DGAP-News:Telefónica Deutschland Holding AG: Preliminary results for January to June 2017

DGAP-News: Telefónica Deutschland Holding AG / Key word(s): Half Year Results/Preliminary Results Telefónica Deutschland Holding AG: Preliminary results for January to June 2017 26.07.2017 / 07:30 The issuer is solely responsible for the content of this announcement.

MUNICH, 26 July 2017 Preliminary results for January to June 2017 Telefónica Deutschland drives solid operating momentum in a market shifting to stronger data growth; reiterating full year 2017 outlook - Driving solid momentum with O₂ Free 15-year birthday tariff in a market increasingly focused on larger data buckets - Underlying MSR [1] shows further sequential improvement to -0.4% year-on-year in Q2 - OIBDA [2] growth of +5.0% year-on-year on the back of an additional ~EUR 40 million of Opex and revenue-related synergies - Reiterating full-year 2017 outlook; cash flow dynamics support mid-term dividend growth Second quarter 2017 operational & financial highlights - Mobile postpaid saw 197 thousand net additions, leveraging the momentum from partners and the 15-year anniversary promotions of the O₂ brand. Partner trading stabilised at 55% share of gross adds as in prior quarter. Contract churn was 1.5%, 0.1 percentage points lower quarter-on-quarter, reflecting the successful focus on customer base development - Mobile prepaid registered 322 thousand net additions on the back of the strong performance from partners - The LTE customer base posted strong annual growth of 53.4% to 14.4 million supported by our successful data monetisation strategy. Data usage continued to benefit from the demand for music and video streaming and was further driven by the launch of bigger data buckets with O₂ Free 15. For LTE customers in O₂ consumer postpaid data usage grew 12% quarter-on-quarter to 2.0 GB per month, up 48% year-on-year - Revenue fell 3.4% year-on-year to EUR 1,771 million, mainly driven by the impact of regulatory effects in form of the reduction of termination rates and the European roaming legislation on mobile service revenue. Roam-like-home came into force on 15 June 2017. Mobile service revenue fell -3.0% year-on-year to EUR 1,318 million on a reported basis. Excluding regulation, mobile service revenue continued to improve to -0.4% year-on-year vs -0.6% in the prior quarter - Handset revenue stabilised at EUR 229 million (+1.5% year-on-year), reflecting market saturation and longer replacement cycles from customers - Fixed-line revenue showed a continuation of trends, falling 11.2% year-on-year to EUR 217 million, mainly as a result of the effects from the planned decommissioning of the ULL infrastructure - OIBDA excluding exceptional effects [3] benefitted from EUR 40 million of additional Opex and revenue-related synergies and increased 5.0% year-on-year to EUR 472 million. This was partly offset by commercial and other investments, notably in the positioning of O₂ Free and the 15-year anniversary promotions. OIBDA margin excluding exceptional effects was up 2.1 percentage points year-on-year to 26.7% in the quarter - CapEx [4] was EUR 226 million, up 6.9% year-on-year, as the company pushed ahead with network consolidation and the further roll-out of LTE, while also generating approx. EUR 10 million of Capex-related synergies - Consolidated net financial debt [5] was EUR 1,575 million at the end of June 2017, bringing the leverage ratio to 0.9x, in line with target Progress of integration and transformation activities Telefónica Deutschland continues to push ahead with the integration activities and is fully on track to deliver 75% or approx. EUR 670 million of the targeted cumulated savings level of approx. EUR 900 million operating cash flow synergies in 2019 already by year end 2017. Our core project, the network integration, is progressing according to plan. In the first half of the year, we have already completed the consolidation in several areas in Southern Germany and are continuing with our integration efforts, aiming for sustained quality gains. With the recently launched "Customer Experience Management Tool" (CEM), we are setting a new benchmark in the quality measurement of our network. The software developed by our partner Huawei together with customised use cases enables us to better understand the data usage of our customers and to enhance customer experience on our network. The project team and as such the CEM tool itselve were nominated for the Innovation Award "Excellence Awards 2017 and honoured as the winner in the categorie "Outstanding Contribution to Enabling Improved Customer Centricity" at the Telecommunications Forum in Nice