DGAP-News:Telefónica Deutschland Holding AG: Telefónica Deutschland releases preliminary results for January to December 2014 and provides financial outlook for the business

DGAP-News: Telefónica Deutschland Holding AG / Key word(s): Preliminary Results/Forecast Telefónica Deutschland Holding AG: Telefónica Deutschland releases preliminary results for January to December 2014 and provides financial outlook for the business 24.02.2015 / 07:30

MUNICH, 24 February 2015 Telefónica Deutschland releases preliminary results for January to December 2014 and provides financial outlook for the business - Operating and financial performance in the fourth quarter of 2014 achieved given outlook, confirming the successful start of the new Telefónica Deutschland - Run rate synergies for 2015 expected to be around 30% of the end target run rate; fully on track to deliver the best high-speed access and service experience to our customers - We are well positioned to become the Leading Digital Telco in Germany leveraging strong focus on data monetisation and operational excellence Thorsten Dirks, CEO of Telefónica Deutschland, commented: "Our fourth quarter results confirm that the merged company has successfully kept its commercial momentum. We have achieved important milestones during the first five months of our integration and transformation program and set cornerstones for future success. 2015 will see us making further significant moves towards creating the Leading Digital Telco." Rachel Empey, CFO, added: "Our outlook reflects our continued focus on data monetisation from a strong position as a leader in the German mobile market and underpins a strong value proposition for our shareholders." Fourth quarter 2014 operational & financial highlights : - Net additions in the mobile postpaid segment reached 318 thousand, following the successful start of the new Company across all brands with focus on data monetisation, leveraging strong demand for LTE. Prepaid net additions totalled 35 thousand on the back of strong performance from partners. - Smartphone penetration at the end of December 2014 already surpassed the 75% mark for our premium brands in the consumer postpaid segment. - Revenue reached EUR 2,019 million, largely stable year-on-year on a like-for-like basis, in line with the given outlook on the back of positive trends for mobile service revenues, the handset business and a better performance of the fixed business. - Mobile service revenue totalled EUR 1,391 million, flat year-on-year on a like-for-like basis, and in line with the given outlook, leveraging strong contribution from premium brands. The increased adoption of mobile data bundles, already outweighing ongoing declines from traditional voice and messaging services, confirmed the improved year-on-year trends already seen in previous quarters. - Fixed revenue reached EUR 274 million (-7.7% year-on-year), an improvement from -9.0% in the third quarter. The impact from a lower retail DSL customer base is partly compensated by a significant uptake of higher speed propositions (VDSL) from new and existing customers, leveraging our strong fixed network cooperation with Deutsche Telekom. - Underlying OIBDA totalled EUR 354 million, meeting the given quarter-on-quarter outlook on the back of a higher contribution from the mobile data business. Commercial expenses reflected ongoing activities that resulted in a sustained trading momentum, while the accrual of additional expenses related to integration activities were not yet compensated by synergies. - CapEx amounted to EUR 438 million, a significant 53% increase over the combined third quarter (EUR 286 million), as anticipated. This marks the starting point of a new investment cycle for the new Telefónica Deutschland, maintaining a clear focus on the accelerated deployment of the LTE network (62% penetration at the end of December 2014) whilst integrating the two existing networks. - Reported Free Cash Flow pre dividends (FCF) for the financial year 2014 reached EUR 719 million, higher than in 2013 (EUR 699 million). The strong conversion from underlying OIBDA4 to FCF in 2014 was mainly driven by a positive EUR 511 million contribution from working capital (without extraordinary effects) during the year. - Consolidated net financial debt was EUR 3 million at the end of December 2014, a significant decrease compared to EUR 468 million at the end of December 2013, increasing Telefonica Deutschland's financial flexibility ahead of 2015 requirements, such as dividend payment, spectrum auction and initial cash-out from restructuring activities. Telefónica Deutschland's financial outlook Germany has emerged from 2014 as one of the most attractive telecommunication markets in Europe, particularly around the mobile data monetisation theme. In this new environment, improving the quality of service is key to facilitate the steady adoption of a more digital lifestyle by customers. The merger of Telefónica Deutschland and the E-Plus Group from 1 October 2014 is the main catalyst for change of a more balanced market, with tangible benefits for our customers and shareholders. Telefónica Deutschland's strategic framework is built around three key priorities: - Keep the Momentum from a leading position in the mobile consumer and partner markets, while growing in customer segments, such as SMEs or digital households from a better quality platform. - Integrate quickly and extract the full value of expected synergies from the integration of both infrastructures and organisations while progressing on the development of the LTE network. - Transform the Company into a truly end-to-end digitally oriented Company, both from an internal and external perspective. Our aspiration is to become the Leading Digital Telco, which will be cemented in the future by three success factors: 1. Offer the best high speed access experience to our customers, with a flexible combination of the latest technologies for mobile and fixed broadband access. 