Preliminary results for First Quarter of 2015

Telefónica Deutschland benefits from mobile data business and considerable integration progress in the first quarter

-Tangible customer benefits due to network enhancements and attractive new products
-Revenues grow 2.9% y-o-y 1) to 1.90 billion Euro
-Mobile service revenues increase by 1.5% y-o-y
-Strong underlying OIBDA 2) (+5.7% y-o-y) reflects focus on customer base development
-Outlook and synergy target for 2015 confirmed
-CEO Thorsten Dirks: “We came out of the blocks well at the start of the year”
MUNICH. Telefónica Deutschland had a good operational start into the new year. In the first quarter of 2015, the company benefitted from the increasing mobile data usage among customers, supported by the progressive expansion of the LTE network and attractive new products. Mobile service revenues increased 1.5% year-on-year. Underlying Operating Income before Depreciation and Amortization 2) (OIBDA) improved considerably by 5.7% to 378 million Euro on a year-on-year basis. A commercial approach focused on customer base retention and a value-based handset sales model contributed to this development. At the same time Telefónica Deutschland made further progress with the execution of its integration program during the first three months. 301 shops were selected which will be taken over by Drillisch in the second half of 2015. Telefónica Deutschland also pushed on with the staff reduction program for 1,600 full-time positions until 2018 which had been announced last autumn. The 2015 objective to conclude respective termination agreements for 800 full-time positions is well on track. Against this background the company reiterates its outlook and synergy target for the fiscal year 2015.
“We came out of the blocks well at the start of the year. Based on new products and further network enhancements we continued to make good progress on our way to become the Leading Digital Telco. During the coming months we will continue working on creating the best network and service experience for our customers,” said Thorsten Dirks, CEO of Telefónica Deutschland. Rachel Empey, CFO, added: “Our first quarter results reflect a good operational start to the year with a significant improvement in profitability. The achievement of important integration milestones adds confidence on the delivery of our full year outlook.”

Good progress of integration and transformation program

During the first quarter Telefónica Deutschland achieved several important integration milestones which will help the company to deliver on its synergy target for the full year. With regard to the redundancy program for 1,600 full-time positions until 2018 which had been announced last autumn, Telefónica Deutschland is proceeding according to plan. The 2015 objective to conclude respective termination agreements for 800 full-time positions is well on track. In February, Telefónica Deutschland and the Workers’ Councils had agreed on a master redundancy program. With the selection of 301 shops which will be taken over by Drillisch in the second half of 2015, the company made good progress with the planned consolidation of its distribution footprint. Discussions about the transfer of the respective employees have already started.

New product offers and additional network enhancements

During the first three months of 2015 customers benefitted from attractive new product offers and substantial investments in network quality and experience. Telefónica Deutschland thus consequently pursued its strategy to further monetise the increasing data consumption among customers. In February, O2 launched the new postpaid tariff portfolio which includes access to LTE in every tariff. The new tariffs also comprise a customer-friendly data automatic upselling mechanism into higher volume tariffs. In addition the company invested significantly in its 4G network with the accelerated roll-out of LTE. The company expects to have a LTE coverage of more than 75% of the population in Germany by the end of 2015. With the introduction of 3G National Roaming from mid-April, customers of Telefónica Deutschland have started to experience first tangible benefits from the merger. By combining the strengths of the O2 and E-Plus networks, the company aims to offer the best 3G network experience in Germany. Since mid-April this customer benefit is the key element of an attention-grabbing advertising campaign. At the same time, Telefónica Deutschland activated the Voice over LTE feature in the whole O2 LTE network. This functionality, which significantly improves the quality of voice calls, will be progressively available across the smartphone portfolio. At the end of March 2015, Telefónica Deutschland’s access base reached 47.7 million, an increase of 1.6% year-on-year on the back of continued growth of the mobile base, which stood at 42.2 million (+2.5% year-on-year). The LTE customer base 3) stood at 5.1 million at the end of March, 2015. This was a sequential improvement over previous quarters as a result of a conscious approach to maximize the usage of the LTE network via portfolio design, including handsets and the opening of access to LTE to the whole O2 postpaid customer base. Fixed accesses declined by 4.4% year-on-year to 5.5 million.

