Increased demand for smartphones like the Apple iPhone and Samsung's Galaxy S2 benefited Everything Everywhere in the first quarter, helping Britain's biggest mobile phone operator to post a rise in underlying revenue.

The joint venture, which combines France Telecom's Orange and Deutsche Telekom's T-Mobile, said on Wednesday it added 151,000 net new contract customers in the first quarter, compared with 160,000 a year ago.

Everything Everywhere, which leads Telefonica's O2, Vodafone and 3 in terms of British customers, said service revenue, excluding regulated cuts in so-called termination rates, rose 2.9 percent, a faster rate than the 1.2 percent recorded in the final quarter of 2011.

Chief executive Olaf Swantee said the improvement was driven by rapid data revenue growth as the group upgraded customers to smartphones and higher-value postpaid agreements.

"We now have 71 percent of our postpay customer base with a smartphone," he said in an interview.

Smartphones typically come on 18-month or two-year contracts, helping retain customers. The group's churn or customer attrition rate, was just 1.2 percent.

"In Q4 we had the best churn in the market," Swantee said. "It's too early to tell this quarter but I expect again we will have the best churn in the industry."

Swantee said the group was seeing a strong performance from the iPhone and Galaxy S, the latest version of which will launch in London on Thursday.

He also said initial sales of HTC's new Team One handsets were "pretty positive" and the group was seeing "some good continuous performance on the entry products around the Blackberry range".

Everything Everywhere does not issue first-quarter earnings, but Swantee said cost savings, targeted at 3.5 billion pounds ($5.7 billion) by 2014, were firmly on track.

"For the first quarter we continued strongly on the cost programs that are behind synergy capture and EBITDA (earnings before interest, tax, depreciation and amortization) improvement," he said.

Everything Everywhere said its service revenue was down 2.5 percent down to 1.5 billion pounds when including cuts imposed by the regulator to charges for connecting calls between networks.

($1 = 0.6165 British pounds)

(The story is corrected to change comparison in para 2 to Q1 2011 from Q4 2011)

(Editing by Hans-Juergen Peters)