NEWS SNAP: O2 Reports Strong 1Q Growth, Repeats Targets"

LONDON -(Dow Jones)- U.K. mobile telecommunications company O2 PLC (OOM.LN) Wednesday reported strong customer growth in the first quarter, allaying fears that subscriber growth is tailing off, and reiterated its full-year targets.

The company, which operates in the U.K., Germany and Ireland, also reported that efforts to reduce churn in the competitive U.K. market has helped stem the flow of its users migrating to other networks.

O2 added 646,000 users in the three months ended June 30, taking its total base to 24.6 million. The company's momentum in Germany continued, and it also added over 200,000 users in the highly competitive U.K. market.

O2 Chief Executive Peter Erskine said the first-quarter performance indicates the company can hit full-year growth and margin targets in Germany and the U.K.

ING Financial Markets analyst Damien Chew was pleasantly surprised at the strong U.K. customer growth and average revenue per user, or ARPU, performance.

"It's a pretty good showing," he said. Chew rates O2 at buy.

At 0731, O2 shares were 0.2%, or 0.25 pence, higher at 136.75 pence in a slightly higher U.K. market.

The U.K. business added 232,000 new customers in the first quarter, driving its total base to 14.6 million, up 8.1% compared with the end of the first quarter last year. Blended ARPU, the average of both contract and prepay users, was GBP2 lower than in the previous quarter but GBP2 higher than in the previous year. A regulator-enforced 30% cut in termination rates - the charge to connect a call between rival mobile or fixed networks - hit U.K. ARPU by GBP15.

O2's subscriber growth was in focus after rival mobile company Virgin Mobile Holdings PLC (VMOB.LN) first-quarter subscriber growth disappointed analysts earlier this week.

But Erskine said that despite reports of 100% penetration of the U.K. market, he only sees it being 75% penetrated as many users have multiple SIM cards. However, he said the company is still winning business from its competitors.

O2 reported a 3% rise in service revenue in the U.K. reflecting the termination rate cut and the loss of its contract with BT Group PLC (BT) in the second half of 2004, which reduced revenue by around 8%.

Without detailing the effect, O2 said its efforts to reduce churn in the U.K. - adding more customer service staff and offering tariff incentives to existing users - was helping to improve churn metrics.

During the second half of fiscal 2005, O2's churn rates increased into the 30% range from the mid-20% during the first half of that year. Erskine said getting back toward the levels of the first-half of fiscal 2005 was a priority.

In Germany, O2's growth driver, service revenue grew 24% at constant currency rate driven by the addition of 412,000 new customers during the first quarter to take its total base to 8.4 million, 33% higher than in the comparable period. A 17% cut to termination rates reduced revenue by around 3%.

Blended ARPU in Germany was EUR356, the highest in the German market, but down from EUR363 in the previous quarter. This drop reflected the termination cut rate, a higher proportion of prepay customers in its customer base and new contract promotions.

O2 has guided toward mid-single digit growth in U.K. net service revenue in fiscal 2006 and a broadly flat EBITDA - earnings before interest, tax, depreciation and amortization - margin. It expects strong service revenue growth in Germany and to continue to improve its EBITDA margin in the region to around 20%.

O2 also restated its fiscal 2005 results under International Financial Reporting Standards, or IFRS. The accounting shift reduced U.K. revenue by GBP108 million to GBP3.9 billion but increased its EBITDA margin to over 30%. The shifts didn't impact the company's full year targets.

Company Web site: http://www.o2.com

-By Nic Fildes, Dow Jones Newswires; 44-20-78429264; nicolas.fildes@dowjones.com

(END) Dow Jones Newswires"

Posted to the site on 20th July 2005