Preliminary results for January to June 2015

Telefónica Deutschland already benefits from integration synergies in the second quarter of 2015

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  • Strong 13.5% y-o-y(1) increase of OIBDA in the second quarter reflects early benefits from integration and ongoing focus on customer base development
  • Revenue growth of 2.1% y-o-y for the first six months 2015 leveraging momentum in the market and focus on mobile data monetisation
  • Tangible results for customers from 3G national roaming and LTE expansion
  • Strong spectrum portfolio post June auction paves way for future mobile data-driven growth
  • On track to realize planned synergies(2) – financial outlook for the year 2015 confirmed
  • CEO Thorsten Dirks: “The rapid integration progress has already positive effects on our profitability.”
MUNICH. Telefónica Deutschland achieved a solid revenue development and strong growth in OIBDA in the second quarter of 2015. The rapid progress of the integration program and the commercial focus on the existing customer base were reflected in a 13.5% increase of the OIBDA to 453 million Euro. Total revenues were up 1.3% to 1.95 billion Euro in the second quarter and 2.1% in the first six months. Mobile service revenues maintained a positive momentum with an increase of 0.2% year-on-year in the second quarter and 0.8% in the first half of 2015. This development was supported by network enhancements, most notably the introduction of 3G national roaming and the accelerated deployment of LTE, which drove the monetisation of increased mobile data usage among customers. Telefónica Deutschland pushed on with its integration program including the almost entire implementation of the 2015 leaver program as part of the planned headcount reduction. The company also started the transfer of 301 shops to Drillisch and signed an agreement with Deutsche Telekom about the transfer of 7,700 mobile sites. Based on the positive operational and financial development, Telefónica Deutschland confirms its financial targets as well as its synergy targets announced for 2015.
“The ongoing network enhancements further drive mobile data consumption amongst our customers. In addition, the auction in June has provided us with a strong spectrum position which will enable us to offer the best network experience to our customers. The rapid integration progress has already positive effects on our profitability. We are fully on track to achieve our ambitions for 2015,“ said Thorsten Dirks, CEO of Telefónica Deutschland. Rachel Empey, CFO, added: “Our commercial strategy and the tight execution of our integration program are driving a gradual progression in OIBDA towards the end of the year. At the same time we keep a strong financial position.”

Further integration milestones achieved in the second quarter

Telefónica Deutschland achieved further integration milestones during the second quarter. As part of the master redundancy agreement with the Workers’ Council, Telefónica Deutschland continued implementing the 2015 leaver program for 800 full-time positions. The agreement provides for the downsizing of 1,600 full-time positions until the end of 2018. The consolidation of the O2 and E-Plus networks made a major step ahead with the agreement to transfer approximately 7,700 mobile sites to Deutsche Telekom. The transaction will save Telefónica Deutschland significant expenditures and resources for the dismantling of the sites and the termination of rental agreements. At the same time, the transaction will enable the company to move ahead even faster with the expansion of its high-speed network in the interests of the customers, and in particular to push on with the deployment of LTE. Financial impacts from the transaction have already been included within the communicated synergies for the integration of both networks. As of June 29, Telefónica Deutschland started the transfer of the 301 shops acquired by Drillisch. The company is transferring 102 own shops and 199 partner shops to the new owner, who also takes over approximately 300 employees of the own shops plus additional office and field staff. The shop transfer will contribute significantly to the planned consolidation of the shop footprint of Telefónica Deutschland. The company intends to divest an additional number of approximately 100 shops until year-end with the main objective to further reduce local overlaps. In the second quarter Telefónica Deutschland also started to harmonise the branding of its shops with the objective to create an optimal customer experience. All shops will now operate under the O2 brand and BASE shops are being converted to O2 shops until the end of the year. The BASE brand will be marketed online. In addition, the blau brand is being distributed through O2 shops since mid-April, strengthening the product portfolio in the discount price range.

