Telefonica SA (TEF) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen. My name is Neil, your conference coordinator and welcome to the Quarter One 02 Analyst Conference Call hosted by Mr. Peter Erskine. You remain on listen-only until the question answer session begins. However you require assistance at any time, please key star zero. May I remind you that this call is being recorded for replay purposes and I would now like to hand the conference over to Mr. Peter Erskine. Thank you.

Well, good morning everyone and thanks for dialing in. We are obviously here to talk about our first quarter key performance indicators. After a few words, I will hand over to David Finch, our CFO. I've also got Richard Poston with me, our Director of Communications and David Boyde and then we will obviously come back to your questions. Well, let me just spend a few minutes taking you through the first quarter and then David Finch would briefly talk about our guidance for the full year. My overall message is that although competition intensified in all our markets during the first quarter, we maintained our momentum and kept on growing. Our markets will stay tough for the rest of this year and as you know, we will be putting through material termination rate counts in the UK and Germany. However, we have raised our UK service revenue growth target range from 5% to 8% and now 7% to 10% and we do remain on track to get hold of our other full-year targets. Now, let me just start with the UK. Here, we saw a lot of competitor activity both from the incumbent and new entrants. However, we had a 261,000 net new customers taking the total base at the end of the quarter to 13.5m. The whole O2 proposition kept on working well. The brand, the targeted offices and services, the distribution channel mix, better network quality, all these combined to drive good quality customer growth.

We added a 149,000 contract customers, 57% of the total net ADS and we saw the recent surge in contract ARPU continue with an increase to 537 pounds, which was 12 pounds higher than the previous quarter and 33 pounds higher than the first quarter last year. Half of this is due to our success in the business market. We've invested in our own channels in the business market. We've targeted key customer segments and it's worthwhile for us. Contract SAC did increase in the quarter, but this was to acquire higher value customers. We also in the UK had a good growth in the pre-pay market despite competitions tossing up , which was reflected in an increase in pre-pay . We put on a 112,000 net new customers without a material increase in SAC and we are putting on good quality customers. ARPU in pre-pay improved to 143 pounds from 141 pounds in the fourth quarter and a 128 pounds this time last year. The growth in the UK remains strong, but it will slow inevitably as we see the impact of the termination rate count and other factors which David will talk more of in a moment.

Now, let's look at Germany and here we saw another good quarter too with 336,000 net ADS of which 209,000 were post-pay. The base at the end of the quarter was 6.32m, nearly 1.3m higher than the same time last year. Blended ARPU was EUR 367, EUR 19 ahead of first quarter last year. The proportion of contract customers in the base is now over 58%. In the contract market, our unique Genion Homezone is still the driver of our success. Increasing competitions of a high-end contract consumer, held back our contract ARPU, which fell slightly from EUR 540 to EUR 537. But, contract ARPU grew year-on-year and our Blended ARPU remains the highest in the German market. We can't a more active approach in the pre-pay market in the first quarter and that is 127,000 net new customers.

Pre-pay ARPU was stable at a EUR 138 and we saw a smooth fall in the pre-pay SAC. The other development to mention in Germany was the joint venture deal we announced with Tchibo. The thinking here is the same as for the Tesco JV in the UK. We get access to a new group of customers but someone with a strong branded presence in that segment and a very powerful retail channel. We will say more about the Tchibo partnership in due course when services are launched. In Ireland, we had a stable quarter with the customer base staying at just under 1.4m. We did well in the contract market with some customer wins in the business market helping us to deliver net ADS to 7,000. Our underlying contract ARPU increased, but we reported a slight fall from EUR 1,061a year to EUR 1,053 because we had been including some handset insurance revenue in service revenue and ARPU and we removed it with effect from this quarter.

The pre-pay customer base is almost flat, but we saw pre-pay ARPU growth from EUR 4 -- by EUR 4 to 361. Year-on-year, pre-pay ARPU growth was EUR 19, encouraging progress in mobile of the group, with ARPU up in all three of our mobile businesses. SMS growth tends to flow in the first quarter, and we saw the same seasonal effect this year as last year. But, our year-on-year estimates volume growth was 33%, the same as in the fourth quarter. Mobile data as a proportion of service revenues using a 12-month rolling basis to eliminate seasonality, increased to 20.9% and 20.1% last quarter. Non-SMS data is continuing to build up encouragingly. More than 24% of the total customer base used a non-SMS data service during the quarter. Before handing over to David, let me give you a brief update on Airwave. At the end of the quarter, we delivered the service to 38 forces and we have added one more since then. We also won a small short-term contract with a regional ambulance service to provide Airwave until the national contract is awarded. We are still hopeful of hearing the outcome of the national ambulance contract tender and one for fast service before the end of this year. I'll now hand it over to David.