in May. Furthermore, we continue to make progress with our other integration projects such as personnel restructuring and optimisation of our shop footprint. All initiatives are running according to plan. Transformation: Opportunities beyond Connectivity As part of our transformation effort, Telefónica Deutschland has streamlined its senior management structure and eliminated several internal boards and committees. The company has elevated selected members to extend the management board as follows: Director Controlling Markus Rolle replaces Rachel Empey as CFO, who is leaving the company upon her own request and as mutually agreed with the Supervisory Board to pursue new opportunities. Wolfgang Metze is appointed as Chief Consumer Officer responsible for the retail business with a clear focus on customer experience. Alfons Lösing is appointed Chief Partner and Business Officer, also responsible for Telefónica NEXT. Cayetano Carbajo Martin is appointed Chief Technology Officer. Guido Eidmann is appointed Chief Information Officer. Valentina Daiber is appointed Chief Officer for Legal and Corporate Affairs. Nicole Gerhardt is appointed Chief Human Resources Officer. We also continue to leverage other business opportunities in the areas of Advanced Data Analytics (ADA) and the Internet of Things (IoT), bundled under Telefónica NEXT. - Telefónica NEXT was awarded with the first price in the category Sustainability Innovation of the "German Awards for Excellence" 2017 for its pilot project in Nuremberg to analyse and control traffic flows and air quality on the basis of anonymous mobile data - We are closely cooperating with Telefónica, S.A., to leverage opportunitites arising from the implementation of AURA, an innovative voice-based user interface for a closer interaction with our customers and the extension our capacities. As a first application on the platform, the Telefónica NEXT smartMedia division recently launched O₂ GET in cooperation with the European start-up people.io. This application gives customers full transparency and control over the data they share, while rewarding them for the data they have chosen to share with selected companies or brands. - Telefónica NEXT is expanding its services for intelligent data analytics leveraging its new partnership with Synergic Partners S.L., a wholly owned subsidiary of Telefónica, S.A., specialising on the consultation for big data strategies. Commercial update In the second quarter of 2017 we saw a dynamic competitive environment. German mobile is shifting to higher data usage with dynamic promotional activities and larger data buckets. We introduced a range of commercial initiatives to support our market position, mainly centered around the 15 year anniversary of the O₂ brand in May. - Telefónica Deutschland celebrated the 15th birthday of its premium brand O₂ in May with selective offers for new and existing customers in fixed and mobile. The promotional O₂ Free 15 tariff has been a significant success. Early stats confirm that big data buckets clearly stimulate data growth and drive cross- and upselling. - In the second quarter we halso renewed our O₂ DSL tariffs, enhancing the offers with higher bandwith across the portfolio and speeds of up to 100 Mbps. - In June, the connect magazine praised the high service quality of our O₂-shops, ranking our premium brand shops as number 2 in the market, at eyes' level with the winner in many categories. The test praised particularly our O₂ guru system and their expert customer support. Financial Outlook 2017 The financial outlook for 2017 remains unchanged as published in the 2016 Annual Financial Report: Base line Outlook 2017 H1 / 2017 2016 (EUR (year-on-year) (year-on-year) million) Mobile Service Revenue 5,437 Slightly -0.5% underlying[1][6] 1. negative to flat #footnote_6 OIBDA before 1,793 Flat to +3.6% exceptional mid-single-digit effects[1][7] 1. % growth #footnote_7 CapEx[1][8] 1. 1,102 Around EUR 1 EUR 434 #footnote_8 billion million Telefónica Deutschland operating performance in the first half of 2017 As of 30 June 2017 Telefónica Deutschland's customer accesses totalled 49.9 million (+2.7% year-on-year) on the back of a 4.1% year-on-year increase in the mobile base, which stood at 45.2 million. Based on market standards for inactivity accounting as introduced with the first quarter results, we had 48.4 million mobile customer accesses and 53.1 million total accesses. In fixed, the retail DSL customer base was 1.0% lower year-on-year at 2.1 million accesses, while wholesale DSL accesses continued to decline at an accelerated speed of 23.8% quarter-on-quarter due to the planned dismantling of the legacy ULL