Report Overview

UK O2 – Merger in the time of COVID

O2’s merger with Virgin Media seems more of a marriage of convenience than a determined pursuit of synergy benefits. With the owners effectively selling their stakes, the combination will be well-advised to exercise caution in any convergence strategy that they pursue

O2’s results this quarter appear to be fairly decent with all metrics ticking up slightly, although caution is advised in interpretation and pressure on ARPU has not eased

With the mobile sector reasonably well insulated from COVID-19 and O2 likely to fare better than most in out-of-contract discounts, the short-term outlook is relatively robust, but competitive and macroeconomic vulnerabilities remain on the horizon

Contents

A merger of convenience

Distorting factors in financial trends

A reasonable quarter from what we can tell

OIBDA better, but many moving parts

Protracted impact of out-of-contract regulation

Automatic discounts likely to have little impact

Notifications impact to evolve as the year progresses

Shifting sands in pricing dynamics

Outlook for 36-month contracts more uncertain

Short-term resilience, longer-term questions

List of charts/tables

Figure 1: OIBDA, revenue, and mobile service revenue growth

Figure 2: UK underlying mobile service revenue vs GDP growth

Figure 3: Change in customer lifetime contribution due to converged bundle

Figure 4: Impact of O2’s Custom Plans on financial metrics

Figure 5: O2 mobile revenue and service revenue growth under IFRS 15

Figure 6: Reported organic mobile service revenue growth

Figure 7: Contract net additions (000s)

Figure 8: O2 KPIs

Figure 9: Contract ARPU growth

Figure 10: ARPU and non-ARPU mobile revenue in mobile service revenues

Figure 11: ARPU revenue and mobile service revenue growth

Figure 12: Annualised contract churn

Figure 13: OIBDA growth

Figure 14: Timing and impact of out-of-contract notifications and discounts

Figure 15: Discounts to out-of-contract customers offered by operators

Figure 16: Potential drag from out-of-contract bundle customers spinning down

Figure 17: ‘Sweet spot’ bundle with iPhone 6s/7/8/XR/11

Figure 18: SIM-only pricing by data allowance (GB)—direct distribution (£/month)

Figure 19: SIM-only unlimited data bundle pricing (£/month)

Figure 20: ROCE using spectrum at current value