Positive development of mobile service revenues

In the first quarter the product and service initiatives particularly contributed to a strong business development. Mobile service revenues increased by 1.5% year-on-year to 1.35 billion Euro (Q1 2014: 1.33 billion Euro). This was mainly driven by Telefónica Deutschland’s successful data-centric strategy. Moreover, the company utilized cross- and upselling opportunities. Mobile data revenues totalled 692 million Euro in the first quarter of 2015. The share of non-SMS mobile data revenues over total data revenues was 70.5% after 68.9% in the fourth quarter of 2014, driven by the monetisation of customers’ rising mobile data volumes. In the O2 consumer area, the company saw a sequential improvement in the adoption mix of tariffs under the new O2 Blue portfolio. 32% of gross additions in the first quarter took a tariff with more than 1 GB monthly allowance versus 25% in the previous quarter. The new data automatic feature in the O2 product portfolio, which enables customers to enjoy an unrestrained mobile data experience, proved very popular among customers from its launch date in February. Total revenues for the first three months amounted to 1.90 billion Euro which reflects an increase of 2.9% over the previous year (Q1 2014: 1.85 billion Euro). This was driven by the higher mobile service revenues and significantly stronger handset sales (+28.8% year-on-year). Fixed business revenues amounted to 261 million Euro (Q1 2014: 293 million Euro). Underlying Operating Income before Depreciation and Amortization (OIBDA) for the first three months improved by 5.7% to 378 million Euro compared to the combined figures for the first quarter of 2014 (Q1 2014: 357 million Euro). Besides the positive revenue trend, OIBDA performance reflected lower commercial costs due to the focus on customer base development as well as the value-driven approach to handset sales. On a reported basis OIBDA was positively impacted by a one-off effect from the sale of yourfone GmbH. Including this effect OIBDA for the first quarter increased by 10.6% to 395 million Euro. OIBDA margin was 20.8% for the first quarter of 2015. Before extraordinary effects, it reached 19.9%, an improvement of 0.5 percentage points over the previous year. The result for the first quarter of 2015 was -176 million Euro. This was mainly impacted by higher depreciation and amortisation charges following the merger with E-Plus which were not compensated by OIBDA.

Strong conversion to Free Cash Flow and high level of financial flexibility

In the first quarter of 2015 CapEx increased by 2.9% year-on-year to 221 million Euro. Operating cash flow (OIBDA minus CapEx) for the first quarter was 175 million Euro. Before extraordinary effects, it amounted to 157 million Euro, which compares positively to the combined figure of 143 million Euro in the first quarter of 2014. Free Cash Flow pre dividends (FCF) 4) for the first quarter of 2015 reached 100 million Euro. Consolidated net financial debt was 120 million Euro at the end of March 2015. The resulting liquidity position increases the company’s financial flexibility ahead of expected cash payments in 2015, such as the upcoming spectrum auction in the second quarter, the dividend for the financial year 2014 and the cash-out related to the restructuring measures to be executed in the year.

Outlook for 2015 confirmed

Telefónica Deutschland reiterated its outlook for the fiscal year 2015: For the year ending 31 December 2014, the management board and the supervisory board suggested to the annual general shareholders' meeting (AGM), which will take place on 12 May 2015 in Munich, a cash dividend of approximately EUR 714 million, to be paid the day after the AGM takes a favourable resolution.
1) Unless indicated otherwise, like-for-like 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 extraordinary 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. 2) Excludes a EUR 17 million extraordinary effect from a gain related to the sale of yourfone GmbH in the first quarter of 2015. 3) LTE customer defined as customer with LTE enabled handset and LTE tariff. 4) Free cash flow pre dividends (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 extraordinary 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 material one-offs, such as capital gains or restructuring costs (EUR 414 million in 2014). 6) 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 and CapEx excludes investments in spectrum.

TELEFÓNICA DEUTSCHLAND GROUP