said in a statement.

The full-year EBITDA margin is expected to be in the high teens, with the second-half margin expected to be slightly lower than the first half, due to the significantly faster rate of customer acquisition seen during this period, O2 said.

In Ireland, Service revenue growth in the low teens is expected for the full-year, higher than previously anticipated, and expected to result in a slightly lower full-year EBITDA margin.

O2 said the current range of analysts' forecasts for full-year EBITDA (before exceptionals) is believed to be from GBP1.72bn to GBP1.78bn, with the average being GBP1.75bn.

The full-year EBITDA reported is expected to be in line with this consensus estimate, O2 said.

O2 said the current range of analysts' full-year forecasts for underlying earnings per share (before exceptional items, goodwill and UMTS licence amortisation) is believed to be from around 8.0 pence to over 9.0 pence.

"The underlying earnings per share is expected to be slightly below the mid-point of this range, reflecting higher depreciation and amortisation charges," O2 said.

"In order to deliver an enhanced customer experience and strengthen customer loyalty, O2 U.K. intends to deploy significant additional resources into customer-facing areas, including opening a fourth major U.K. customer service centre, and further expanding the O2 retail network," O2 said in a statement.

To support these initiatives O2 U.K. plans to hire 2,000 new retail, and customer service staff over the next two years, offsetting the cost of this expansion by targeting efficiencies across a wide range of managerial and administrative functions.

This is expected to result in a reduction of up to 500 permanent positions in non customer-facing areas in early 2005/06, and give rise to an exceptional charge of GBP40 - GBP45 million, to be taken in the current financial year, O2 said.

The Court approved scheme of arrangement undertaken during the fourth quarter, which includes payment of a premium of five pence per share on the 300 million shares for which a cash alternative was made available, gave rise to a total cost of GBP33 million.

The GBP18 million cost of the transaction will be charged as a non-operating exceptional item in the current financial year, with the GBP15 million cost of the five pence per share premium charged directly to reserves.

O2 said capital expenditure is expected to be towards the top of the range of GBP1.3 to GBP1.4bn previously indicated, with UMTS investment in the U.K. and in particular Germany offsetting lower than expected Airwave capital expenditure.

02 will report its results for the 12 months ending Mar. 31 on May 18.

The telco also provided preliminary guidance for the 2005/06 financial year.

In the U.K., mid-single digit growth in net service revenue is expected, reflecting the remaining five months' impact of the September 2004 termination rate cut, and continuing competition in what is now a highly penetrated mobile market, 02 said.

The EBITDA margin is expected to remain broadly stable, reflecting the competitiveness of the market, and O2 UK's programme to allocate substantial resources to develop additional customer-facing capabilities, and achieve higher long-term customer retention.

In Germany, further strong service revenue growth is expected, mainly driven by continued rapid growth of the customer base.

The EBITDA margin is expected to improve further, to around 20%, reflecting O2 Germany's continuing prioritisation of revenue growth, as well as the impact of UMTS network running costs and the continued costs of national roaming.

Group capital expenditure is expected to be in line with the total incurred in 2004/05, with higher UMTS network investment, particularly in Germany, offsetting the reduction in Airwave capital expenditure due to completion of the police network roll-out.

"Looking ahead to 2005/06 in the U.K., we expect mid-single digit service revenue growth, as new customer growth slows across the market," Erskine said.

"We are again targeting a broadly stable margin, because we plan to deploy significant additional resources into the customer-facing areas of our operations.

"This programme will include creating 2,000 new customer-facing jobs over the next two years, opening a fourth major U.K. customer service centre and expanding our retail network further.

"By delivering an enhanced customer experience, and strengthening customer loyalty, we aim to improve customer retention and reduce churn, to create a sustainable basis for enhanced long-term returns.

"We will offset the cost of this expansion by simplifying our activities in non-customer-facing areas, which will result in a reduction of up to 500 positions in these areas in early 2005/06," Erskine said.

"In Germany, this year we aimed to increase the EBITDA margin into the high-teens, and to accelerate the rate of customer and revenue growth to take advantage of the market opportunity.

"This was achieved, and we expect to report service revenue growth and an EBITDA margin for 2004/05 in line with our guidance," Erskine said.

"Our aim next year is to maintain this momentum in the German market, lifting the EBITDA margin to around 20% and delivering further strong service revenue growth, driven by sustained high-value customer growth.

"As we announced in November, we will support this rapid growth by stepping up our network investment significantly in Germany, as part of a five-year programme aiming to achieve UMTS network quality and population coverage that is competitive with the market leaders," he said.

The end of the financial year will mark the successful completion by O2 Airwave of the police network roll-out, with service delivered on schedule to all 51 forces in Britain.

"We remain confident that the next phase of growth of the Airwave business, expanding the service beyond the core police network contract, can start to be developed in early 2005/06.

"Across all the O2 businesses our aims for 2005/06 are straight-forward and clear - we will continue to drive profitable growth, and we will build for the future, by putting in place the infrastructure and capabilities that we need to deliver the best experience for our customers," Erskine said.

(END) Dow Jones Newswires "

Posted to the site on 22nd March 2005