Thanks Peter. I'll just talk through the guidance in a bit more detail. As Peter said we're increasing our guidance for UK service revenue growth, from 5% to 8% up to 7% to 10%. There are a number of factors contributing to this change. We just reported a good first quarter, during which year-on-year service revenue growth was running well ahead of the 7% to 10% range guided, but there are three factors that will affect service revenue growth in the second half. First, at the beginning of September, we have to cut our termination rates by around 30%. Now, termination revenue accounts for 21% of O2 UK service revenue last year, now that 6% or 7% coming of our revenue. Secondly, we lost the BTO news contract which last year contributed around 1% of UK service revenue. And thirdly, we see the market remaining competitive through the rest of the year. So, in the second half, our growth was slow, and our UK service revenue will effectively be rebased by the termination rate cut by a little over 200m Pounds per annum. However, for the year as a whole, we have increased our service revenue growth expectation in the range 7% to 10%. And we continue to expect to achieve the stable EBITDA margin in the UK in the full year on a like-to-like basis. We are also taking a termination rate cut in Germany having negotiated a 17% cut to come into effect from late December. However, this is pretty much in line with our expectations when we set the guidance for Germany in May to further strong revenue growth and an EBITDA margin in the high-teens. So, given this outcome and the continuing momentum, we just reported in the first quarter, we are not changing any of our guidance for the German business, nor are we changing our full-year CaPex guidance, which is that we expect to spend 100m to 200m Pounds more than last year. And we are continuing to work towards updating distribution policy, I'm telling you more about this in November. Peter?

Thanks David. To summarize, this is a quarter where we maintained our momentum. We kept on growing despite competition intensifying. Our businesses are all performing well and they are all in good shape to keep on doing so. But now, we are really happy to take the questions.Over to you..

Thank you Mr. Erskine. Ladies and gentlemen, your question-answer session will now begin. If you wish to ask a question, please key star one on your turndown phone. If you change your mind and decide to withdraw your question, send the key star two. All questions will be answered in the order received and you'd be advised when to ask your question, all other lines will remain on listen-only. So, I remind you again please to dial star one if you wish to ask a question. Okay, and our first question comes from Mr. Margens . Please go ahead.

Hi, are you able to talk a little bit about cost profitability? I appreciate you have kept your margin outlook the same, but I'm just wondering with the intensifying competition, if you could sort of embellish what has actually happened in terms of cost?

Well, clearly we are not publishing financial information at the moment. But I think I'll draw your attention to the points we made in the statements regarding churn and acquisition costs. So, in the UK, we have seen some increase in our acquisition cost in post-paid in particular then that's reflected in the fact that we are attracting a higher spending customer in UK post-pay, which is in turn reflected in a 12 Pounds increase in the ARPU in a quarter on a rolling basis. There has been a general drift up, which is not a new trend in churn-- in pre-pay in the UK. This is something we talked about with preliminary results in May, and that trend has continued, and I'd expect frankly most players in the industry to be experiencing the same effect, and then this also has a bearing on the level of gross adds we need to achieve in order to achieve a given level of net adds. Having said all that we are maintaining a margin guidance for the UK at a flat margin over last year on a like-to-like basis. And as we said in May, the objective in the UK is to grow as quickly as we can whilst at the same time holding the level of margin and that's how we are guiding for the full year, that's unchanged. In Germany, we guided to an EBITDA margin in the high-teens for the full year, which is an increase from the 15% that we reported for the full year to March, and again, we are not changing that guidance, and once again, I think we are confirming or reconfirming the guidance we gave in May, which was the way we are going to grow as quickly as we could in Germany whilst at the same time growing the margin to the high-teens, that objective remains the same, and so far we are on track to do that.

Thank you.

Thank you sir. And our next question comes from Sinclair from Citigroup.

Good morning. Tell me just, where you are seeing ARPU going up? Is that the cause of voice usage changes, and is it also because of different yield per minute? And I wonder if you could comment on the general shape of time, I mean -- our initial view is that, with the way competition is showing up is more in terms of subscriber acquisition costs, and special offers and changes in tariff? I wonder if you could comment on that for the rest of UK and Germany.

Well, it's different pieces really. Our ARPU 0.1, our Data ARPU's gone up. So a year ago in the UK, it was 65 pounds, it's now -- sorry at 31of March, it was 65 pounds. It's now 59 pounds. And in Germany it's gone up, March '04 it was 71, it's now 74. So Data is going up. In the UK, undoubtedly the major driver is that one, we are improving the mix. We are winning, this time close to 60% of our net ads were postpaid. And the quality is very strong, witness the fact we pulled up the postpaid ARPU from 525 to 537, and even at Christmas, at the end of December it was 504. It's gone up 30 odd pounds in six months, subtract the whole base up. So we are -- our fight into the business market as a result of having our own total sales force there is now really pulling up the postpaid ARPU. Germany, it's pretty much, much of the same, we've got, as you know the best ARPU out there. Postpaid ARPU was down two or three Euros, compared to last time, just literally because of the competitive market we had to deal a bit more, and as well as postpaid being up a bit. We also won, some new customers giving three and some times six months free-line rent to which is diluting the ARPU a little bit. But the good news is, that the total blended ARPU year-on-year is up over 5%, despite the fact we are best in the market. So, I think it's a bit of we've always said a -- more recently said the three reasons why our ARPU is going up in the UK. One US ARPU is holding steady and in fact increasing slightly. Data ARPU continues to rise. And thirdly we are winning best of customers. In terms of the shape of tariff, I think they're just getting more targeted, we haven't needed to to three. I mean it's worth saying that although in this first quarter, it's the first time we've had eight, compared to we've had three at last in stock. Weekly seems to get a little bit of traction. Tesco's really up, and it's worth saying, Tesco -- it just in four weeks from now going to be broadened the range of . I'm giving the more based, so we see, Tesco is going to get a lot, lot strong stronger in the second half here. So, it's the first quarter, we've had all eight competitors really firing, and yet our net ads in the UK, where a couple of thousand, ahead of the same quarter last year. But a much richer mix. We won a lot more postpaid in the same time last year. So all ends up, I think the tariff shape is very much about us using . We continue to offer things like our, bundles of , you've seen most recently our promotional offer of a happy hour and also two std codes at 40% off to the business customer. It's about targeted office today to targeted marketing segment.

