Preliminary results for January to September 2015: Telefónica Deutschland grows 9M OIBDA by 16%

-2015 OIBDA outlook updated to 15 to 20% y-o-y growth(1,2)
-Broadly stable mobile service revenues expected / + 0.4%(1) in the first nine months
-Proposal for cash dividend(3) of 0.24 Euro/share for the financial year 2015
-CEO Thorsten Dirks: “Moving into 2016, we continue to focus on the integration and are using our full strength in the transformation of our company towards the Leading Digital Telco.”
MUNICH. Telefónica Deutschland has successfully completed year one of integration and is fully on track to deliver on its strategic targets. In the first nine months, OIBDA(1,2) increased by 16.1% to 1.285 billion Euro year-on-year, driven by cost optimisation and accelerated synergy(4) contributions resulting from the integration. By the end of the third quarter, significant integration activities have been brought forward from 2016 into 2015. As a consequence, the Company updates its OIBDA outlook for the full year to 15 to 20% year-on-year growth from more than 10% previously. In-line with the previous outlook, mobile service revenues are expected to come in broadly stable in 2015 in an ongoing dynamic market environment. The Management intends to propose to the next Annual General Meeting a cash dividend of 0.24 Euro/share for the financial year 2015.
“Our third quarter performance clearly reflects that we are keeping our momentum and delivering on our goals. We have made significant progress in the first year as a combined company. However, we still have a long way ahead of us. Moving into 2016, we continue to focus on the integration and are using our full strength in the transformation of our company towards the Leading Digital Telco,” said Thorsten Dirks, CEO of Telefónica Deutschland. Rachel Empey, CFO, added: “While our total synergy case remains unchanged, we have been able to bring forward significant integration activities into 2015. Our dividend proposal shows continuity and reflects our attractive shareholder remuneration policy.”

Significant OIBDA improvement

Telefónica Deutschland continued to benefit from the commercial focus on its customer base and the early capture of synergies on the back of bringing forward various integration initiatives from 2016 into 2015. In the third quarter, the Operating Income before Depreciation and Amortisation (OIBDA) increased by 29.8% year-on-year to 454 million Euro (Q3 2014: 350 million Euro). The OIBDA margin before restructuring costs amounted to 22.9%.

Total revenues slightly up after the first nine months

Mobile service revenues remained broadly stable on a year-on-year basis and amounted to 1.42 billion Euro in the third quarter (Q3 2014: 1.42 billion Euro). For the first nine months mobile service revenues showed slight year-on-year increase of 0.4% to 4.15 billion Euro (Q1-Q3 2014: 4.14 billion Euro). The mobile data-centric strategy of Telefónica Deutschland continued to pay off. The Company saw a strong growth of the monthly mobile data usage of O2 consumer customers with LTE-enabled smartphones of 11% to 1.1 gigabyte (GB)/month(5) versus the previous quarter. Mobile data revenues reached 728 million Euro in the third quarter, driven by the increasing mobile data consumption of customers; again an improvement over the second quarter of 2015. The share of non-SMS data revenues over total data revenues further grew to 71.9% after 71.5% in the previous quarter of the current year. While mobile service revenues stayed broadly flat, handset revenues increased by 2.7% to 301 million Euro (Q3 2014: 293 million Euro) year-on-year. Fixed business revenues amounted to 256 million Euro (Q3 2014: 283 million Euro). In the third quarter Telefónica Deutschland generated total revenues of 1.98 billion Euro (Q3 2014: 2.00 billion Euro). Revenues for the first nine months of 2015 totalled 5.83 billion Euro, an increase of 0.9% over the previous year (Q1-Q3 2014: 5.77 billion Euro).

Good progress across all areas of integration – Further improved network experience

Telefónica Deutschland again made significant progress with the implementation of its integration initiatives in the third quarter. In July 2015, the Company agreed to transfer approx. 7,700 mobile sites to Deutsche Telekom as part of the planned network consolidation, helping to drive a more efficient site dismantling process. Moreover, selected shops were transferred to Drillisch as previously planned. The programme to harmonise the branding of all shops is well underway and is expected to be successfully completed by the end of 2015. In addition, Telefónica Deutschland has almost completed its 2015 leaver programme. Furthermore, the Company continued with its accelerated deployment of the LTE network. Telefónica Deutschland continues to aim for LTE coverage of 75% across Germany by the end of 2015.

Mobile access base grows to 43.3 million

Supported by enhanced mobile network experience for customers, Telefónica Deutschland grew its total access base to 48.6 million by the end of September. This is reflected by a year-on-year growth of 1.8% in the third quarter. The mobile access base increased by 2.6% year-on-year to 43.3 million, mostly driven by good traction of the partner business and seasonally strong prepaid growth with a high share of net additions from the Company’s ethnic brands over the summer. Overall, Telefónica Deutschland registered 672 thousand mobile net additions in the third quarter (169 thousand in the postpaid segment and 503 thousand in the prepaid segment), increasing the total amount of net additions in the first nine months to 1.16 million. Smartphone penetration(6) across all brands continued to improve to 52.9% in the third quarter (vs. 51.3% in the second quarter of 2015), as demand for data and smartphones continues to also rise in the prepaid customer base, particularly in partner brands. In addition, the LTE customer base continued its growth trajectory and further grew to 7.0 million, up 14.9% versus the previous quarter. Fixed accesses amounted to 5.4 million at the end of September. With a lower number of net disconnections (-12.6 thousand), the decline in the retail fixed broadband access base continued to improve slightly over consecutive quarters, bringing the total retail base to just over 2.1 million. Strong VDSL net additions could not quite compensate for the decline in fixed wholesale accesses.

