Preliminary figures for the fourth quarter of 2017 and the full year:
Telefónica Deutschland reports further improvement in operating income and turnaround in wireless revenue trend
- OIBDA before exceptional effects 1) up 2.6 percent despite impact of regulation
- Mobile service revenue returns to growth path
- 737,000 contract customers added in the past year
- Mobile data usage up 55 percent in 2017
- Outlook for 2018: Revenue before regulatory effects broadly stable; OIBDA before exceptional effects and regulatory effects flat to slightly positive
- CEO Markus Haas: “In the past year, we further improved our profitability, achieved a turnaround in terms of revenue and largely concluded the integration process. We intend to build on these foundations in 2018. We don’t just want to remain the network operator with the most mobile users in Germany – we want to create an even simpler, faster and better customer experience through the digital transformation of products and services.”
Telefónica Deutschland continued its positive development in the fourth quarter and achieved its targets for the year as a whole. The company increased its operating income before depreciation and amortisation (OIBDA) before exceptional effects by 2.6 percent to EUR 1.84 billion thanks to solid operating business and additional synergies from the merger with E-Plus. Mobile service revenue (MSR) amounted to EUR 5.29 billion last year. Adjusted for regulatory effects 2), this was nearly stable compared to 2016. In the fourth quarter, the company increased its mobile service revenue on this basis by 0.8 percent thanks to strong demand for O2 Free tariffs and a dynamic partner business – the first gain in two and a half years. There were two reasons for the sustained upturn in the operating business. Firstly, Telefónica Deutschland added 737,000 new contract customers in the past year. Secondly, demand for mobile data continued to enjoy strong growth, leading to increased sales of higher-end tariffs. The company expects revenue before regulatory effects to remain broadly stable in 2018, with OIBDA before exceptional and regulatory effects forecast to remain flat or increase slightly. “In the past year, we further improved our profitability, achieved a turnaround in terms of revenue and largely concluded the integration process,” said Markus Haas, CEO of Telefónica Deutschland. “We intend to build on these foundations in 2018. We don’t just want to remain the network operator with the most mobile users in Germany – we want to create an even simpler, faster and better customer experience through the digital transformation of products and services. In short, we want to become Germany’s Mobile and Digital Champion.”
Data usage is booming – especially among O2 Free customers
2017 was characterised in particular by further rapid growth in mobile data usage. With the introduction of tariffs offering at least 10 GB in September, the company became the first German network operator to systematically respond to customer demand for mobile freedom. Telefónica Deutschland’s network transported approximately 418,000 terabytes (TB) of data, an increase of around 55 percent (150,000 terabytes) versus the previous year. Meanwhile, the average monthly consumption of O2 contract customers with LTE tariffs increased by 68 percent to 2.8 gigabytes (GB) thanks to the O2 Free portfolio. On average, customers with large O2 Free packages used more than 7 GB per month. In a competitive environment, Telefónica Deutschland’s network and services remained consistently popular in 2017. The monthly churn rate among contract customers was stable at a low level of 1.6 percent. Thanks to strong demand for own-brand tariffs and a successful partner business, the company added 737,000 contract customers in the course of the year. The number of prepaid accesses fell to 21.9 million at the end of 2017. This was due among other things to the final harmonisation and clean-up of the prepaid databases as part of the integration of the Telefónica Deutschland and E-Plus computer systems. The introduction of mandatory identification in the summer and the removal of roaming charges in the EU also served to reduce demand for prepaid tariffs. Telefónica Deutschland had a total access base of 50.4 million at the end of the year, of which almost 4.45 million were fixed lines. VDSL accesses enjoyed particularly strong growth of 43 percent from the previous year. At almost 46 million, mobile accesses account for the vast majority of the access base. Almost 98 percent of this figure relates to SIM cards used by people. No other mobile network in Germany has more mobile users. The rising number of accesses in the market as a whole is primarily attributable to SIM cards for machine-to-machine (M2M) communication.
