DGAP-News:Telefónica Deutschland Holding AG: Telefónica Deutschland releases third quarter 2013 preliminary results and announces a proposal for the financial year 2013 dividend

DGAP-News: Telefónica Deutschland Holding AG / Key word(s): Quarter Results/Dividend Telefónica Deutschland Holding AG: Telefónica Deutschland releases third quarter 2013 preliminary results and announces a proposal for the financial year 2013 dividend 07.11.2013 / 07:31

7th November 2013 Telefónica Deutschland releases third quarter 2013 preliminary results and announces a proposal for the financial year 2013 dividend MUNICH. The operating and financial performance of Telefónica Deutschland in the third quarter of 2013 reflects the continued execution of its strategy to monetise mobile data amidst a more dynamic competitive environment. The quarter saw a higher number of commercial activities to increase the value of its customer base through customer insight-led promotions. The conversion of operating results to Free Cash Flow remained strong with a stable year-on-year-performance up to September 2013. As such, the management of Telefónica Deutschland resolves the intention to propose to the Annual General Meeting in 2014 a cash dividend for the current financial year of approximately 525 million Euro. 'We are progressing well with the execution of our strategy in a particularly dynamic environment', said René Schuster (CEO), and Rachel Empey (CFO) added 'We are already seeing increasing opportunities to drive growth from the steady adoption of smartphones and related data services from our customers and we are taking the appropriate investment decisions in the market. At the same time, we stay committed to maintain an attractive shareholder remuneration'. Third quarter operational and financial highlights: - Net additions in mobile postpaid at 55 thousand (vs. 60 thousand in the previous quarter), reflecting continued market focus on retention and increased quality of new and existing customers taking one of the new 'O₂ Blue All-in' tariffs. As a result, churn rate continued its positive progression at 1.3% (-0.1 percentage points year-on-year) and smartphone penetration increased 12.8 percentage points year-on-year to 69.8% in its core O₂ consumer brand. - Mobile prepaid had a very strong performance relative to previous quarters, with positive net additions of 110 thousand (vs. 27 thousand in the previous quarter), mainly driven by Fonic and other secondary brands, with an accelerated growth rate of the smartphone penetration in the base (+11.5 percentage points year-on year to 18.3% in the Fonic brand). - Improvement of trends in the fixed broadband business, with 29 thousand retail ADSL net disconnections (vs. 40 thousand in the previous quarter), leveraging increasing demand for 'Speed option', based on VDSL technology (45% share of orders with speed option ). - Wireless service revenues declined 1.8% year-on-year (-1.3% in the previous quarter) as the combination of trading momentum, pricing and changes in customer behaviour around SMS substitution continued in the quarter, with trends stabilising on a quarterly basis. Mobile data continued to be the main growth lever (+20.2% year-on-year in non-SMS data) for the business, leveraging more favourable tariff mix adoption within the 'O₂ Blue All-in' portfolio. Total revenues declined 7.0% year-on-year, with a significant impact from mobile termination rate cuts. - Increased commercial investments were focused on mobile customer base retention activities and specific promotions on devices attached to high value tariffs in order to improve the mix of customer spend. This added to the negative flow-through effect from revenues to results with a year-on-year decline of 14.0% in OIBDA and a 1.9 percentage points margin reduction to 23.8%. - Capex increase of 3.4% year-on-year in the nine months to September, with a strong focus on the deployment of the LTE-based mobile network (doubling investments relative to the previous year). - Free Cash Flow pre dividends amounted to 543 million Euro in the January-September period, resulting in a net financial debt position at the end of September 2013 of 745 million Euro (leverage ratio of 0,6x). Outlook and shareholder remuneration update: The company expects the German telecommunication market to remain active and competitive in the medium term, with significant impacts from mobile termination rate cuts, changing customers' communication behaviours, and the variability of device launches and replacement cycles. As a challenger in the market, Telefónica Deutschland is impacted by the variability of these diverging trends. Thus, as a standalone business the goal for long term success is to maintain a consistent focus on gaining service revenue market share in the core wireless business and achieve further efficiencies of scale. The planned acquisition of KPN's German mobile business E-Plus (closing scheduled for mid-2014) will likely change the scope of operations and financial expectations. The company has observed an increasing pressure on revenues throughout the year 2013 from competition, changing customer behaviour and regulation. It's strategy remains focused on the mobile market, driven by an innovative multi-brand, data-centric approach. Additional levers, such as the introduction of LTE and convergent fixed-mobile data services will be key for medium-term profitability as a standalone business, with the recently announced acquisition of E-Plus amplifying this opportunity in the medium term, when finally approved by shareholders and regulatory authorities. The Company continues monitoring the mobile market place