Thank you very much.

Thank you. Our next question comes from Mr. Andrew from . Thank you.

Thanks. Good morning. Got a couple of questions. Firstly on Germany, where you mentioned increasing competition for higher end consumer subscribers. How is your contract churn developed in that market? And then, which are really the stronger competitors? Has it been, the two market leaders Deutsche Telekom and Vodafone? And have you, got it to see a little bit of extra pressure because of the bucket plans that they have introduced? And secondly, just a little bit of help with moving from quarterly ARPU in the UK to service revenue. In the first half of last fiscal year, the GAAP was about 6%, in the second half the GAAP was about 8%. At this point, would you see it at about 8% or so more or less than that? You could help us with that. Thank you.

Yes, of course, just I will take the first part of your question. stated on the service revenue as you served in Germany on contract is black. So, we are not being affected at all, but obviously we would seek to bring it down, but as you know, it's a number in the mid teens, about 16% 17%, though that's reasonably . Who is with competition? I think it's everybody, undoubtedly the big who now will take this very seriously. In is extremely aggressive in the market, it's putting a lot of money out there, as you know it was doing it's $0.03 a minute for calls fixed, et cetera, limitless -- unlimited numbers of minutes. But the good news is, it isn’t impacting us yet, we are pushing a bit harder in the market, quite frantically because we are selling for a $1b, we are able to win more customers, very good value customers with a very high output. It's worth saying that in Germany, a year ago in this same quarter, we were pleased, but we had actually put on 225,000 net charge, and this time we put on over a 100,000 more, and we haven't got to that number, but trying too hard in the prepaid market, this first quarter last year, we put on a 164,000 post paid and we were pleased within the last year with a very strong year, and yet in the first quarter this year we put on 209,000, so actually, the German momentum is increasing despite the competition. In UK, the momentum in quality and is also increasing, so we are quite encouraged with it.

But I think, yes some of the points about our proven service revenue; I think you should assume that this probably being a modest growth in the signs of that gap, as the reasons that caused the gap, the fact that has effectively reported gross and service revenues' net remain the same, but the revenue share which was the reason for the growth last year, is sort of more fully embedded in the rolling 12 months now than it was. Any question?

Dave, and our next question comes from Mr. Krishna Nair from Investing. Please go ahead.

Thanks guys, well done good set of numbers. Just a couple of things, firstly on comes the inevitable questions on competition is, is there anywhere in the UK where competition has surprised you versus what you were saying in May the result, are they positive or negative. And then secondly just on the upcoming mobile termination rate cut, are deeper than this time last year. Last year you did react by upping prepaid prices, I believe, and cutting some prepaid subsidies. You believe you will be able to do something similar this time?

Well I think as far as competition surprising us, I think acting out there that always surprises. But I do think how UK business has performed better in the first quarter than we had expected. Though in a way, we are surprised ourselves and witnessed the fact we have guidance for the year from a year start of 5% to 8%, and now 7% to 10%, in the face of very very strong competition. The mobile termination rate cuts and will we do other things as well -- off course, we always look to maximize the profitability consistent with the remaining competitors, but I think all of that is within our guidance for the year on revenue and margin performance. It is a big rate cut, it rebases our business and indeed our industry takes 7% of the revenue out of a couple of 100m. But once we have gotten that out, it comes out obviously starting September, we see the growth continuing in our business and will be paid off for new level base, thanks to the regulator.

Fine, thank you.

Thank you and our next question comes from Mr. Robert David of Lehman Brothers.

Thanks, yes. Robert David from Lehman Brothers. Just a couple of questions please. I want -- you mentioned usage trends both in the UK and Germany, I wonder if could be a little bit more specific about minutes of use, growth that you have seen in both those markets in the period, and then secondly, coming back to the question on how in the UK -- from the work that we have done, one of the areas that we can see that's delivered strong revenue growth for the operators in the UK, it's about the tariffs being pretty stable over the last year, but now seeing the Hutchison seems to have gotten its products a little bit more in order, and is now aggressively promoting on tariff setting, you can now get the 500-minute tariff promotion to half price for the full year, so effectively 12 pounds 50 for 500 minutes. I think 16 pounds gets you 25 minutes. I wonder if you think, over the next six months, there is a need to, you know, either put more minutes into those bundles or whether you can actually keep tariffs stable over the rest of the period? Thank you.