Leverage ratio improved to 0.9x

The result for the third quarter amounted to -134 million Euro, mainly reflecting higher depreciation and amortisation charges in course of the integration of E-Plus and the consolidation of both networks. As a consequence, depreciation and amortisation charges still exceeded OIBDA. On back of the positive synergy effects, CapEx(7) (excluding spectrum) for the January to September period was reduced to 704 million Euro (-2.8% year-on-year). At the same time, Telefónica Deutschland continued to focus its investments on the deployment of the LTE network. Free Cash Flow (FCF)(8) for the first nine months reached 350 million Euro, driven by 58 million Euro in proceeds from the sale of yourfone GmbH in the first quarter as well as an upfront payment of 150 million Euro received in July 2015 from the MBA contract with Drillisch. Consolidated net financial debt(9) was 1,415 million Euro at the end of September 2015, returning to a leverage ratio of 0.9x, which is below the Company’s target leverage ratio. At the end of the second quarter, the leverage ratio stood at 1.2x, mainly due to the dividend payment for the financial year 2014 and long-term investments in spectrum licences.

Update of OIBDA outlook for 2015

Having reached a number of important milestones on its path to becoming the Leading Digital Telco, Telefónica Deutschland updates its outlook for the financial year 2015. The Company was able to accelerate and bring forward various integration activities from 2016 into 2015. In addition, it further optimised commercial costs. As a consequence, Telefónica Deutschland now expects OIBDA to grow 15-20% year-on-year, compared to previous growth expectations of more than 10% year-on-year. As forecasted, mobile service revenue is expected to remain broadly stable compared to 2014 in a dynamic market environment. Moreover, Telefónica Deutschland anticipates CapEx in 2015 to show a low double-digit percentage decline year-on-year compared to a high single-digit percentage decline previously anticipated.
1)Unless indicated otherwise, year-on-year comparisons are based on combined figures for 2014. These are approximate and the result of the aggregation and then consolidation of Telefónica Deutschland and E-Plus Group financials according to Telefónica Deutschland Group accounting policies. The combined figures are further adjusted by exceptional effects, such as capital gains or restructuring costs based on estimates made by Telefónica Deutschland management and resulting in combined figures we believe are more meaningful as a comparable basis. Exceptional effects in the first nine months of 2015 include a capital gain of 15 million Euro from the sale of yourfone GmbH and restructuring costs of 66 million Euro. Comparable figures from 2014 exclude 13 million Euro restructuring costs in the third quarter.
2)Unless indicated otherwise, values include retrospective adjustments from the purchase price allocation (PPA) within the twelve-months-period following the acquisition of E-Plus group as of October 2014 (IFRS 3).
3)Intention for dividend proposal to Annual General Meeting in May 2016. For further details please refer to our dividend policy on our website: https://www.telefonica.de/investor-relations-en/share/dividends.html.
4)Synergies defined in terms of Operating Cash Flow (OIBDA-CapEx) with a target run rate after year 5 from start of integration of 800 million Euro. OpEx savings (excluding restructuring costs) and revenue synergies refer to a comparison with 2014 combined financials. CapEx excludes investments in spectrum and includes specific restructuring investments.
5)Average data monthly usage (in GB) from O2 consumer customers with a LTE-enabled smartphone (all tariffs).
6)Defined as the number of active mobile data tariffs of premium brand customers over total mobile premium brand customer base, excluding M2M and data-only accesses.
7)CapEx excludes investments in spectrum and includes specific restructuring investments.
8)Free cash flow pre dividends and payments for spectrum as well as pre-acquisition of E-Plus (FCF) is defined as the sum of cash flow from operating activities and cash flow from investing activities.
9)Net financial debt includes current and non-current interest-bearing financial assets and interest-bearing liabilities as well as cash and cash equivalents and excludes payables for the spectrum auction.
10)Combined figures for 2014 are approximate and the result of the aggregation and then consolidation of Telefónica Deutschland and E-Plus Group financials according to Telefónica Deutschland Group accounting policies. The combined figures are further adjusted by exceptional effects, such as capital gains or restructuring costs based on estimates made by Telefónica management and resulting in combined figures we believe are more meaningful as a comparable basis.
11)Year-on-year comparisons are based on combined figures for 2014. OIBDA in the first nine months of 2015 excludes a capital gain of 15 million Euro from the sale of yourfone GmbH and restructuring costs of 66 million Euro. CapEx excludes investments in spectrum and includes specific restructuring investments.
12)All expected regulatory effects (MTR cuts and others) are included in the outlook. Restructuring costs from the integration of E-Plus Group are excluded from OIBDA Outlook. CapEx excludes investments in spectrum and includes specific restructuring investments.
13)Intention for dividend proposal to Annual General Meeting in May 2016. For further details please refer to our dividend policy on our website: https://www.telefonica.de/investor-relations-en/share/dividends.html.