platform by 2019. Mobile postpaid net additions came to 368 thousand in the first half of 2017 versus 197 thousand in the second quarter and 520 thousand in the same period of 2016. The rebalancing of retail versus wholesale continued as a result of the improvements in the discount pricing environment. Partner brands contributed 55% of gross adds both in the second and in the first quarter. In the retail business, Telefónica Deutschland maintained its strategic focus on customer base development and retention, leveraging the positive customer response to its O₂ Free portfolio. At the end of June, the mobile postpaid base was 20.9 million accesses, up 6.6% year-on-year and the postpaid share of total mobile customers further increased by 1.1 percentage points year-on-year to 46.3%. Mobile prepaid saw 505 thousend net additions in the period January to June versus 322 thousand in the second quarter with a strong performance from partners. The customer base was up 2.0% year-on-year to 24.3 million. Postpaid churn was slightly lower year-on-year at 1.6% in the six months period and 1.5% in the second quarter (-0.1 percentage points year-on-year in both periods) and the O₂ consumer postpaid brand reported an even lower churn of 1.4% in the first half year and 1.3% in the second quarter reflecting our successful brand management and the sustained retention focus. Smartphone penetration [9] as of the end of June was up 1.2 percentage points year-on-year across brands and segments at 57.4%. The LTE customer base continued to benefit from the increasing demand for high-speed mobile and posted another quarter of strong growth, reaching 14.4 million accesses as of 30 June 2017, up 53.4% year-on-year. Regulatory changes further impacted ARPU and outweighed accretive effects from O₂ Free in the first half of 2017. The blended mobile ARPU came to EUR 9.6 in the first half year and EUR 9.7 in the second quarter, 6.6% and 6.5% lower year-on-year respectively. The postpaid ARPU was EUR 15.5 both in the six month period and the second quarter, 6.4% and 6.5% lower year-on-year respectively. The prepaid ARPU continued to be affected by the prepaid to postpaid dynamics in the discount segment and fell 10.9% year-on-year to EUR 5.1 in the period up to June and 9.4% year-on-year to EUR 5.2 in the second quarter. The retail fixed broadband customer base fell 1.0% year-on-year to 2.1 million accesses. In the first half of 2017 we registered 22 thousand net disconnection (-13 thousand in the second quarter). The demand for VDSL remained strong with 154 thousand net additions for the six months period, of which 88 thousand fell into the period April to June. Fixed wholesale accesses were 428 thousand at the end of June, posting 263 thousand net disconnections in the first half year (134 thousand in the second quarter) due to the planned decommissioning of the ULL broadband access infrastructure. Telefónica Deutschland's financial performance in the first half of 2017 Revenue were 4.1% lower year-on-year at EUR 3,542 million (-3.4% year-on-year in the second quarter to EUR 1,771 million) due to the regulatory headwinds on mobile services revenue as well as continued trends in the fixed business. Mobile service revenue totalled EUR 2,610 million, 3.1% lower year-on-year, in the first half of the year and EUR 1,318 million, -3.0% year-on-year, in the second quarter on a reported basis. Excluding regulatory effects from termination rate cuts and the European roaming legislation of in total EUR 70 million (EUR 35 million in each of the quarters), mobile service revenue was down 0.5% year-on-year in the six months period and 0.4% year-on-year in the second quarter, compared to -0.6% year-on-year in the prior quarter. Top-line headwinds from the retail to wholesale mix-shift as well as legacy base effects in a dynamic competitive environment continued to outweigh the benefits from the successful marketing of the O₂ Free portfolio to new and existing customers. Mobile data revenue was 0.7% higher year-on-year at EUR 1,488 million for the period January to June and EUR 772 million (+3.1% year-on-year) in the second quarter, reflecting continued OTT trends as well as demand from customers for higher data bundles. The non-SMS data revenue share of data revenue increased 2.1 percentage points year-on-year to 57.0 % and amounted to EUR 1,199 million (+6.6% year-on-year) in the first half of 2017 and EUR 630 million (+9.8% year-on-year) in the second quarter. Handset revenue fell 2.2% year-on-year to EUR 482 million and rose 1.5% to EUR 229 million in the second quarter, reflecting continued lower demand for handsets in line with general market