Enhanced spectrum position and network enhancements support mobile data-driven growth strategy

In the frequency auction in June, Telefónica Deutschland acquired a valuable frequency package that enhances its overall spectrum position. The company secured a 60 MHz package in the 700, 900 and 1,800 MHz bands which will enable it to further expand its high-speed network and monetise the growing data business. The investment for the new frequencies amounted to approximately 1.2 billion Euro. With its comprehensive spectrum, Telefónica Deutschland is in a strong position after the allocation to offer customers the best network experience as part of its strategy to become the Leading Digital Telco in Germany. The company has a particularly strong portfolio in the bands higher than 1 GHz which enables Telefónica Deutschland to build up an even more powerful high-speed network and to further expand its capacity. With regard to the bands below 1 GHz the company is on par with the competition. The company continued to improve its network performance during the second quarter. In addition to the accelerated deployment of LTE, Telefónica completed the activation of national roaming between the 3G networks of O2 and E-Plus in May. Since then all our customers in Germany benefit from the combined strength of both 3G networks. The combined 3G network infrastructure now reaches 90% of the population in Germany and offers the densest 3G coverage in urban regions while further expanding coverage in rural areas with download speeds of up to 42 Mbps. In May 2015, customers used national roaming for the daily transfer of more than 60 terabyte data volume. In April, Telefónica Deutschland started offering Voice over LTE (VoLTE) for customers in the O2 network, which enhances the customer experience with higher speech quality and shorter call setup times. Telefónica Deutschland’s access base at the end of June 2015 reached 48.0 million reflecting year-on-year growth of 1.6% in the second quarter. The mobile customer base increased by 2.4% year-on-year to 42.6 million on the back of increased contribution from partner brands and business connections. In addition, the commercial focus on customer base development positively resulted in a lower rate of churn in the consumer postpaid segment. Postpaid mobile net additions in the second quarter of 2015 amounted to 201 thousand, higher than the previous quarter (141 thousand). Mobile prepaid net additions were strong with 237 thousand in the second quarter of 2015. Smartphone penetration at the end of June showed a year-on-year increase of 4 percentage points to 76% within the O2 postpaid customer base. The LTE customer base(3) showed a strong progression to 6.1 million at the end of June 2015, which again was an improvement over previous quarters supported by the conscious approach to maximize usage of the LTE network. Fixed accesses stood at 5.4 million at the end of the reporting period with an on-going positive trend in VDSL demand, which yet cannot compensate for losses in the standard fixed line business.

Ongoing increase in mobile data consumption

Telefónica Deutschland office in Düsseldorf
Telefónica Deutschland continued to benefit from its successful mobile data-centric strategy in the second quarter. Mobile service revenues maintained a positive momentum with an increase of 0.2% to 1.38 billion Euro in the second quarter of 2015. Average monthly mobile data usage of O2 consumer customers with a LTE-enabled smartphone continued to show strong growth with a 22% increase to 959 MB versus the previous quarter, driven by the steady adoption of LTE-enabled handsets by customers and the growing usage of audio and video-streaming applications. The rising mobile data consumption of customers drove mobile data revenues to 707 million Euro, with the share of non-SMS mobile data revenues over total data revenues growing to 71.5% after 70.5% in the first quarter of 2015. An increasing number of customers in the O2 consumer segment adopted higher value tariffs, with approximately 35% of gross additions in the second quarter opting for a tariff with more than 1 GB monthly allowance versus some 32% in the first quarter. In addition, the new data automatic feature provides an unrestrained mobile data experience for the customer. Since February 2015, the rate of automatic extensions of monthly data allowance increased to 34% of the opted-in customer base. Total revenues for the quarter grew by 1.3% year-on-year to 1.95 billion Euro (Q2 2014: 1.92 billion Euro). Mobile service revenues maintained a positive momentum in the second quarter while handset sales was up 18.7% year-on-year to 303 million Euro (Q2 2014: 256 million Euro). Fixed business revenues stood at 260 million Euro in the second quarter (Q2 2014: 287 million Euro). In the first half of 2015, Telefónica Deutschland increased mobile service revenues by 0.8% to 2.74 billion Euro (H1 2014: 2.71 billion Euro). Data revenues were up 1.6% to 1.40 billion Euro driven by increasing mobile data volumes. The share of non-SMS data revenues over total data revenues rose to 71.0% in the first half year. The increase in mobile service revenues and the strong handset business both contributed to the growth of total revenues by 2.1% to 3.85 billion Euro in the first six months (H1 2014: 3.77 billion Euro). Revenues in the fixed business amounted to 521 million Euro compared to 581 million Euro in the first half of 2014.