Well our major goal obviously is to keep driving up the ARPU, now the way we've done that is we lead the market on text bundles and what that meant was that we were often one of the lower cost carriers in term of cost of text per minute to the customer, but also we were winning the very high ARPU customer, who went with being a heavy texter, and that's why we've really ratcheting up the prepaid ARPU over the last two years. I think it's about targeted pricing. Are we going to match today's pricing? No, there is no need, customers are still aware they are buying a low-price voice bundle, handover is full, the handset quality is still very challenged and it will be interesting what happens to if they come up to the anniversary of their first customers, how many of those etcetera. But we are using our targeted segmented marketing approach very effectively now. We know the kind of customer we want to win, we know how to drive up the ARPU and our goal is to keep using targeted office to win those. And we will remain competitive; I think undoubtedly we feel in the channel is certainly in the first quarter of this year, and we are confident we'll continue that we've got serious momentum, we are seeing this good market is winning the kind of customer we wanted to win. And on the side of course, is worth saying not in these numbers, is Tesco, which is winning off a very different kind of customer that last reported 0.25m customer base. It's aiming to get 0.5m now in quite a sensible timeframe. And that's really ratcheting up, having learnt the ticks now, you will see in Tesco a broader range of products over the next few weeks and much more shelf space, so that we can really build on Tesco. So, I think we are really competing out there, but not on price much more on good value and good quality to our targeted segment.

All right. And then on usage trend.

Well, we are not saying this time, as you know we reported at the preliminaries the minutes of usage, and they were up variously by I think on average about 8% to 10% the minutes of use by year-on-year.

And you'll -- sort of a similar trend might have continued into Q1. Is that --?

We are reporting that right now.

Okay. Thank you very much.

Thank you. And our next question comes from Mr. Demon of Morgan Stanley. Thank you.

I think that was Mae Demon for Morgan Stanley. I have three questions first one, just back on the issue of UK competition. I think we've heard from everybody putting up the noises apart from Vodafone and Orange. So, I was just wondering what you're seeing from them this quarter in the market. And whether it's possible, but some of the growth we've seen from yourself and other player, is that the expenses of Orange and Vodafone? And second question, 3G coverage, there seems to be a little bit of an escalation of competition Orange launched saying that they have much better 3G coverage than Vodafone on their data card. I'm just wondered what your position on coverage was? What you targets are? Are you worried that there might be arms rise on 3G coverage coming in 2005? And the final question, I'm very impressed by the 24% of you base, let's say using, of more sophisticated data services, could you perhaps tell us which services were the main contributors to that usage?

It's difficult to comment on Voda and Orange even as you say they haven't reported clearly we didn't look at competition, but our main goal is to how are we performing, the general impression to now, and I don't think it's changed a lot. As Orange have lost their way a lot in the market, but on the specifics of the quarter, I think we will assimilate as you do once numbers get published. But, I'm very confident that we are performing well. The 3G coverage, I'm just amazed actually, I mean, let's put this in a context. Voda was the first out there, very commendably in the UK were it launched its data card to its corporate customers. It's been well known, but obviously that had come out a little early, they had to mile the distribution say there were certain laptops it wouldn't work on. 3Gs are very early technology, there will be launches this year and we will be competitive, we'll have coverage. But one has got to put it in a context, it's a very early adopt, which doesn't get at all material until '05. So, we will be competitive, will we have the greatest coverage, no we won't. But I promise you once it becomes an important technology that customers want, we'll be out there. And I think it's very important that we we go in cautiously at least. Voda has obviously taken a bet and put a lot CAPEX out there. Our judgment is it's very much too early, both in terms of having assets not being used and over the time 3G coming down. So, those who you presume to be paid a higher price for than you needed to. But we are spending now on 3G. I'd also say that on non-SMS data, there is a number of good signs, the BlackBerry now, bluntly when we started, was a bit of a push say, and now it's a pull, we are up to over 62,000 BlackBerry sold in each month, we are penetrating the customer base quite materially. That's going well and that's a nice revenue the Xda I and II, now exceed 200,000. That's quite material base. And the kind of services the non-SMS data user is going for, ring tones there were 2.5m downloads in quarter one, MMS is about starting to take off, our use MMS very much to show don't go too early with new technologies, we launched as you know some six to nine months after Voda, I wish we had left it longer because only now is the customer experience starting to get half decent, where most messages get through. But now 32% of my base have an MMS-capable device, and there is 1.5m customers who are now at least starting to use MMS.

Now, we're starting to get the services growing, and I think we're quite encouraged to have over 5m of our customers using non-SMS data during the last quarter.

Thank you.

Thank you. And our next question comes from Mr. Christian. Thank you.

Hi, it's Christian from Smith Barney. Just on your guidance, I was wondering if you should read anything in the overlap of the old and the new UK revenue guidance. And secondly, can you help us to understand in which sense do you drive fix-the-mobile substitution? Thank you.