2. Ensure a superior customer experience to customers across all channels and throughout their customer journey, with tailored offers per customer segment designed to monetise increased demand for mobile data and a more efficient and digital customer service. 3. Achieve Operational Excellence while the integration of both networks and organisations is taking place, with a progressive improvement of efficiencies while consistently delivering on customer expectations. In 2015 (year one in the integration schedule), we already expect to achieve a run rate of around EUR 250 million Operating Cash FLow (OIBDA minus CapEx) synergies , which is approximately 30% of the target run rate of OpCF synergies (EUR 800 million) expected after five years. CapEx synergies (from the avoidance of dual network roll-outs) are anticipated to represent around 50% of total run rate OpCF synergies expected for 2015. We expect OpEx savings (ca. 40% of total OpCF synergies in 2015) to have an impact in financials mainly in the second half of the year from the initial execution of the headcount restructuring program, related reduction of facilities and shop footprint reduction. Thus, for OpEx synergies we anticipate a split of roughly 60% in commercial areas and 40% in SG&A (Selling, General and Administration) areas. Revenue and other synergies (less than 10% of total run rate synergies expected in the year) are expected to come from cross and up-selling activities, the increase of market share in the SME segment and the initial contribution from the Mobile Bitstream Access agreement to our wholesale business. In line with our vision to become the Leading Digital Telco in Germany, in 2015 we will put an even stronger focus on the development of our customer base. We will continue to be the value-for-money choice for our customers and partners while keeping a strong view on data monetisation. As a result, we expect mobile service revenue in 2015 to remain broadly stable over 2014 combined figure (EUR 5,528 million). The fixed business will continue to play an important role, leveraging increased demand for high-speed access and flexible propositions to facilitate our customers' digital journey. We expect a gradual progression of improvement in OIBDA throughout 2015 driven by the capture of synergies from the integration of organisations and initial projects for the combination of networks, the focus on operational excellence with increased scale of the business and a higher contribution from mobile data. From a 2014 combined base of EUR 1,461 million, we expect Operating Income before Depreciation and Amortisation (OIBDA) to grow more than 10% year-on-year in 2015. The fourth quarter of 2014 reflected the start of a new investment cycle for the new Telefónica Deutschland, and for 2015 we expect synergies to outweigh the additional investments to be made to accelerate the deployment of the LTE network and the initial works for the consolidation of the two networks. As a result, we expect that CapEx in 2015 to show a high single digit percentage decline year-on-year from a combined base of EUR 1,161 million. With regards to shareholder remuneration, it is our intention to suggest to the general shareholders' meeting a cash dividend of at least EUR 700 million for the year 2014, payable in May 2015. In line with our publicly stated dividend policy , the Company intends to maintain a high pay-out ratio in relation to Free Cash Flow while keeping the leverage ratio below 1.0x over the medium term. With regards to the integration of the E-Plus Group, synergies expected to be realised in the near future might be considered when making a dividend proposal. Telefónica Deutschland's operating performance in 2014 At the end of December 2014, Telefónica Deutschland's access base reached 47.7 million, an increase of 1.6% year-on-year on a like-for-like basis on the back of strong mobile trading. The mobile access base stood at 42.1 million (+2.4% year-on-year, like-for-like), while fixed accesses declined by 4.0% year-on-year to 5.5 million. Main recent commercial highlights and relevant announcements include: - From 3 February 2015, the O₂ Blue tariff portfolio is further tailored to the digital needs of consumers. LTE is included in all tariffs and customers can take advantage from additional data volumes throughout the portfolio. The new data automatic top up feature guarantees carefree surfing at constant speed while attractive EU roaming options allows travellers to use services abroad in the same way as at home. - LTE initiative: Starting 3 February 2015, LTE access will be enabled for all O₂ postpaid customers. This is part of the strategy of Telefónica Deutschland to deliver superior digital customer experience and to further