trends. Fixed revenue continued to fall to EUR 440 million (-11.6% year-on-year) and EUR 217 million (-11.2% year-on-year) in the second quarter. Fixed retail revenue in the first half of 2017 benefitted from the continued strong performance of VDSL and contributed -2.3% to the year-on-year decline respective -2.6% in the second quarter. The fixed wholesale revenue decline continued to accelerate on the back of the planned dismantling of the legacy infrastructure, contributing -6.5% to the year-on-year decline (-7.2% in the period April to June). Other income was EUR 59 million compared to EUR 436 million in the first half of 2016, which included an exceptional effect of EUR 352 million from the sale of tower assets in April. Operating expenses were 6.7% lower year-on-year both in the six months period and in the second quarter at EUR 2,760 million and EUR 1,351 million respectively. This is mainly a result of the additional savings from integration projects. Restructuring costs of EUR 30 million (EUR 19 million in the second quarter) were mainly related to network, the optimisation of our shop footprint and the leaver programme. - Cost for supplies came to EUR 1,132 million, 6.2% lower year-on-year and 5.3% lower year-on-year at EUR 547 million in the second quarter. Hardware cost of sales (44% of supplies in the second quarter) were slightly higher year-on-year, while connectivity-related cost of sales (45% of supplies in the second quarter) were lower year-on-year on the back of the mobile termination rate reduction in December 2016. - Personnel expenses came to EUR 313 million including restructuring costs of EUR 13 million, a decline of 6.3% year-on-year, and EUR 157 million in the second quarter (-1.8% year-on-year). - Other operating expenses totalled EUR 1,315 million including restructuring costs of EUR 17 million, a decrease of 7.2% year-on-year, and EUR 646 million in the second quarter (-9.0% year-on-year). In the second quarter, commercial costs and non-commercial costs made up 57% and 39% respectively. Savings from integration were partly offset by higher commercial investments into the positioning of O₂ Free. Operating Income before Depreciation and Amortisation (OIBDA) in the first half of 2017 amounted to EUR 841 million compared to EUR 1,170 million in the prior year, and EUR 452 million in the second quarter compared to EUR 791 million in the prior year; with both comparative periods in 2016 including the exceptional effect of EUR 352 million from the sale of tower assets in April. OIBDA excluding exceptional effects [10] rose 3.6% year-on-year to EUR 873 million (EUR 472 million or +5.0% in the second quarter) with in-year savings from OPEX & revenue-related integration activities amounting to approx. EUR 75 million (EUR 40 million for the period April to June). The OIBDA margin increased by 1.8 percentage points year-on-year to 24.6% in the first six month of the year. Group fees amounted to EUR 20 million in the first half of 2017 and EUR 10 million in the second quarter. Depreciation & Amortisation came to EUR 964 million in the first six month of 2017, a 9.8% year-on-year decrease compared to EUR 1,069 million in the same period of 2016, mainly as a result of the accelerated amortisation of software assets due to IT integration measures and the expiration of various spectrum licenses in 2016. The operating loss for January to June 2017 was EUR 123 million versus an operating income of EUR 100 million in the same period of 2016, due to the above-metioned sale of passive tower infrastructure which was partly offset by an amortization decrease of EUR 105 million year-on-year. The net financial loss for the six months period amounted to EUR 16 million, which was broadly stable year-on-year. The Company reported no material income tax for January to June 2017. The net loss for the first half of 2017 came to EUR 139 million. CapEx [11] grew 1.1% year-on-year to EUR 434 million and EUR 226 million in the second quarter (+6.9% year-on-year), as we pushed ahead with network consolidation and further rolled out LTE while generating approx. EUR 20 million of Capex-related synergies, mainly in relation to network integration. Operating cash flow (OIBDA minus CapEx11) for the first six months of 2017 was EUR 407 million, down 45.0% year-on-year. Free Cash Flow (FCF) [12] for the first six months of 2017 reached EUR 68 million. Working capital movements came to a negative EUR 326 million, primarily driven by seasonal prepayments of EUR 221 million mainly for leased lines and rental contracts for mobile sites, as well as other recurring working capital movements, which include silent factoring transactions