Well, your first question, read into it. We've changed it. It was for the year, 5 to 8, because we've had the best of start to the year than we expected, so it's now 7% to 10%. Don't read anymore into than that please. Now, read on fix-the-mobile, we watched it, I think our fix-the-mobile convergence has been talked about for all of the 12 years I've been in the industry with very little output. I was most interested, but recently when BT announced a deal with Voda there was there was BT talking about it, but the rumors were in within a couple of days I think it was the next to your Merrill's conference as saying he didn't believe in it. I think in the end, we are very confident that we can get a lot of revenue growth with mobile, and where we should offer customers as we already do some corporate customers and fix-the-mobile product put together we do. Our German business will be launching in the autumn, the product itself launched in February-March which is the Genion for home product, which is saying we already without Genion home phone product, so you don't need a fixed phone in the home for, and what this Genion home product was offering was the customer would access with his laptop with around his home a box by wireless LAN and out from that box to get outside on to the Internet, the 3G connection would be used, so there we were saying you don't need a fixed connection in your house in order to access the Internet. We can give you good speeds via 3G. Plus our own view largely is there an awful other benefit by focusing on mobile. We will be up with the technologies we consistently set things like Bluetooth wouldn't be ready till well into next year and I think recent tests approving everybody feels that way now even though if you were originally a bit more optimistic. Our own view is wireless LAN looks interesting as a around the home good quality mobile and portable technology, but still this -- frankly, the real future we believe in the one to focus on most of our time is what we can do with mobile.

Thank you.

Thank you, and our next question comes from Victoria from. Thank you.

Hi, Victoria. Couple of questions on UK corporate if I can. I think in the last quarter you said that it was Orange you've been making most of your wins from; does that still hold true or have you also made some wins in Vodafone? The second thing is, in terms of your wins on the UK side, is that coming through price competition or is it because you've been able leverage off things like . And finally, your potential revenues that you've been getting indirectly via BT has that -- I think it's 3% before, has that declined further over this quarter? Thank you.

In terms of who are we winning it from the business I said both Orange and Voda predominantly in this area in the low end corporate because frankly the high end corporate it's quite difficult often to see how you make the profit. How we are winning? Well, first of all we built up over the last 15 months quite a strong sales results, and we got some strong office, no, it's not price, but it's things like you may remember six months ago, we were running on billboards all over the country and the Two-Minute Challenge I call it, we got something talk to you about. More recently, we launched very successfully this offer that said there were two STD codes you could pick, which you as a small business could bring for a 40% reduction. Now, yes that a targeted offer, but obviously we also win all of the rest of the ARPU from that at normal rate. So, I think it's that kind of targeted approach. Your third point, BT. Yes, well we said that we're very obviously aware that the in-house business BT has got which is about 30m pounds a year well over the next six to nine months slowly migrate that's fairly predictable, and that will start sometime this autumn. As to the rest of the business, no we haven't seen any decline I mean they are very clearly contracted to us till November, but frankly we don't revision a decline these are customers who are all on our contract, we know where they all are, we've been intimately involved with them. BT is merely been the agent and bluntly it worked, they will churn the same kind of percentage as our normal contract customers one in full. I think the upside is that no longer are we restricted to which business customers we can call on, we can now put our own resources in wherever we choose without the BT sales force saying that we are at already in that, and obviously we can ensure that when we call it's completely focused to maximize the mobile revenue. Now, we've improving the (audio gap) working on frankly since we demerged, and I think it's quite rewarding for the people indulged in delivering this to see the first of all the number of subscribers in those target segments starting to come through in line with our expectations, but better than that was rapidly rising ARPU as well. So, I think that we have prepared the business for the ending of this arrangement is absolutely evident from the figures we are reporting today.

Thank you. And our next question comes from Justin Funnell of Credit Suisse First Boston.

Thanks very much. Just a couple of questions. Just quantifying again the impact from service revenues from these changes, the impacts of the BT, what you called own use, 1% of UK service revenues, I presume what you mean there is the BTs are employees using your network. Is that correct?

Correct. And that's over a full year. Obviously, it will only be slowly phased if they start in the autumn to migrate.

Can I just ask a couple of follow-up question? Could you please just quantify and give us some guidance on the revenue impacts from losing other revenues obviously from your long-standing arrangement with BT in terms of how quickly other contracts, act as an agent for the service provider for it would be potentially terminated and moves over to Vodafone?

That's what we were discussing in the answer to the last question. There is no step change or effect. I mean, all the customers of BT acted as agents in contacting our customers contracted to O2. They think that dealing with O2 will see O2 in the screen when they switch the phone on, and they are no more. There is no more propensity to churn that there're any other post-paid customer. They have a normal sort of profile of contract renewals, and indeed some of them have got more than one-year term contracts anyway. But, the fact that the agent has effectively left the case doesn't mean that there is an increased propensity for these customers to churn. We simply quantified how many they are, because there was a widespread belief that we were far more dependant on BT than in fact we are. We are talking here about 3% of UK revenue. It all contracted to the UK and no more likely to churn than any other post-paid revenue, underpinned by the fact that we've now got rapid growth in this and smaller corporate parts of the UK post-paid market. So, we think, we're very well placed to ride through this.

When are those contracts start to be churned off? Is it from November or is it before that?

