Telefónica O2 Czech Reports

PRAGUE, Czech Republic -- Telefónica O2 Czech Republic, a.s. is pleased to announce its audited financial results for the fiscal year 2006. These results are consolidated and prepared according to International Financial Reporting Standards and include the Slovak operation.

"2006 was a very challenging year for us as the company launched its integration process including re-branding project. Nevertheless, we managed to achieve excellent financial results that actually overachieved our plans for 2006 in many regards. The total Group revenues experienced moderate year-on-year growth, indicating turn around of the trend. In spite of increased expenses related to the integration process, including the costs of re-branding and our activities in Slovakia operating profit also increased. Also, in 2007, the Group expects strong cash flows generation. Based on this the Board of Directors intends to propose a dividend payment of CZK 50 per share," said Jaime Smith, CEO and Chairman of the Board of Directors, Telefónica O2 Czech Republic, when commenting on the financial results.

Group Highlights1

2006 Revenues and OIBDA guidance achieved

Revenues of CZK 61.3 billion (+ 0.4%)

Operating costs of CZK 34.1 billion (+ 2.8%)

OIBDA of CZK 27.9 billion (+ 2.4%), OIBDA margin of 45.8%

Operating income of CZK 11.2 billion (+ 18.3%)

Net Income of CZK 8.0 billion (+ 28.3%)

Net gearing at 2.1% (- 4.2 p.p.)2

CAPEX of CZK 6.5 billion (+ 7.0%) – CAPEX/Revenues ratio of 10.6%

Group Headcount 9,416 (- 6.4%)

2007 guidance – Revenue growth of 1 – 3%, OIBDA3 decline of -1% to flat, CAPEX around CZK 9 billion, including Slovakia (Slovakia approx. 20% of total CAPEX)

2006 Dividend of CZK 50 per share to e proposed to the AGM

Consolidated Financial Statements

Revenues, operating costs and OIBDA

Consolidated revenues (business and recurring revenues) reached CZK 61.3 billion in 2006, up 0.4% yoy, and up 0.1% yoy in Q4 alone. The mobile business was the key driver of this growth, while revenues in the fixed business continued to decline, although the rate of this decline slowed during the year. Revenue growth was slightly higher than guidance for 2006 of flat revenues. Total consolidated operating costs reached CZK 34.1 billion, up by 2.8% yoy and 13.2% in Q4 alone. Re-branding costs and costs related to the Slovak project incurred in Q4 were the major drivers of the OPEX increase, temporarily offsetting the ongoing cost efficiencies. Consolidated OIBDA amounted to CZK 27.9 billion, up by 2.4% yoy confirming healthy performance and the tight cost control already seen in previous quarters. OIBDA margin (OIBDA over Business revenues) reached 45.8% in 2006, compared to 44.9% in 2005. 2005 OIBDA margin was significantly affected by an impairment charge of CZK 1.3 billion, while in 2006 the impairment charge amounted to CZK 253 million. OIBDA margin excluding these impairment charges would reach 46.9% and 46.3% in 2005 and 2006 respectively.

Depreciation and Amortization

Consolidated depreciation and amortization amounted to CZK 16.7 billion in 2006, a decline of 6.0% yoy, on the back of ongoing investment discipline as a result of the strong investment activity already made in the past, continuing the trend seen in previous quarters.

Operating Income, Income before tax and Net income

Consolidated operating income and consolidated income before tax went up by 18.3% yoy and 25.1% yoy to reach CZK 11.2 billion and CZK 10.9 billion respectively in 2006, on the back of the decrease in consolidated depreciation and amortization and financial expenses and supported by OIBDA growth. Consolidated net income amounted to CZK 8.0 billion, up by 28.3% yoy.

CAPEX

Similar to the first three quarters of 2006, in Q4 the Group focused its investments on the growth areas of the business. Total consolidated CAPEX amounted to CZK 6.5 billion in 2006, up 7.0% yoy. While CAPEX in the fixed segment increased by 40% yoy to CZK 3.1 billion and was spent largely on ADSL rollout and IPTV development, investments in the mobile segment were directed largely to the CDMA and UMTS networks. CAPEX in the mobile segment decreased by 16.9% to CZK 3.2 million in 2006, while it fell 45.9% yoy in Q4 alone due to significant investments in CDMA and UMTS made in 4Q 2005. CAPEX for other subsidiaries amounted to CZK 181 million and was represented mainly by investments related to the launch of the Slovak operation. Despite increased CAPEX due to the accelerated rollout of ADSL and IPTV project launch, CAPEX/Revenues ratio reached 10.6% confirming our year end target of 10 to 12%.

Free Cash Flows

The total amount of the Groups’ free cash flows amounted to CZK 18.4 billion in 2006, down by 1.4% yoy. Operating cash flows went up by 3.4% yoy to CZK 24.5 billion, driven by the increase in OIBDA, while accelerated investments into growth areas resulted in net cash used in investing activities increasing by 26.4% compared to 2005.

Cash and Debt levels

The group’s consolidated financial debt (long-term and short-term) amounted to CZK 9.4 billion at 31 December 2006, down by 2.8% compared to the end of 2005. The amount of cash and cash equivalents reached CZK 7.5 billion on the same day. This resulted in net leverage of 2.1% and gross leverage of 10.6% compared to 6.3% and 10.1% at 2005 year end.

Telefónica O2 Czech Republic