and the change in restructuring provisions. Consolidated net financial debt [13] amounted to EUR 1,575 million at the end of June 2017, bringing the leverage ratio to 0.9x versus 0.4x at year-end 2016. The increase mainly results from the EUR 744 million dividend payment for the financial year 2016 paid in May 2017. APPENDIX - DATA TABLES Please refer to the following link to access the download of the data tables. Thank you. https://www.telefonica.de/investor-relations-en/publications/financial-publications.html Further information Telefónica Deutschland Holding AG Investor Relations Georg-Brauchle-Ring 23-25 80992 München Veronika Bunk-Sanderson, Director Investor Relations Marion Polzer, Senior Manager Investor Relations Markus Block, Senior Investor Relations Officer Pia Hildebrand, Investor Relations Officer Saskia Puth, Office Manager Investor Relations (t) +49 89 2442 1010 ir-deutschland@telefonica.com www.telefonica.de/investor-relations Disclaimer: This document contains statements that constitute forward-looking statements and expectations about Telefónica Deutschland Holding AG (in the following "the Company" or "Telefónica Deutschland") that reflect the current views and assumptions of Telefónica Deutschland's management with respect to future events, including financial projections and estimates and their underlying assumptions, statements regarding plans, objectives and expectations which may refer, among others, to the intent, belief or current prospects of the customer base, estimates regarding, among others, future growth in the different business lines and the global business, market share, financial results and other aspects of the activity and situation relating to the Company. Forward-looking statements are based on current plans, estimates and projections. The forward-looking statements in this document can be identified, in some instances, by the use of words such as "expects", "anticipates", "intends", "believes", and similar language or the negative thereof or by forward-looking nature of discussions of strategy, plans or intentions. Such forward-looking statements, by their nature, are not guarantees of future performance and are subject to risks and uncertainties, most of which are difficult to predict and generally beyond Telefónica Deutschland's control and other important factors that could cause actual developments or results to materially differ from those expressed in or implied by the Company's forward-looking statements. These risks and uncertainties include those discussed or identified in fuller disclosure documents filed by Telefónica Deutschland with the relevant Securities Markets Regulators, and in particular, with the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht - BaFin). The Company offers no assurance that its expectations or targets will be achieved. Analysts and investors, and any other person or entity that may need to take decisions, or prepare or release opinions about the shares / securities issued by the Company, are cautioned not to place undue reliance on those forward-looking statements, which speak only as of the date of this document. Past performance cannot be relied upon as a guide to future performance. Except as required by applicable law, Telefónica Deutschland undertakes no obligation to revise these forward-looking statements to reflect events and circumstances after the date of this presentation, including, without limitation, changes in Telefónica Deutschland's business or strategy or to reflect the occurrence of unanticipated events. The financial information and opinions contained in this document are unaudited and are subject to change without notice. This document contains summarised information or information that has not been audited. In this sense, this information is subject to, and must be read in conjunction with, all other publicly available information, including if it is necessary, any fuller disclosure document published by Telefónica Deutschland. None of the Company, its subsidiaries or affiliates or by any of its officers, directors, employees, advisors, representatives or agents shall be liable whatsoever for any loss however arising, directly or indirectly, from any use of this document its content or otherwise arising in connection with this document. This document or any of the information contained herein do not constitute, form part of or shall be construed as an offer or invitation to purchase, subscribe, sale or exchange, nor a request for an offer of purchase, subscription, sale or exchange of shares / securities of the Company, or any advice or recommendation with respect to such shares / securities. This document