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Carphone Warehouse has posted better-than-expected profits for the year, despite customer service problems that have plagued the roll-out of its new broadband service.

Europe's largest mobile phone retailer said its profits for the 12 months to March 31st was £123.1 million, down 9.5 per cent from £136.1 million in the previous year.

The drop reflects start-up losses of £80.5 million associated with the launch of Free Broadband and Virgin Mobile, the joint venture Carphone Warehouse has created with Sir Richard Branson's company in France.

Nonetheless, the telecoms company predicted a positive outlook for its business and said it was confident that the "substantial investments" it had made over the year would deliver an "excellent return" to shareholders.

In a statement the firm said it had subsequently had "no hesitation" in proposing a 30 per cent increase its full year dividend, which has now been set at 3.25 pence a share.

Carphone Warehouse, which earlier this year withdrew its sponsorship of Big Brother over the racism row that engulfed the celebrity version of the reality show, acknowledged that the initial roll-out of its broadband service had resulted in a high number if errors and a "very poor customer experience".

However the company, which has started migrating its customers from BT's network onto its own unbundled lines, stressed there had since been a "significant improvement" in the service.

As of March 2007 Carphone Warehouse had more than 700,000 consumers, over 30 per cent of its broadband base, on its own unbundled network and operating costs are set to drop substantially as more of its customers migrate to the new service.

The firm, which purchased AOL's internet business during the year, is now Britain's third-largest residential broadband and fixed-line telecoms provider.

A target of 15 per cent has been set by the company for subscription growth over the year in a positive outlook.

Commenting, Carphone Warehouse chief executive Charles Dunstone said: "These are strong results."

"We have grown revenues by over 30 per cent and made significant investments in telecoms infrastructure, customer recruitment and strategic acquisitions."