encourage our customers the usage of mobile internet. - As part of our cross-and-upsell strategy after the integration of the E-Plus Group, the O₂ Blue mobile portfolio, as well as the O₂ DSL portfolio - including the Kombivorteil - are now available in BASE shops. Sales activities for the business segment have been coordinated since October 2014. Moreover, E-Plus direct salesforce is addressing the SME segment with O₂ products and services, with a clear focus on the new digital products: "O₂ Unite", "Digital Phone" and "Digital Workplace". - Since 27 December 2014, Chromecast has been added to O₂ DSL All-in L and XL fixed tariffs, so customers can experience high speed internet access at home and at the same time share it on the big TV-screen. - As part of the integration process, Telefónica Deutschland has sold yourfone GmbH (a former E-Plus Group company) including all trademark rights, customers and staff to Drillisch AG with effect of 2 January 2015. Postpaid mobile net additions in the fourth quarter of 2014 amounted to 318 thousand. This follows a successful start of the new Company with focus on data monetisation, leveraging strong demand for LTE. Total postpaid mobile base reached 18.8 million accesses at the end of December 2014, with their share over total mobile customer base ending at 44.6%. Mobile prepaid net additions were 35 thousand in the fourth quarter of 2014 on the back of a good performance of the partner business. At the end of December 2014 mobile prepaid base was 23.4 million. Postpaid churn was 1.9% in the fourth quarter of 2014 before adjustments in the customer base. Smartphone penetration at the end of December 2014 already surpassed the 75% mark for our premium brands in the consumer postpaid segment as a result of the continued commercial focus on LTE and data monetisation. Mobile ARPU in the fourth quarter of 2014 was EUR 10.9. Postpaid ARPU14 was EUR 17.7 in the same period and reflects the new perimeter of the Company from 1 October 2014. Prepaid ARPU for the fourth quarter was EUR 5.6. Retail fixed broadband access base declined by 4.5% year-on-year to 2.1 million at the end of December 2014, with the acceleration of the contribution from VDSL accesses in the fourth quarter (65 thousand, +34% over prior quarter) helping to improve the trend in net additions to -17 thousand in the fourth quarter (-31 thousand in the previous quarter). Wholesale broadband fixed accesses registered 24 thousand net disconnections in the quarter and 12 thousand net disconnections for the full year of 2014 (from 37 thousand net additions in 2013), on the back of the overall demand of customers for high speed accesses also affecting partner brands. Telefónica Deutschland's financial performance in 2014 Revenue for the financial year 2014 totalled EUR 5,522 million, consolidating E-Plus Group with effect of 1 October 2014. On a combined basis, 2014 revenues would have been EUR 7,793 million. In the fourth quarter, total revenue amounted to EUR 2,019 million, a largely stable performance over the previous year on a like-for-like basis (-0.2%), achieving the given quarter-on-quarter outlook. Mobile service revenue for 2014 were EUR 3,580 million; EUR 5,528 million on a combined basis. In the fourth quarter, mobile service revenue amounted to EUR 1,391 million, flat year-on-year on a like-for-like basis (+0.3% if the impact from mobile termination rate cuts is also excluded), and in line with the given quarter-on-quarter outlook, leveraging strong contribution from premium brands. The increased adoption of mobile data bundles is already outweighing ongoing declines from traditional voice and messaging services, thus confirming the improved year-on-year trend already seen in previous quarters. Mobile data revenue totalled EUR 1,793 million in 2014, consolidating E-Plus Group from the fourth quarter. The share of mobile data revenues over total mobile service revenues in the fourth quarter of 2014 was 52.0% or EUR 723 million and the share of non-SMS data revenues over total data revenues was 68.9% in the same period, totalling EUR 499 million. This was the result of the continued focus on data monetisation across brands and segments, leveraging the higher smartphone penetration in the base and the demand for LTE. Handset revenues amounted to EUR 795 million in 2014 consolidating E-Plus Group from October onwards and to EUR 350 million in the fourth quarter, following the strong demand for smartphones and LTE-enabled devices in particular. Fixed business revenues amounted to EUR 1,138 million in 2014, a decline of 7.8% year-on-year. In the fourth quarter, they decreased 7.7% year-on-year to EUR 274 million. This represents an improvement over the previous quarter as a result of the increased uptake of demand for higher speed accesses based on VDSL from new and existing customers. Operating expenses in 2014 totalled EUR 4,948 million, consolidating E-Plus Group from 1 October 2014. In the fourth quarter of 2014, operating expenses amounted to EUR 2,104 million (including restructuring costs of EUR 401 million). - Supplies amounted to EUR 2,144 million in 2014 and EUR 762 million in the fourth quarter, mainly driven by handset purchases. - Personnel expenses in 2014 amounted to EUR 828 million, while in the fourth quarter of the year they were EUR 498 million, which included a significant proportion (approx. 