Press release

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OPERATIONAL HIGHLIGHTS:

• Telefónica Europe delivers strong performance on back of propositions which have led to more customers choosing and staying with O2 
• Powerful cash generation in the first half of 2009 – up 16.8% year-on-year to €1.130 billion
• First half revenues increased to €6.571 billion (2.2% growth in constant currency), with OIBDA up to €1.879 billion (6.2% organic growth)
• Total customer base grew 8.3% year-on-year to 47.6 million
• Mobile customers increased to 42.6 million, with 85% of net additions in the contract segment
• Rebalancing of European portfolio bears fruit as Telefónica O2 Germany maintains growth trend
• Telefónica O2 UK clearly outperforms market with lowest-ever churn and leading customer satisfaction scores

Matthew Key, Chairman & Chief Executive of Telefónica Europe, commented:
"Telefónica Europe has maintained its market momentum and delivered a strong financial performance in the first six months of the year against a challenging economic backdrop. 

"There is clear evidence that the rebalancing of our European business portfolio is continuing to bear fruit, especially with the performance of Telefónica O2 Germany, which has been the main contributor to our OIBDA growth in the year to date.  Group revenues continued to grow in the last quarter, with a 1.8 per cent increase, excluding the effect of mobile termination rate cuts. Furthermore, we have continued to invest in the business and, at the same time, delivered a significant increase in operating cashflow.

"In the first six months of 2009, we added 1.5 million customers, bringing Telefónica Europe's total base to 47.6 million. Telefónica has further underlined its position as the 'home of the smartphone' with the recent signing of the Palm Pre exclusive across Europe to add to its already impressive portfolio of high-end mobile devices.

"As anticipated, Telefónica O2 UK experienced slower growth than the first quarter yet clearly outperformed the competition in a flat to declining market, with a 4.1 per cent increase in revenues and net mobile customer additions of 252,268 in the last three months.  The UK's excellent postpay net adds – up 73.3 per cent year-on-year - were driven by ongoing record low levels of churn and market-leading customer satisfaction scores.  Telefónica O2 UK reported yet another quarter of strong growth in data fuelled by mobile broadband and usage of smartphones.  O2 has also actively expanded into new business areas, with the introduction of the Joggler and, most recently, O2 Money.

"Telefónica O2 Germany maintained its impressive OIBDA performance in the second quarter, up 29 per cent year-on-year, and – excluding the impact of the latest cut in mobile termination rates – mobile service revenue growth accelerated to 1.2 per cent, while net mobile customer additions amounted to 426,723.  Our German business continues to make significant progress thanks to the solid foundations put in place in recent years – including the rollout of our own next generation networks, greatly improved distribution channels and a new simpler product portfolio.  The flagship O2o tariff proposition is gaining traction from other networks and delivering higher than average ARPUs, while it is anticipated that the Palm Pre exclusive will be important in driving customer acquisition and revenues.  Telefónica O2 Germany is now moving into an exciting new phase in Europe's biggest market.

"The severe economic climate has resulted in an extremely tough trading environment which is impacting revenues for both Telefónica O2 Ireland and Telefónica O2 Czech Republic.  Nonetheless, in Ireland we have delivered operational improvement and increased cashflow generation through efficient business management, while in the Czech Republic we are maintaining our commercial momentum and reported our best-ever quarterly customer additions in Slovakia.

"These strong results reflect our ongoing investment in the products and services that our customers really value, which will continue to pay dividends and prove critical in driving long term growth of our business in Europe."

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Telefónica Europe plc contacts
David Nicholas
Director of Communications
Telefónica Europe plc
david.nicholas@o2.com
m +44 (0)7715 759 176

Simon Lloyd
Head of Media Relations
Telefónica Europe plc
simon.lloyd@o2.com
m +44 (0)7912 072 777

Telefónica Europe plc press office: t +44 (0)1753 628 402

All Telefónica Europe plc news release can be accessed at our website: http://www.o2.com/

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