Slough, UK-based O2 operates in the UK, Ireland, and Germany, and is Europe’s sixth largest mobile phone company, with a total of 24.6 million customers (14.6 million in the UK). During the past three months, it added 646,000 customers to the group. This was made up of 232,000 new subscribers in the UK and 412,000 in Germany. Analysts had predicted only 612,000 new customers.

There is some concern however that due to O2’s limited market reach, it lacks the scale to compete against some of the more truly global players such as Vodafone Group Plc and France Telecom’s Orange SA. Vodafone is expected to report its key performance indicators early next week.

These concerns have meant that the UK operator has been constantly at the center of takeover speculation, especially after it rebuffed an offer from Royal KPN NV in February 2004. KPN has long been viewed as offering a good fit with O2, especially if it were to combine O2’s strong presence in Germany with KPN’s German division E-Plus. Another mooted acquirer has been Spain’s Telefonica SA.

However, O2 also delivered more good news when it revealed that customer churn is falling for both prepaid and contract customers, although it didn’t specify by how much. This shows that O2 is taking action after it reported for the year ending March 31 that its annual churn had risen to 35% in the UK from 30% a year earlier. It had offset that news with impressive financial results for the year, after posting net income up 81.3% to GBP 301m (553.2m) on revenue 17.5% higher at GBP 6.89bn ($12.7bn).

We’ve seen encouraging progress in our drive to reduce churn in the UK, said O2 chief executive Peter Erskine. There are winners and losers in the UK. This does give us the belief that we’re among the winners.

However, Erskine had previously said that average churn rate would be about 25%. This means that unless O2 improves its current performance, it will have to sign up at least a third more customers this year just to stay the same size.

Under the new accounting rules, average spending by each UK customer rose to GBP 271 ($468) in the year ended June from a restated GBP 269 ($465) a year earlier, O2 said. In Germany, where spending is unaffected by the new rules, customer spending fell to GBP 244 ($422) from GBP 252 ($435) a year earlier.

Looking forward, O2 reiterated that it expects mid-single-digit percentage growth in UK wireless revenue in the fiscal year that ends next March. In its last fiscal year, the growth was 14%. The company also said it expects strong growth in Germany.

Shares in O2 rose 1.65% to 138.75 pence ($2.40) at the close of trading on the London Stock Exchange.