in the second half of 2013 and still sees a significant level of competition around smartphone 3G tariffs and device bundles. With a short-term focus on value maximisation in a transition year to the next technology cycle, the Company already anticipates the need to keep flexibility in the market through targeted investments and allocation of resources. As a result, 2013 OIBDA margin is expected to be at or below prior year's level. In terms of investments, 2013 and 2014 are considered as being key years for the LTE network roll-out of Telefónica Deutschland. For 2013 it is not expected that capital expenditures exceed the levels reached in 2010 (680 million Euro) when the company was rolling out 3G capacity. Thereafter, the planned acquisition of E-Plus will likely change the investment strategy. Operating results conversion to Free Cash Flow (FCF3) remains strong, with a stable year-on-year FCF performance up to September already supporting the current shareholder remuneration policy. The management of Telefónica Deutschland intends to propose to the General Shareholders' Meeting a cash dividend for the year ending December 31, 2013 of approximately 525 million Euro, payable in 2014. Telefónica Deutschland's operating performance: At the end of September 2013, Telefónica Deutschland had 25.4 million customer accesses, a year-on-year increase of 0.5%. Mobile accesses continued showing growth at 2.4% year-on-year to 19.6 million. Main commercial highlights for the third quarter of 2013 include: - Launching of attractive device & tariff bundles, covering a wide spectrum of customer demand for the most attractive smartphones in the market while improving tariff mix uptake. - LTE-driven marketing campaign ('Alles Drin'), e.g. 12 month test of the new 4G network with the 'O₂ All-in M' package and selected smartphones. - Promotions targeted to specific segments, such as young people, with the 'O₂ Blue M' including an enlarged data allowance (1 Gb) and access to 4G for 12 months at 24.99 Euro/month. - Continued innovation in the digital space, with the launch of mobile advertising propositions, such as 'O₂ More Local' and 'netzclub Local', and a new solution for digital advertising for small and medium sized retailers ('Promotion Pad of O₂'). In the third quarter of 2013, the German mobile market showed a high level of commercial activity level around bundles of smartphone and related tariffs across segments. Retention activities in the high end segment and a very dynamic discount/no-frills segment continued in the quarter. The access to LTE is also beginning to get traction as a purchasing decision factor for customers. Telefónica Deutschland continued focusing in the mid-range of the consumer market with its 'O₂ Blue All-in' tariff portfolio, improving quality from new and existing customers. As a result, postpaid mobile net additions in the quarter were 55 thousand (60 thousand in the previous quarter), and total postpaid base reached 10.3 million customers (+4.3% year-on-year). Postpaid customer base penetration over total mobile base increased 1.0 percentage points, year-on-year, to 52.7%. The mobile prepaid segment registered 110 thousand net additions in the third quarter of 2013 (27 thousand net additions in the previous quarter), following continued success of secondary brands (Fonic, Tchibo, netzclub, Türk Telekom) and increased adoption of prepaid smartphone tariffs. Prepaid customer base reached 9.3 million at the end of September 2013 (+0.4% year-on-year). Blended churn in the third quarter remained flat over the previous year at 2.1%, with continued good performance of postpaid churn at 1.3% (-0.1 percentage points, year-on-year), which is a reflection of the successful management of the high value customer base, including retention and focused tariff migration activities. Smartphone penetration reached 29.8% at the end of September 2013, an improvement of 5.5 percentage points over the previous year. In the specific segment of O₂ consumer postpaid, smartphone penetration reached 69.8%; +12.8 percentage points year-on-year. The prepaid segment is rapidly contributing to it, with penetration improving to 17.3% in O₂ consumer and 18.3% in Fonic (+7.1 and +11.5 percentage points year-on-year increases, respectively). The adoption rate of LTE-enabled handsets from new and existing customers is improving (approximately 55% of total sales in the third quarter vs. 40% in the previous quarter), which is an encouraging trend for further data monetisation. Mobile ARPU, excluding the impact from mobile termination rate cut from December 2012, declined 4.4% year-on-year to reach 13.4 Euro in the third quarter of 2013 (-8.2% year-on-year to 12.9 Euro in reported terms), an improvement over previous quarter (-8.4% year-on-year reported) in both contract and prepaid segments. Postpaid ARPU, excluding mobile termination rate cuts, declined 6.6% year-on-year to reach 20.4 Euro in the third quarter, an improvement over the 6.9% decline seen in the previous quarter. The performance in reported terms was -10.1% year-on-year to 19.6 Euro. This performance reflects the evolution of three main factors: a) improved tariff mix within 'O₂ Blue All-in' portfolio, b) the lower dilution achieved throughout the ongoing process of long-term contract renewals within the customer base, and c) the less negative impact from the substitution of SMS by IP-messaging applications in the market, mostly impacting incoming ARPU. After the launch of the new 'O₂ Blue All-in' tariff portfolio at the beginning of March 2013, the mix of adoption from new customers and tariff renewals continued its positive progression relative to