Well, I think you are asking a wrong question. It's not about those contracts can be churned off now. Voda and Orange can attack at anytime they like. The agency arrangement with BT expires in November.

Okay. And just as a follow-up question on something else if I may. We thought what you are seeing, you get close to doing a deal with KPN early this year. You appear to disagree not really on price, but on the performance or consideration you wanted more cash by wanted to offer your shares. Since that time, KPN shares have actually started to outperform your stock. If that continues, would that change your view on taking shares from KPN?

Well, I think it was dealing with the fact that when KPN bid for us on February 20, their stock was about 685. I think, today it is also shared by back this morning, they were 620. That brings down something around 10% in. When the bids were off, we were sitting just above 90, and I think this morning, we were just above 90. So point one, we've stayed, we've been up with back flat, they're down quite materially. So, there hasn't been disadvantage relativity for us. I think the KPN thing, they went to vie -- you say it wasn't priced, it was paid to all in the end that won't come back to price or value to our shareholders, and our goal now is very simple. We've got a good German operation. It has got serious momentum that is now demonstrated for eleven quarters. We said that we would get to number three, and I'm certain this quarter's result would have done everything to narrow that gap, although they haven't yet announced. We are very confident that we are driving the value in our business. What happens in the medium and long run, I don't know, but I think it's extraordinary unlikely that KPN, given their that they wouldn't come back, or going to come back in the near-term. Our goal is to grow value for our shareholders and we continue to do that.

Thank you very much.

Thank you. And our next question comes from Mr. Paul Howard.

Hi, it's Paul Howard of Cazenove. A couple of questions, just confirm on the UK. Both Tesco Mobile and Hutch roaming revenue are not included in service revenue, are they? Could you give us an idea of what trends we are seeing in other revenue in the UK? And then secondly, on Germany, I got the impression that the full-year result that actually German momentum was picking up and perhaps as a result of that, we were expecting a slightly higher growth in subscribers in Germany in the quarter. Has this competition intensified more in towards the last month or two? Or, what, you are waiting for the whole quarter?

Let's talk about other revenue, first of all. First off, you're absolutely right. The airtime sales to Tesco not been service revenue there, in other revenue. And I think it's fair to say at this stage, there is a not significant enough to make an easy difference bearing in mind, you know, that the service revenue in the UK is of the order of about well into the 3b territory. It's -- other revenue has dwindles because the sources of it are basically disappeared. So, things like the paging business have been melting away and the service provider customers that each of us acquired when we out service providers in the late 90s were dwindling. Though that trend is evident and continues and then overlaying that or overlaid on that, you have a little bit of revenue and it is quiet a little bit, frankly, at this stage coming through from Tesco and . Now, hopefully the Tesco revenue grows, but last time they reported they only had 250,000 shops. So, ambitious for, it is not a huge number yet.

I think, so far as Germany, we -- frankly it's the second best ever net adds for Germany, only beaten by last quarter. There is always seasonality but it's important to compare year-over-year. This quarter, last year, the quarter ending June, we put on 225,000 net adds and everybody felt that was very strong. Well this time we put on 336,000. And last time, within that that mix, 164,000 were post-paid. This time it's 209,000. So, we think it's a stellar performance bluntly, and shows continued momentum in the right direction. So, what's saying in the last 12 months, Germany has put on 1.3m net adds and 60% plus of that has been post-paid. So, we're very encouraged as to growth. We don't yet know what the others have done, they haven't yet reported in Germany. But, we're very - we're pleased with this. It's actually better than we'd expected at year start.

Thank you.

Thank you. Our next question comes from Mr. Morris Patrick of Bear, Stearns.

Yes, I am Morris Patrick from Bear, Stearns. Some two quick questions. Recently, you are saying on 24% of your base are now using non-SMS data. Can you give an indication of what the number was a year ago? Second question is come down because you are no longer encoding Handset insurance. Could you give us an indication of what that number was? Thank you.

Yes, I mean we've got over 5m customers on non -- I think last year, we are quickly checking around, but it looks certainly half that, at least. So, it's materially grown. It's some 2m. So, it's materially grown. David?

Handset insurance in Ireland, the number we're talking about is just a little bit below 10m EUR in a full year, though it's very small.

Fine, thank you.

Thank you. Our next question comes from Mr. Simon Weeden of Goldman Sachs.

Thanks. Two very quick questions and first on German competition with one of your -- I don't think you've touched the message, probably you are seeing a bit more life out of in the channels hint in one of your previous questions that you are looking to overtake them perhaps a just not on this you meant on that. Other is a slightly different question once if you have any plans to use or recent test any technologies that would take advantage of your spectrum in the UK . Thanks.

I think we dropped that activity. Yes, they are more activities, but we are definitely putting a lot more money into the channels. The SAC codes you mentioned are not quite materially. We largely seeing them though in very different places go up. As you know, and that sort of that business comes from service providers, which loose their margin in customer. They are also generally tending to put on a lot different mix to a lot more pre-pay than post-pay. But undoubtedly, they are throwing a lot of money at it, they've also this 3 cents a minute deal on cost of fix, which must be extremely expensive. So, if one defines activity throwing a lot of money out there yet. But I don't think, our guess would be in relying more on they report that we would have seen a real cut through in terms of the growing profitable customers with strong revenues.