80%) of the above-mentioned EUR 401 million one-off restructuring costs. - Other operating expenses amounted to EUR 1,976 million for the twelve months period and EUR 843 million in the fourth quarter. The remainder of the restructuring costs not related to personnel were booked under this category. This cost category was mainly driven by the continued commercial investments to enhance trading momentum and additional costs related to the acquisition and integration of the E-Plus Group. Operating Income before Depreciation and Amortisation (OIBDA) for 2014 amounted to EUR 679 million (EUR 1,461 million on an underlying , combined basis). In the fourth quarter of 2014, OIBDA was negative by EUR 46 million, while underlying17 OIBDA was EUR 354 million, thus meeting the given outlook. OIBDA margin was 12.3% for the full year 2014, while underlying17 OIBDA margin in the fourth quarter was 17.6%, in line with the given outlook, and 18.7% for the full year 2014 on an underlying17, combined basis. OIBDA excluding group fees amounted to EUR 733 million in 2014, while in the fourth quarter it was negative in EUR 38 million (positive EUR 363 million on an underlying17 basis). In the fourth quarter underlying17 OIBDA margin excluding group fees was 18.0%. Depreciation & Amortisation totalled EUR 1,325 million in the financial year 2014 compared to EUR 1,132 million in 2013; primarily driven by the incorporation of E-Plus Group as of 1 October 2014. The amortisation of fair values allocated in the purchase price allocation (PPA) to intangible assets resulted into higher amortisation charges; partially offset by the write-off of assets in the software category no longer depreciated due to the end of their useful life. As a result, operating income was negative in EUR 646 million for January to December 2014, while in 2013 was positive in EUR 105 million. Net financial result as of December, 2014 was negative in the amount of EUR 41 million (EUR -27 million in 2013). This is mainly the effect from recent financing activities, e.g. the bonds issued in November 2013 and in February 2014. The Company reported an income tax expense for January to December 2014 of EUR 34 million, mainly relating to the revaluation of deferred tax assets. As a result, the result for the year 2014 was EUR -721 million. CapEx in 2014 amounted to EUR 849 million (EUR 1,161 million on a combined basis). In the fourth quarter, on a combined basis it registered a significant 53% quarter-on-quarter increase to EUR 438 million. The fourth quarter of 2014 saw the starting point of a new investment cycle for the new Company, maintaining a clear focus on the accelerated deployment of the LTE network. Outdoor coverage of the LTE network increased to 62% at the end of December, 2014, up 20 percentage points from end of prior year. The integration of the two legacy networks was already initiated in the fourth quarter. Operating cash flow (OIBDA minus CapEx) for 2014 was negative EUR 169 million. On an underlying17 basis, it amounted to EUR 300 million. Free Cash Flow pre dividends (FCF) for the financial year 2014 reached EUR 719 million, higher than in 2013 (EUR 699 million). The strong conversion from underlying OIBDA to FCF in 2014 was mainly driven by a positive EUR 511 million contribution from working capital without extraordinary effects during the year. Working capital in 2014 was positively affected by silent factoring transactions with handset receivables executed during the year, the higher non-current deferred income from other advanced payments for future services to be received (already registered in the second quarter), and the phasing of payments for CapEx in the fourth quarter. Telefonica Deutschland paid EUR 6 million taxes for prior periods in 2014. Net interest payments were higher year-on-year in EUR 9 million to EUR 30 million, owing to the debt funding activities executed in 2014 and 2013 and the impact in the fourth quarter from the incorporation of additional liabilities from the E-Plus Group. Consolidated net financial debt was EUR 3 million at the end of December 2014, a significant decrease compared to EUR 468 million at the end of December 2013, due to the net positive impact from the opening balance sheet of the E-Plus Group as of 1 October 2014 (EUR 184 million) and the FCF18 generated during the year (EUR 719 million) that offset the impact from the dividend payment in May 2014 (EUR 525 million). Additional effects, like the usage of available cash to partially fund the acquisition of E-Plus and others add up to the final net debt position. 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. 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/financial-publications/q4- 2014.html Further information Telefónica Deutschland Holding AG Investor Relations Georg-Brauchle-Ring 23-25 80992 München Victor J. García-Aranda, Director of Investor Relations Marion Polzer, Manager Investor Relations Christian Jurado, Investor Relations Pia Hildebrand, Office Coordinator 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 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. 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.

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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 TecDAX End of News DGAP News-Service

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