the previous portfolio, with the 'O₂ Blue All-in M' (EUR29.99/month incl. VAT) being the most popular tariff and 'O₂ Blue All-in L' (EUR39.99/month incl. VAT) gaining traction amongst first adopters of LTE. The increasing adoption of smartphone tariffs in the prepaid segment is also having a favourable impact in prepaid ARPU (-0.6% year-on-year in the third quarter, compared with -2.3% in the previous quarter, excluding the impact from mobile termination rates). Retail fixed broadband accesses declined by 29 thousand in the third quarter of 2013, a continued improvement over the previous quarters (-40 and -41 thousand in the second and first quarter, respectively), which shows the increased traction of demand for speed amongst customers. In regions where VDSL is available, close to 45% of new additions were taking the 'Speed' option, which is a significant improvement over the previous quarter. On the other hand, wholesale broadband accesses registered positive net additions of 3 thousand in the third quarter. From mid-October 2013, the Company launched a new retail fixed portfolio ('O₂ DSL All-in S/M/L'): - It constitutes the first all-net offer in the market (including fixed and mobile networks), with speed as differentiator and different data volume consumption policies , adding transparency and simplicity to the current proposition. - Facilitates O₂ convergent strategy, allowing for 'Kombi-Vorteil' combinations in the 'O₂ DSL All-in M and L' options. Telefónica Deutschland's financial performance: Telefónica Deutschland's revenues reached 3,671 million Euro in the first nine months of 2013, a 5.2% year-on-year decline (-2.8% excluding mobile termination rate cuts from December 2012). Revenues in the third quarter were 1,225 million Euro, a decline of 7.0% over the same period of last year (-4.6% excluding mobile termination rate cuts). Wireless service revenues amounted to 2,246 million Euro in the first nine months of 2013 (-4.8% year-on-year; -0.9% excluding mobile termination rate cuts), while in the third quarter they amounted to 765 million Euro (-5.7% year-on-year; -1.8% excluding the impact from mobile termination rate cuts), with trends stabilising on a sequential basis. The year-on-year performance in the third quarter continued to be driven by the postpaid segment, where improving ARPU trends were not compensating a lower year-on-year trading activity (net additions) and a higher number of tariff renewals in the base (365 thousand in the quarter for the O₂ consumer segment, +13% year-on-year). The share of bundled revenues over total wireless service revenues was higher by 9 percentage points over the previous year reaching 62%. Mobile data continued to be the main driver for revenue performance, reaching 1,079 million Euro in the first nine months of 2013 and 365 million Euro in the third quarter (+4.3% and +3.0% year-on-year, respectively). Non-SMS data revenues registered growth of 22.9% year-on-year in the January-September period (+20.2% in the third quarter), resulting in a ratio of non-SMS data over total data revenues of 67.6% in the third quarter, 9.7 percentage points above the same period of last year. Handset revenues, mainly through 'O₂ My Handy' distribution model, reached 482 million Euro in the first nine months of 2013, an increase of 2.1% year-on-year. In the third quarter, handset sales were 11.0% lower than in the same period of last year, reflecting different timings of device launches over the previous year and promotions on selected smartphones bundled with high value mobile data tariffs. Wireline revenues stood at 938 million Euro in the first nine months of the year (-9.5% year-on-year; -8.1% in the third quarter), mainly leveraged on a lower retail DSL base (mitigated by an increasing uptake of VDSL) and a stable evolution of the retail DSL ARPU. This revenue line was also impacted by a further reduction of revenues from the low margin voice transit business. Operating expenses in the January-September 2013 period amounted to 2,870 million Euro, a year-on-year decrease of 3.7% (-3.4% in the third quarter to 959 million Euro). Main drivers for expenses evolution were: - Decline in supplies of 7.6% year-on-year to 1,451 million Euro (-12.2% in the third quarter), driven by a reduction in mobile voice and SMS interconnection expenses (voice rates were cut in December, 2012), lower costs associated with the fixed business and a lower volume of handsets sold in the period. - Personnel expenses increased by 1.8% year-on-year to 312 million Euro (+4.2% in the third quarter) as a result of a general increase in salaries from July, 2013 (around 3%). - Other expenses increased by 0.4% year-on-year to 1,107 million Euro (+8.0% in the third quarter), with efficiencies in overheads, advertising spend and lower bad debts not compensating a significant increase in commercial expenses, mainly related to customer retention and promotions made in the third quarter. Operating Income before Depreciation and Amortisation (OIBDA) reached 864 million Euro in the first nine months of 2013 and 292 million Euro in the third quarter (-7.7% and -14.0% year-on-year, respectively). OIBDA margin was down 0.6 percentage points year-on-year in the January-September 2013 period to 23.5% (-1.9 percentage points to 23.8% in the third quarter). OIBDA excluding group fees totalled 918 million Euro in the January to September 2013 period (-6.9% year-on-year; -12.0% in the third quarter). OIBDA margin excluding group fees was down 0.5 percentage points year-on-year in the year to September 2013 to reach 25.0% (-1.5 percentage points to 25.7% in the third quarter). The year-on-year OIBDA