Revenue impacted by regulation – clearly positive trend over the year
The German mobile telecommunications market was impacted by significant regulatory effects in 2017, with mobile service revenue adversely affected by the reduction in mobile termination rates and the removal of European roaming charges. In this environment, mobile service revenue declined to EUR 5.29 billion for the year as a whole (previous year: EUR 5.44 billion). The actual operational strength of Telefónica Deutschland is illustrated by its mobile service revenue adjusted for regulatory effects, which rose by 0.8 percent in the period from October to December – the first such increase in ten quarters. On this basis, mobile service revenue for the year as a whole was largely stable. Revenue from devices increased by 6.4 percent to EUR 1.13 billion in 2017, including thanks to strong demand for smartphones and tablets in the fourth quarter. In the fixed business, income during the past year continued to decline as a result of the withdrawal from the DSL wholesale business, which is now largely complete. The company's total revenue declined by 2.8 percent to EUR 7.30 billion in 2017, largely as a result of regulatory effects. However, there was a pronounced recovery in the second half of the year on the back of improved mobile service revenue.
OIBDA boosted by sustained synergy realisation and positive revenue trend
In terms of its operating income, Telefónica Deutschland continued the positive development recorded in recent years. Despite regulatory effects in excess of EUR 50 million, OIBDA 3) adjusted for exceptional effects increased by 2.6 percent to EUR 1.84 billion in 2017. The OIBDA margin rose by 1.3 percentage points to 25.2 percent. In the fourth quarter, operating income increased by 1.4 percent to EUR 499 million. This positive development is largely attributable to the successful realisation of synergies from the merger with E-Plus. As forecast, the company reported annual savings of around EUR 670 million in terms of its operating cash flow. This corresponds to 75 percent of the target set for the end of 2019. In the fourth quarter alone, Telefónica Deutschland realized additional year-on-year savings of EUR 45 million in operating costs and EUR 30 million in CapEx thanks to successful integration measures. Earnings were also boosted by the positive revenue performance. Telefónica Deutschland made good progress with the further development of its mobile network and is on schedule. The integration of the E-Plus network will be largely complete by the end of the year. At the same time, the company pressed ahead with the expansion of LTE coverage and fibre connections for mobile masts, thereby noticeably improving the user experience for customers. This was confirmed by independent tests by Computer Bild and Connect Netzwetter at the end of the year. In the coming year, the company aims to offer its customers not only the biggest network in Germany, but also the most modern one. This vision focuses on availability and reliability. CapEx 4) totalled EUR 950 million in the year under review (previous year: EUR 1.10 billion). The year-on-year reduction was due to improved efficiency as a result of continued network integration. The net loss for the period amounted to EUR -381 million (previous year: EUR -176 million). This was attributable to depreciation and amortisation for network components being removed following the merger and for the book value of the E-Plus customer base. The company’s liquidity and operating performance are not affected by this accounting-related change. The net result for the previous year was also positively impacted by extraordinary income from the sale of mobile masts to Telxius. Telefónica Deutschland reported income tax expense of EUR 262 million for the period from January to December 2017. This was largely due to changes in the accounting treatment of deferred taxes. Free cash flow (FCF) 5) amounted to EUR 680 million in the past year (previous year: EUR 1.41 billion). The prior-year figure includes the proceeds from the sale of mobile masts to Telxius for EUR 587 million. Consolidated net financial debt 6) amounted to EUR 1.06 billion at the end of December. At 0.6, the leverage 7) ratio remained significantly below the defined upper limit of 1.0.