or a part of it shall not form the basis of or relied upon in connection with any contract or commitment whatsoever. These written materials are especially not an offer of securities for sale or a solicitation of an offer to purchase securities in the United States, Canada, Australia, South Africa and Japan. Securities may not be offered or sold in the United States absent registration under the US Securities Act of 1933, as amended, or an exemption there from. No money, securities or other consideration from any person inside the United States is being solicited and, if sent in response to the information contained in these written materials, will not be accepted. [1] Excluding the impact from regulatory changes in form of the termination rate effect and the glide path of the European roaming regulation [2] Excluding exceptional effects. The three months ending 30 June 2017 include restructuring expenses of EUR 19 million and EUR 2 million of acquisition related consultancy fees, while the same period of 2016 included restructuring expenses of EUR 14 million as well as the net capital gain from the sale of passive tower infrastructure to Telxius amounting to EUR 352 million. For 2016, we have calculated an OIBDA comparable which includes the operating lease-related effects from the sale of Telefónica Deutschland's passive tower infrastructure as if it had occurred on 1 January 2016. [3] Excluding exceptional effects. The six months ending 30 June 2017 include restructuring expenses of EUR 30 million and EUR 2 million of acquisition related consultancy fees, while the same period of 2016 it included restructuring expenses of EUR 37 million as well as the net capital gain from the sale of passive tower infrastructure to Telxius amounting to EUR 352 million. For 2016, we have calculated an OIBDA comparable, which includes the operating lease related effects from the sale of Telefónica Deutschland's passive tower infrastructure as if it had occurred on 1 January 2016 [4] Including additions from capitalised finance leases and excluding capitalised costs on borrowed capital for investments in spectrum [5] 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 the payables for the spectrum auction [6] The impact from regulatory changes in form of the termination rate effects and the glide path of the European roaming legislation are excluded from the MSR guidance. Altogether these effects will result in a drag on 2017 MSR of approx. 3-4% year-on-year. [7] Exceptional effects such as restructuring costs are excluded from our OIBDA guidance. For 2016, we have calculated an OIBDA comparable, which includes the operating lease-related effects from the sale of Telefónica Deutschland's passive tower infrastructure as if it had occurred on 1 January 2016 [8] Including additions from capitalised finance leases and excluding capitalised costs on borrowed capital for investments in spectrum [9] Defined as the number of active mobile data tariffs over total mobile customer base, excluding M2M and data-only accesses [10] Excluding exceptional effects. The six months ending 30 June 2017 include restructuring expenses of EUR 30 million and EUR 2 million of acquisition related consultancy fees, while the same period of 2016 it included restructuring expenses of EUR 37 million as well as the net capital gain from the sale of passive tower infrastructure to Telxius amounting to EUR 352 million. For 2016, we have calculated an OIBDA comparable, which includes the operating lease related effects from the sale of Telefónica Deutschland's passive tower infrastructure as if it had occurred on 1 January 2016 [11] Including additions from capitalised finance leases and excluding capitalised costs on borrowed capital for investments in spectrum [12] Free cash flow pre dividends and payments for spectrum (FCF) is defined as the sum of cash flow from operating activities and cash flow from investing activities and does not contain paments for investments in spectrum as well as related interest paments [13] Net financial debt includes current and non-current interest-bearing financial assets and interest-bearing liabilities as well as cash and cash equivalents

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Language: English Company: Telefónica Deutschland Holding AG Georg-Brauchle-Ring 23-25 80992 München Germany Phone: +49 (0)89 24 42 0 Internet: www.telefonica.de ISIN: DE000A1J5RX9 WKN: A1J5RX Listed: Regulated Market in Frankfurt (Prime Standard); Regulated Unofficial Market in Berlin, Dusseldorf, Hamburg, Munich, Stuttgart, Tradegate Exchange TecDAX End of News DGAP News Service

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