Your question on the spectrum. We are running little test. We got a few things that we going to be running later this year to learn more about customer interest in some of the outputs from there. But I think it's too early to start to make any material statement. We are bluntly largely concentrating on getting ready for 3G launch with the regular spectrum and making absolutely certain we time that right and don't have any assets out there in terms of CAPEX spends. That is the earning key for . Main focus is though of getting the 3G launch right. Right mean that we don't spend a penny more than we should and only defend and grow the right kind of customers.

Thanks very much.

Our next question comes from Mr. Will Draper of .

Hi, good morning. Coming back to SACs, just for a moment. You have explained the rise in contract SACs in UK and Germany, but I wonder if you might differentiate between SRCs and SACs, perhaps quantify on a per unit basis or as a percentage of revenue, what those levels have moved up to, and whether you think we're now moving into an environment, where SACs are ratcheting back up, as to the next several quarters, whether this is just a one-off? Thanks.

I'm not in a position to provide additional quantification of SAC and retention cost. These are really just physical KPIs we're reporting today. So, we have given you few anecdotes, if you like, about the trends, but we can't go any further than that. I think it's fair to say that both the German and the UK markets are and remain, and are likely to remain for the rest of the year pretty competitive, but I think we're satisfied at the moment that we're not having to do irrational or financially unwise things with either retention or acquisition costs in order to keep the growth and the momentum going in our business.

So, when you talk about SACs, maybe you are not also including SRCs within that?

From the last time trends, what we did report was SAC plus SRC was going in a good direction downward. I think, what we are saying and what we've given you by our anecdotes, is SACs certainly in the UK contract market have gone up, and in order to ensure we keep winning the high-ARPU customer who want to win and they've gone up direction and the same in Germany.

Okay, thank you.

Thank you and our next question comes from Mr. Morten Singleton of Williams de Broe. Thank you.

Good morning. It's Morten Singleton, Williams de Broe, and two quick questions if I may. The first one just concerns your comments on re-basing associates with the termination rate reductions. I just wanted to confirm that when you talk about guidance of 7% to 10% net service revenue growth in the UK, that's not on a basis of rebased numbers for last year, but it is on a basis of absolute reported numbers for last year?

That's year-over-year, absolutely.

Absolute year-over-year. Excellent, thank you. And the second question just concerning BT again. You've talked about 1% of the service revenue is coming directly from BT business. You've also talked about 3% from BT related business, all their customers that they've put towards you. I just wanted to confirm, is that 4% in total or it is only 3% in total, 1% of which is BT direct?

It's 3% in total, of which 1% is BT direct, but I do want to make this very, very clear. The only bit that we are going to lose because it's certain, is that over the next six months or so, the 1% will slowly be migrated as you know, we are not naive on that, but the rest is no more than they are just an agent. It is on our contract, we have resourced in there, that is increasing in its fire power and we see no likelihood that will turn frankly anything like even the rates of the rest of our post-paid base. And indeed, the freedom now to work in all business customers, which was previously denied to us, is so welcome. I think it's the reason why our business ARPU and our wins in the business market is increasing in the last couple of quarters. So, where I am modeling I will forget that 3%, the only thing that is certain is that we will start to, and that was 1% over a full year, that their own users were, that we will start to in the autumn. And I'm guessing it will take six months, to have that customer base BTs only -- I think we quantify a $30m pounds to be actually quite precise that will migrate out over a full year.

That's brilliant, thank you very much. I have no further questions.

Thank you. Again ladies and gentlemen, if you would like to ask a question, please press star one now, thank you. Okay we have a further question from Mr. from Credit Suisse First Boston.

I am going to bug you, so I am going to ask you about the business thing again -- which have gone past, they obviously have infrastructure that overlaps instruments technology to airwaves. Would you -- could you see any scenario where you might buy some or all of.

Well, I think those is in the hands is - it is in administration at the moment and I understand the administration is trying to realize something for the network. As I think, an offer has been made to some of the assets in London, and it looks now as though that network is going to be physically broken up. So, there is - there are possibly a few things in that that would help us with the Airwave's rollout. But when you design a network, the precise location of the key to its performance and its always an issue, we need to try to take two parallel built networks and try to integrate them, whether or not the infrastructure of one is as much value frankly for the other. I think the point to hold is that network, that built network now to be being broken up. I think that's the most significant thing.

Did I mean it is more likely you and the other contracts in Airwave?

I am not sure that the two are actually related. really regarded and is a credible bidder. But the opportunity for some body to use that network, as a network for something is dwindling fast.

Okay, thanks.

Thank you, and our next question comes from Ms. Managers.

Hi, its Managers. I have two questions. The first one is, have you begun the process sort of getting relevant approvals from either your banks or the legal approvers for the buyback to get the - to get out of the reserve limitation. And the second one is on your medium term CAPEX level, where do you see it going on as a percentage of revenue or at a max limit level?

