Letter from the Chairman
of the Board of Directors
To Our Shareholders
Let me use this opportunity to review the activities, development and the results of the Telefónica O2 Czech Republic Group in 2010. Our results of the past year were marked by the gradual economic recovery, continuing strict regulation and the highly competitive climate in all areas we do business in. Despite the challenges of the external environment, I can frankly say that I regard our results of the past year as satisfactory and our activities make a good springboard for further improvement in the year 2011.
Let me first make a brief summary of our goals we entered the year 2010 with. In line with our long-term strategy to maintain the leadership in the Czech telecommunications market, our goal was to keep up the customer adds in our key business areas, which are mobile contract customers and ADSL broadband internet. By actively promoting our ADSL-centric proposition in the fixed access segment, we aimed to slow down the rate of decline in the number of fixed lines. Growing demand from our customers for mobile broadband internet propelled our plans to improve our offer in this area, alongside the expansion of our mobile data network coverage. In Telefónica O2 Slovakia, our aim was to grow the customer base and improve financial performance. Last but not least, we wanted to deliver on all of the above while maintaining our high operating efficiency.
And now let me review, in more detail, the achievement of our goals for 2010.
I am proud to say that we succeeded, without accounting for the one-off reduction of inactive customers, in increasing the number of our mobile contract customers by 160 thousand, especially in the fiercely competitive atmosphere that prevailed in the market in 2010. This achievement was largely aided by our active strategy focused on the migration of customers from pre-paid services to contracts, the steady popularity of our O2 NEON tariffs, and, in the second half of the year, also the positive effect of the increased mobile broadband customer base. Despite the considerable competitive pressure felt throughout the whole year 2010 from the cable provider UPC, we accomplished a solid growth in our ADSL customer base. In 2010, their number grew more than 11% to 806 thousand. The steady growth in the number of customers using our internet connectivity service without a voice tariff, and the growth in business customers using the Voice-over-IP service, contributed to the fact that the number of fixed accesses’losses in 2010 declined 17% on the previous year, down to 101 thousand.
As I already mentioned above, our long-term aspiration is to keep our leadership in the mobile internet market in the Czech Republic. We gave this segment our focused attention in 2010, with some positive results to report. By the end of 2010, we have covered almost 43% of the population with our 3G network, and EDGE was within the reach of almost all Czech population. At the same time we considerably increased the transmission speed – without compromising on the quality of the voice and data traffic. Together with our high-speed networks expansion we also launched a portfolio of innovated mobile internet tariffs
for our pre-paid and contract customers. The offer was successfully promoted by means of our Smart Network campaign, which delivered a promising growth in the number of mobile broadband customers and customers of internet in the mobile telephone in the second half of the year, followed by a positive effect on our mobile revenues.
Our offer of simple, transparent and clear O2 Fér tariffs in Slovakia, which, in the past two years, completely turned around the development in the Slovak mobile market, continued to attract customers and improve financial performance. In the past year alone, the number of customers went up by 328 thousand, closing the year 2010 with 880 thousand customers in total, which represents a 15% share of the market. This, in turn, delivered a solid revenue growth and positive OIBDA in the third and fourth quarter.
In line with our long-term strategy to constantly drive for better operating efficiency, in order to keep us in a competitive position in today’s challenging market environment and to continue to create value for our shareholders, we embarked on an ambitious programme of restructuring in 2010. Its aim was to implement a more efficient organisation structure by way of reducing the number of organisation levels in the Company. We also focused on improving the efficiency of processes and systems. Special significance was attached to the transformation of our network operation, which resulted in outsourcing of some network related activities and delivered a headcount reduction by more than a thousand employees, with a positive effect on the staff costs in the second half of the year.
In addition to the above-mentioned restructuring programme, we continued with other projects aimed at improving our operating efficiency while raising the quality of customer care and customer experience. Improvements in the quality of service delivery, sales in our brand stores and communication with our customers have produced a reduction in the number of complaints and claims in both main customer divisions. We also saw an improvement in our call centres; their level of production increased while the average number of calls per customer and the average duration of call went down. Overall level of customer satisfaction with the service of our call centres also improved across all segments. All the above-mentioned activities aimed at enhancing the customer experience delivered an improvement in our Customer Satisfaction Index and helped us with closing on our competition.
As I already mentioned at the beginning, our financial performance in 2010 was aided by the gradual economic recovery, which has led to the stabilisation of consumption during the year in question, especially as far as mobile customers were concerned. Our revenues were at the same time under the pressure of falling termination rates and lower-than-expected ICT revenues due to fewer projects commissioned by the public sector. The total consolidated revenues reached CZK 55.7 billion in 2010, which is a 7% decline on the previous year. Projects and measures aimed at operating cost efficiency succeeded with reducing the operating costs (not accounting for the impact of the settlement agreement with T-Mobile from 2009) by 4.7% year on year, down to CZK 33.4 billion. The consolidated operating income before depreciation and amortisation (OIBDA) improved 1.1% year on year and reached CZK 27.4 billion, mainly due to the reversal of the impairment charge. Not accounting for this accounting operation, OIBDA would decline 14.9%, namely as a result of the lower revenues and one-off items posted in 2009 and 2010; the OIBDA margin would be 41.3%. This helped us maintain an above-average operating profitability compared to other operators in Central and Eastern Europe. I already mentioned that the year 2010 saw our investments going mainly into the roll-out of our mobile broadband networks and into projects to improve the quality of these networks. We also continued our selective investments in pro-growth areas, including namely various ADSL developments. We pursued focused investments in our information systems and technologies, to make their processes more efficient in the interest of greater operating efficiency and a better customer experience. The total investment costs were down 12.7% year on year to CZK 5.7 billion in 2010. Finally, in my review of our financial performance in 2010, I would like to highlight the 21.2% increase in free cash flows, which reached the total of CZK 16.4 billion and translates into CZK 51 per share.
The year 2011 will see us persevering with our dedication to improvement and enhancement of our relationship with customers by means of raising the quality of service and offering new products to meet the customers’ needs. The priority for these initiatives and other projects is to achieve the ultimate customer experience and satisfaction. We will also continue with introducing further improvements to our portfolio of broadband services, where we plan to launch a host of VDSL-based services, in order to stabilise the number of fixed accesses and remain competitive. In line with our plans for further roll-out of the 3G network, and with the help of the recently signed agreement on 3G network sharing with T-Mobile, we will focus on offering innovated mobile broadband and data services. To this end, we plan to take advantage of our competitive position of having the largest and the best 3G network to attract more mobile broadband and mobile data customers, which will drive the share of these services in the total mobile revenues.
In Slovakia, we plan to continue with the active marketing of our transparent, simple and value-based services. We are confident that this strategy will impart a positive reflection on our financial performance and profitability, and help us maintain a solid growth in our customer base.
As there are several factors with an uncertain outcome at play, which will nonetheless have a bearing on our revenues, we present only a general outline of the expected developments in 2011. We anticipate that the revenues from ICT services may continue to be under the influence of the restrictions in the public sector, which will result in a lower number of projects. Additionally, mobile revenues will continue to be under pressure due to further cuts in mobile termination rates (by 35% in 2011). At any case, we will stay loyal to our drive for efficient operating and investment expenditure while continuing with investments that generate value for our customers and enhance their experience. And finally, cash flow generation and its maximisation remains one of our key strategic priorities for the future.
Luis Antonio Malvido
Chairman of the Board of Directors
