O2's aggressive contract drive has seen customer numbers increase by 6.9%, but margins were hit to the tune of 16.6%.
Service revenues for the three months to 30 June were down 8.1% to €1.51bn. Excluding the impact of mobile termination rates (MTRs), mobile service revenue would have fallen 5% year on year. Increasing smartphone use led to a small rise in data revenues, which increased 2.8% to €767m. O2 UK achieved smartphone penetration of 42%, up from 34% a year ago.
Operating income before depreciation and amortisation (OIBDA) was down 20.3% to €402m, although the operator slowed its rate of decline from its first quarter when OIBDA fell by 26.8%.
O2 has been aggressively pushing for contract customers and that gamble appeared to have paid off in subscriber numbers. It had 251,000 new contract additions in the second quarter, compared to 25,000 in the same period last year. Prepay customers fell 4.4% to 11 million. Overall mobile customers were up 1% to 22.4 million. Churn was 2.7% during the quarter, a decrease of 0.4 percentage points on 2011. Contract churn was lower, at 1%.
Average revenue per user (ARPU) fell 8.8% to £22.40, which O2 put down to MTR cuts, strong competition and customers moving to lower priced bundles. Contract ARPU was down 10.8% to £35.10, with prepay falling 13.2% to £9.50. Voice data slumped by 17.8% during the second quarter, although data ARPU was up 2.1% on the same period in 2011.
The operator's margins were down 16.6% to 23.4%, although margins had improved from the first half of the year. For the first six months of 2012, margins were 21.4%, down 22.5% on 2011. O2 said it had gradually reduced handset subsidies during the first half of the year. Fewer customers upgraded because of a reduction in those who fell out of contract during the period. O2 said it increased its operating expenses by 2.5% in a bid to 'maintain market momentum'.
O2 UK CEO Ronan Dunne said: 'We have maintained our commercial momentum in Q2 by building on our Q1 performance in a highly competitive market. At the same time we continue to grow our broad portfolio of innovative services that are attracting and retaining more and more customers every day.'
Earlier this month, around a third of O2's customers were hit by a service outage. The financial statement said it is changing its software to reduce the risk of this happening again.
Meanwhile, Tesco Mobile recorded more growth, making 136,000 net additions in the second quarter to reach 3.2 million customers by the end of June 2012. Its contract base has more than doubled during the past 12 months to reach one million.
Speaking more widely about the business, the Telefónica statement said its financials were 'significantly impacted by the difficult trading environment in key countries, including adverse economic conditions, intense competition and the negative effects of regulation'.
Struggles across Europe continued to hit Telefónica's revenues in the first half of 2012, although these were partially offset by its performance in Latin America. Consolidated sales were up 0.1% to €15.45bn but OIBDA was down 6.6% to €5.73bn.
Editor: Graeme Neill