UPDATE 1-Smartphone demand boosts Britain's EE and Carphone

Wed Jul 24, 2013 4:05am EDT

* EE posts record margins on contract demand

* Carphone Warehouse posts better than expected sales

* TalkTalk records second quarter of sales growth

By Kate Holton

LONDON, July 24 (Reuters) - Demand for high-end smartphones on long-running contracts helped Britain's largest mobile operator EE and phone retailer Carphone Warehouse to post better than expected results on Wednesday.

EE, owned by Orange and Deutsche Telekom , said it had grown first-half earnings by 9 percent and posted its highest ever margins as demand for mobile contracts, including those running on its superfast fourth generation network, jumped ahead.

The group added 216,000 new contract customers in the second quarter. It said it had 687,000 customers on the 4G network and was on track to exceed its target of one million by the end of the year.

The leap in core earnings, helped by more customers taking longer contract services as opposed to prepaid offerings, came despite a 4.4 percent fall in second-quarter service revenue, which records the provision of ongoing services and strips out one-off costs such as handsets.

The fall in service revenue was broadly in line with that reported last week by Vodafone, the country's third largest mobile operator behind EE and Telefonica's O2.

Analysts at Espirito Santo said the results showed the cost savings promised at the formation of the EE joint venture in 2010 were coming through.

Chief Executive Olaf Swantee said the group aimed to increase its margins to 25 percent by 2014, from the current 22.9 percent. This would come via a combination of customers paying more for faster services, and cost savings.

The demand for longer-term contracts in Britain also helped Carphone Warehouse in its first quarter, with like-for-like sales up 10.6 percent compared with a consensus forecast of 8 percent.

Chief Executive Roger Taylor told Reuters the firm had seen an increasing number of customers opt for longer contracts as that enabled them to buy phones such as Apple's iPhone and smartphones from Samsung.

On a busy day for the British telecom sector, fixed-line operator TalkTalk said it had posted its second successive quarter of year-on-year revenue growth, with 8,000 new customers joining in the first quarter.