performance was mainly due to an increase in commercial investments focused on mobile customer base retention activities and specific promotions on devices attached to high value tariffs. This added to the negative flow-through effect from revenues to results. Depreciation & Amortisation in the first nine months of 2013 amounted to 842 million Euro, a year-on-year increase of 1.2%. This increase was due to increased investments in the rollout of 4G network and increase in capacity of the 3G network throughout the year. In the third quarter, depreciation and amortization amounted to 276 million Euro, a year-on-year decrease of -3.0%. This was the result of some assets that have been fully depreciated in the period. Operating income amounted to 22 million Euro in the January-September 2013 period (104 million Euro in the previous year), while in the third quarter it was 16 million Euro (55 million Euro in the previous year). Net financial expenses in the first nine months of 2013 were -23 million Euro (-6 million Euro in the third quarter), from a positive income of 3 million Euro in the previous year (-2 million Euro in the third quarter of 2012). This was the result of the new capital structure of the Company from September 2012 onwards. As a result of the above and nil tax expense in the period, net profit from continuing operations in the first nine months of 2013 was negative by 1 million Euro (+9 million Euro in the third quarter), which compares with a positive figure of 108 million Euro in the same period of the previous year (+53 million Euro in the third quarter of 2012). Capex in the first nine months of 2013 amounted to 468 million Euro, an increase of 3.4% year-on-year, supporting future growth with accelerated investments in the development of the LTE network, which more than doubled compared to the LTE investments in the same period of 2012. Capex in the third quarter declined by 5.5% year-on-year due to different investment schedules. Operating Cash Flow (OIBDA-Capex) reached 396 million Euro in the first nine months of 2013, a year-on-year decline of 18.1% (-23.7% year-on-year in the third quarter), and this translated into Free Cash Flow pre dividends from continuing operations (FCF) of 543 million Euro (from 549 million Euro in 2012). This strong conversion from Operating Cash Flow to FCF was the result of a year-on-year positive working capital contribution of 115 million Euro, with different silent factoring transactions executed in both years having a major role. In the third quarter of 2013 FCF amounted to 199 million Euro (397 million Euro in the same period of 2012). The Company did not pay income taxes neither in the first nine months of 2013 nor in the same period of 2012, and registered a net interest payment of 15 million Euro (3 million Euro income in the same period of 2012) and a contribution to a term deposit in the amount of 15 million Euro which will be released over time. Consolidated net financial debt stood at 745 million Euro at the end of September 2013, resulting in a leverage ratio of 0.6x. APPENDIX - DATA TABLES Please refer to the following link to access the download of the data tables. Thank you. http://www.telefonica.de/page/18157/q3-2013.html Further information Telefónica Deutschland Holding AG Investor Relations Georg-Brauchle-Ring 23-25 80992 München Victor J. García-Aranda, Head of Investor Relations Marion Polzer, Manager Investor Relations Pia Hildebrand, Office Coordinator Investor Relations (t) +49 89 2442 1010 ir-deutschland@telefonica.com www.telefonica.de/investor-relations Disclaimer: The financial information contained in this document (in general prepared under International Financial Reporting Standards (IFRS)) contains in respect of the results for January - September 2013 period only preliminary numbers. The financial information and opinions contained in this document are unaudited and are subject to change without notice. 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 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 Market Regulator (Bundesanstalt für Finanzdienstleistungsaufsicht - BaFin). The Company can offer 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, and shall take into account that the numbers published are only preliminary. Past performance cannot be relied upon as a guide to future performance. Except as required by applicable law, Telefónica Deutschland undertakes no obligation to release publicly the results of any revisions to these forward-looking statements which may be made to reflect events and circumstances after the date of this presentation, including, without limitation, changes in Telefónica Deutschland's business or acquisition strategy or to reflect the occurrence of unanticipated events. This document contains summarized 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. Finally, it is stated that neither this document nor any of the information contained herein constitutes an offer of 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 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. The issuer or selling security holder has not and does not intend to register any securities under the US Securities Act of 1933, as amended, and does not intend to offer any securities in the United States. 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. End of Corporate News

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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: Regulierter Markt in Frankfurt (Prime Standard); Freiverkehr in Berlin, Düsseldorf, Hamburg, München, Stuttgart TecDAX End of News DGAP News-Service

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