Extensive innovation – with a clear focus on customers’ mobile freedom
Telefónica Deutschland is committed to creating mobile freedom for its customers. To achieve this, the company uses digital technologies and continuously improves its processes in order to simplify and enrich its customers’ lives. This is epitomized by the enhancement of the O2 Free portfolio, which will be augmented with a number of innovations aimed at significantly improving the customer experience over the course of 2018. The data analysis capability of the subsidiary Telefónica NEXT can now also be experienced by customers: The “How Germany moves” website lets them track nationwide traffic flows. By the end of this year, Telefónica Deutschland will offer its customers a uniform solution for simple and protected login for internet services in the form of Mobile Connect, which will be implemented in conjunction with Deutsche Telekom and Vodafone. In order to realise innovations within the company even more quickly, the Group’s venture capital financing company, Wayra, has refocused on supporting start-ups in Germany in the areas of Internet of Things, data analytics, cybersecurity and artificial intelligence. In the future, the young companies supported will work for Telefónica Deutschland in a targeted manner as partners and technology suppliers. The company is also leading the way when it comes to the development of new network technology. Telefónica Deutschland and Nokia are planning to construct a 5G pilot network in Berlin this year in order to test the applications of new network technology in the open air. Together with the consolidation of network infrastructure and pilot projects like the test area for self-driving cars on the A9 motorway, Telefónica Deutschland is laying the foundations for introducing the mobile communications standard of the future. In addition, the company is planning a cooperation with Vodafone to mutually connect each other’s wireless sites using fibre optic cables. This will increase our network capacity for broadband services and, eventually, for 5G services. This means that even more customers of Telefónica Deutschland will be able to surf the Internet at particularly high speeds. As part of the cooperation, the company has sold a part of its spectrum in the 3.5 gigahertz (GHz) range, which it was no longer using, to Vodafone.
Flat to slightly positive OIBDA forecast for 2018
Telefónica Deutschland expects mobile prices to continue to stabilise in the current year. As previously, business is expected to be supported by further growth in demand for large data packages and strong development in partner business. The slowdown in prepaid demand that was recorded in 2017 is likely to continue in the current year. This is due in particular to more stringent EU regulations concerning mandatory identification. Fixed business remains an important element of the corporate strategy. Advanced Data Analytics and the Internet of Things will make a significant contribution to Telefónica Deutschland’s business performance in the medium term. In order to better illustrate these developments, Telefónica Deutschland has decided to issue a forecast for expected revenue in future instead of the previous forecast on the basis of mobile service revenue. Revenue is expected to remain broadly stable in 2018. This forecast is adjusted for negative regulatory effects, which are estimated at EUR 30-50 million and result from the removal of roaming income and the further reduction in mobile termination rates. Operating income before depreciation and amortisation (OIBDA)8) adjusted for exceptional effects is expected to remain flat or increase slightly in the current year. This forecast is adjusted for negative regulatory effects of around EUR 40-60 million. The company also expects to have achieved annual synergies in its operating cash flow of around EUR 800 million by the end of the year, corresponding to around 90 percent of the target of EUR 900 million set for 2019. Reflecting the change in the benchmark used for its revenue forecast, Telefónica Deutschland is also adjusting the presentation of its CapEx target. In the future, a relative forecast reflecting the ratio of CapEx to revenue will be issued. CapEx is expected to amount to between 12 percent and 13 percent of revenue in 2018. This will include around EUR 50 million in synergy effects. At its upcoming Capital Markets Day on 23 February 2018, Telefónica Deutschland is going to present its transformation agenda in detail as well as the medium-term business expectations. Details of the financial forecast can be found in the table below.
|1||Excluding exceptional effects. 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|
|2||Effects include the impact from regulatory changes in the form of termination rate effects and the glide path of the European roaming regulation|
|3||Before exceptional effects. For 2016, an OIBDA comparable was calculated including 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||Free cash flow before payments for dividends, spectrum and acquisition costs for E-Plus is defined as the sum of the cash flows from operating and investing activities.|
|6||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.|
|7||Leverage is defined as net financial debt divided by the OIBDA of the last twelve months before exceptional effects.|
|8||Exceptional effects such as restructuring costs or the sale of assets are excluded.|