Strong improvement of OIBDA in the second quarter

Credits: Telefónica Deutschland
Telefónica Deutschland headquarter in Munich
Telefónica Deutschland saw the Operating Income before Depreciation and Amortization (OIBDA) improve significantly in the second quarter. It increased by 12.8% year-on-year to 450 million Euro (Q2 2014: 399 million Euro). In addition to lower commercial costs due to the increased focus on customer base development and the value-driven approach to handset sales, the company benefited from the delivery of first integration synergies due to the rapid progress of the integration program, the latter driving more than 40% of the OIBDA year-on-year development in the second quarter. Excluding -3 million Euro in restructuring costs, OIBDA before exceptional effects would have grown 13.5% in the second quarter. OIBDA margin before restructuring costs was 23.3%, an improvement over the previous quarters. The result for the second quarter of 2015 amounted to -100 million Euro, mainly impacted by higher depreciation and amortization charges following the merger with E-Plus and the planned network integration which were not compensated by OIBDA. In the first half of 2015, OIBDA increased by 11.8% to 845 million Euro (H1 2014: 757 million Euro). OIBDA before exceptional effects would have grown 9.8%. The OIBDA margin amounted to 22.0% on a reported basis and 21.6% before exceptional effects. Telefónica Deutschland generated a result for the first half of -276 million Euro, mainly effected by expected high depreciation and amortization charges related to the acquisition of E-Plus and planned network integration.

Free Cash Flow and outlook

CapEx excluding investments in spectrum amounted to 242 million Euro (+8.2% year-on-year) in the second quarter. Investments continued to be focused on the development of the LTE network, with a good progression into the coverage target of approximately 75% by the end of 2015. Free Cash Flow (FCF)(4) for the first half of 2015 reached 94 million Euro, of which 61 million Euro were proceeds from the sale of yourfone GmbH in the first quarter. Consolidated net financial debt was 1.78 billion Euro at the end of June 2015, reaching a leverage ratio of 1.2x. This was mainly due to the effects from the dividend for the financial year 2014 paid in May and the payment in June for long-term investments in spectrum licenses.

Outlook for 2015 confirmed

Telefónica Deutschland reiterates its outlook for the fiscal year 2015 including operating cash flow savings of approximately 30% of expected run-rate of synergies in year five of integration:
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 material 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. In the first quarter of 2015 a EUR 17 million capital gain from the sale of yourfone GmbH is excluded, while in the second quarter of 2015, it excludes a EUR -3 million restructuring cost, mainly related to the shop consolidation process.
2)Synergy run-rate (OIBDA-CapEx) of approximately EUR 250 million in 2015 and EUR 800 million by year 5 of integration.
3) LTE customer defined as customer with LTE enabled handset & LTE tariff.
4)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.
5) 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 material 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. Financials also exclude one-offs, such as capital gains or restructuring costs (EUR 414 million in 2014).
6)Year-on-year comparisons are based on combined figures for 2014. OIBDA in the first quarter of 2015 excludes EUR +17 million from a capital gain related to the sale of yourfone GmbH. In the second quarter of 2015, it excludes EUR -3 million restructuring costs, mainly related to the shop consolidation process.
7)All expected regulatory effects (e.g. MTR cuts) 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.

Telefónica Germany Q2 results 2015