I think your first question is relates to our discussion at the end of the preliminary results in May, I have asked them to do it, that needs to be done ahead of the distribution policy, is that correct?

Yes.

Yeah, well I think -- all we can say today is that we're continuing to work on that, and we are very concerned that we're going to tell you more in November, and that really is all we can say. With regard to the medium term levels of capital expenditure, there are two really big moving parts in capital expenditure projections at the moment. The first one is Airwave, which we've talked about a few minutes ago, we spent something like 250m pounds on the Airwave's rollout in the year '03-'04, and I indicated that we expected to spend a bit more than that in the current year '04-'05. At the end of which that network rollout is complete, and that level of CAPEX drops right away to a maintenance level, which bearing in mind the whole network is new should be fairly low. The other is 3G, where we're also increasing the level of -- or the rate of bills in spend during the course of '04-'05, particularly in the UK. And as Peter was saying, we're working hard to have the commercial industrial strength service ready for launch at some stage in the relatively near future. So we're continuing to spend quite quickly on 3G in the UK, now how much we go on to spend after that? Will very much depend on the appetite, on the part of the customers for 3G service. If there is a big demand, then we will build faster and if there isn't, we probably won't. And then a sort of second strength to the 3G story relates to the situation in Germany, where as u know we've achieved the necessary population coverage to satisfy the regulatory requirement, and we are closing the rate of rollout now while we see what happens with the launch of the service. We've actually launched the 3G now in Germany, that happened at the beginning of this month. And then again as with the UK, we will assess where we go in terms of 3G in Germany in the light of what happens in the market. So there is a make versus buy decision to be considered in Germany. Where as our business grows in scales, we consider whether we've got sufficient revenue to justify building the network, or continue with the roaming arrangements with the mobile.

So we will take one more question, I think then we will have to draw it off. Any questions?

Okay, thank you. And our final question comes from Mr. in .

Peter talked about handsets, are you saying as very I know what you offer, but are you actually selling as a broad range of handsets or your service to new customers really concentrated in choosing a handful of models?

It's actually quite broad and getting broader. I think if you'd looked to their numbers eighteen months ago, it was Nokia and one or two other big , now Nokia slows down quite materially. Undoubtedly Samsung is left up, well up the list. Motorola has got more credible. Sony Ericsson has had some nice models and particularly in Germany, Siemens does very well. So, and then if you take within each of those manufactures, I've mentioned, we usually got at least a couple of models and sometimes there are many more. So, now it's a quite broad range. I couldn't tell you of the top of my head the model is sort of 80-20 rule, but I've given you the manufactures and I think we're selling a broad range and from an another broadening range of vendors, let me add to that, but their own equipment is increasing in importance. We had a run up this with ex one a year ago, in which we learnt a lot, the X2, we are extremely pleased at sale of performance. That was and we will be bringing out subsequent models where we've gone around the world and so is has done well for us, but that will be more along that line. As though we never -- in the medium terms here becoming colossal. But what it does allow us to offer it to our customers a very good value, usually lower end product that performs very well and in the near term we will be bringing put a good quality camera phone of our brand of at a very good price. I think yes we offer a broad range to give you a short answer.

Do you think buying power of the handsets has improved over the last year or two significantly?

Yes. I think for several reasons one, because the wind has spread i.e., Nokia is no longer so important. They crumble and with nobody being able to get arrogant, at one stage it could be Samsung becoming the new Nokia but then they have got LG in their launch in their own backyard catching up real fast. So, one, the vendor is getting a lot more competitive and that's why we have always said we would not launch 3G until there was a broad range of handset manufacture while that's proved truthful. The second thing helping us is the StarMap alliance we have got now good coverage in 10 countries and with staffing to able to go source OEM manufacture product by bringing together the clout of all of the alliance. And that's quite powerful. It's also, we would say, we benchmark real hard to make sure we are buying as well as competition based official benchmarking and of course on occasion folks join us from our competition and we see that our evidence that actually bigger scale operators internationally are buying better and the reason is because actually the vendors like most other companies become break range and even cuts a good deal and likely gets a good price. Though we are very encouraged with the trend we are able state 3G handset will be the same time to that is a 2.5:1 which is exactly where we wanted it to be.

Thanks very much.

Okay we thank you all for dialing in your questions. You can tell that we are encouraged with the results. We see continued momentum. I've already read the phrase this morning this is as good as it gets with the obvious answer is that I don't know but I'll tell you what; I see a sign of it. Despite increased competition you've already seen we've had to raise our guidance for this year in the UK that's a nice first class type problem that have to improve our revenue forecast for the year in the UK. Germany continues to pleasantly surprise us. We had not envisioned what we got in the first quarter in the way of net adds and the quality of the customer base. Airwave is now coming nicely of age giving us good revenues monthly because we have got a lot of the bigger police forces built. And Texaco is really ramping up for a relaunch in the autumn. It's learnt a lot from round 1 and to Texaco and is just the beginning of a very exciting journey. So we are confident the business is performing well and we can see continued good performance ahead. Thanks very much.

Thanks Mr. Erskine. Thank you ladies and gentlemen and that concludes your call and you may now disconnect. Thank you good morning.