Board of Directors' Report on Business Activity

  • The Czech telecommunications market in the first half...
  • Telefónica Czech Republic Group in the first half of...

Letter from the Chairman
of the Board of Directors

Dear Shareholders

Allow me to look back at the activities and results of the Telefónica Czech Republic Group in the first half of 2011.

Given the challenging external environment, I consider our results for the first six months of this year as satisfactory. We succeeded in maintaining a solid growth of our customer base in key areas, which include fixed and mobile broadband internet and mobile contract customers. It shows that our strategy – to offer services which respond to the customers’ needs – is on the right track. Our simple and comprehensible market proposition helped us to maintain our customer adds momentum in Slovakia.

In the past half-year, the household spending continued to be weak which resulted in only a slow recovery of our customers’ spend, while the demand in the government segment declined, which impacted mainly our revenues from ICT services. Our results were also influenced by the regulation, especially further cuts in mobile termination rates and lower roaming prices. In addition, we had to contend with strong competitive pressures in all areas of our business.

In the fixed access segment, the launch of VDSL-based broadband internet further improved the competitive position of our offer, which has been met with a lot of interest from our existing customers and which will help us maintain our Average Revenue Per User (ARPU) and reduce the churn rate. The popularity of our xDSL services helped to sustain a two-digit rate of growth of their user base and slow down the rate of decline in the number of fixed accesses. This, together with our measures focused on the reduction of the decline of traditional voice lines, succeeded in slowing down the rate of fixed accesses’ decline by 6.2% year on year in the first half of 2011 to 58 thousand.

In the mobile segment we continued with the migration of our prepaid customers to contracts. The growth in the mobile internet contract customer base helped us achieve an increase of 93 thousand in the total mobile contract customer base in the first half year and out-perform the competition. Our small business and home office customers benefited from an improved access to our call centre operators and dedicated priority service desks staffed with qualified assistants which we set up in selected brand stores. In March, we cut the data roaming prices – both the base rates and the prices of the majority of bundles. Our pricing offer for surfing online within the EU was the most competitive on the market.

As regards mobile broadband internet, we continued to roll out our 3G network coverage. Early in the year we entered into an agreement with T-Mobile for the construction and sharing of 3G network infrastructure in areas which were not yet covered. This will assist us with accelerating the rate of network roll-out and bring the benefits of mobile broadband to even more customers. At the end of June, our 3G network was available to approximately 55% of the Czech population, confirming our market leadership. Together with the expansion of our mobile data networks we also improved our service proposition. We changed the way we bill for mobile data usage to customers who go online only occasionally and we paid a lot of attention to promoting the advantages of having internet in a mobile to customers, in order to increase the penetration of smartphones in our customer base. In relation to this we launched a marketing campaign by the name of Now I Know Why which guides customers through their first steps in the world of applications. Already after the first month of the campaign the rate of users of small-screen internet service more than doubled compared to the level before the campaign.

In Slovakia, we continued to offer our simple and comprehensible tariffs O2 Fér and O2 Moja firma for entrepreneurs. The new tariff O2 Filip set out to satisfy the needs of the higher-value consumer customer. Despite the fact that the competition was trying hard to copy our market proposition, we succeeded in maintaining our strong rate of growth in our customer base, improve its structure and the loyalty of customers. The Customer Satisfaction Index in Slovakia has been hitting record marks for quite some time and we controlled our advantage over the rest of the field. At the end of the first half of the ear, the number of customers in Slovakia hit the one million mark. At the same time we strengthened our position in the Slovak mobile market, with our market share rising almost two percentage points since the start of the year to 16.6%. The growth in the customer base was accompanied by improved financial performance. Our revenues grew almost 50% year on year in the first half of the year and the company posted a positive operating profit OIBDA.

In the first half of 2011 we upheld our focus on operating efficiency in both commercial and non-commercial areas. Our goal is to maintain a high operating profitability in the time of significant pressures on our revenues, which will boost our competitiveness and maintain the value of the business. As in the last year, we carried on with the implementation of our restructuring programme which seeks to leverage our human capital and deliver personnel cost savings.

As I am reviewing our financial results and listing the factors that have impacted on them and on the trends of the first half of the year, I have to mention again the adverse macroeconomic climate, the effect of the regulation and the competition, which was fierce especially in some customer segments. Our consolidated business revenues went down 6.7% to CZK 25.9 billion in the first half year. Revenues from the mobile segment in the Czech Republic recorded a 9.7% year-on-year decline, down to CZK 12.9 billion, which was caused by a slow recovery in the customer spend and the mobile termination rate cuts, while the revenues from the fixed access segment were down 7.9% year-on-year, reaching CZK 11.3 billion. In this instance, the incremental revenues from broadband internet failed to offset the decline of revenues from voice and ICT services. Revenues in Slovakia were up 50% to EUR 73.1 million. In the first half of 2011, OIBDA reached CZK 10.3 billion, which is a year-on-year decline of 8.3%. OIBDA margin, excluding brand and management fees, remained, with 42%, at about the level of the previous year, which is the result of our dedicated campaign for efficient expenditure in both the commercial and non-commercial areas. Net profit was down 17.1% to CZK 3.6 billion; the decline was driven by the lower OIBDA, and a slight increase of depreciation and amortization, which was not fully compensated for by the lower tax.

Despite the fact that our first-half results do not meet our full-year expectation, I confirm, on behalf of the Company, our 2011 year-end guidance for OIBDA, which is a decline within the range of 1-5%, and capital expenditure, which should reach approximately CZK 5.7 billion.

I am confident that the second half of the year will see some recovery in the mobile market where we aspire to maintain our leadership position. We will continue with our investments in the expansion of our 3G network coverage, driving for higher average revenue per user of mobile services. The continued growth in our customer base and revenues from the Slovak market will positively impact on our profitability. In the Czech Republic we plan to focus on strict cost control with a view to compensate for as much as possible of the revenue decline, and we want to maintain a high level of operating efficiency.


Luis Antonio Malvido

Chairman of the Board of Directors