DGAP-News:Telefónica Deutschland Holding AG: Telefónica Deutschland already benefits from integration synergies in the second quarter of 2015

DGAP-News: Telefónica Deutschland Holding AG / Key word(s): Preliminary Results/Half Year Results Telefónica Deutschland Holding AG: Telefónica Deutschland already benefits from integration synergies in the second quarter of 2015 29.07.2015 / 07:30

MUNICH, 29 July 2015 Preliminary results for January to June 2015: Telefónica Deutschland already benefits from integration synergies in the second quarter of 2015 - Strong 9.8% y-o-y OIBDA growth in the first half and +13.5% y-o-y in the second quarter from a focused commercial approach and the first benefits from integration synergies - Revenue growth of 2.1% y-o-y1 until June 2015 leveraging momentum in the market and focus on mobile data monetisation - Tangible results from 3G national roaming and LTE expansion, paving the way for an enhanced network perception amongst customers - Strong spectrum portfolio post June 2015 auction fully enables our long term aspiration to become the Leading Digital Telco in Germany - Financial outlook for the year 2015 confirmed, including operating cash flow savings of approx. 30% of expected run-rate of synergies in year five of integration Second quarter 2015 operational & financial highlights1 - Net additions in mobile postpaid reached 201 thousand, reflecting an increased contribution from business and partner brands to gross additions, while the rate of churn in the O₂ consumer brand further improved to 1.3%. Prepaid performance was strong with 237 thousand net additions. - LTE customer base showed a strong progression until June 2015 to 6.093 million. - Mobile service revenues were broadly stable year-on-year, which is a reflection of our strategy to drive value through the development of the customer base, particularly in premium brands. - Revenues reached EUR 1,949 million (+1.3% year-on-year), with mobile service revenues (+0.2% year-on-year) and handset sales (+18.7% year-on-year) outweighing a 9.5% year-on-year decline in fixed revenues. - OIBDA excluding exceptional effects totalled EUR 453 million (+13.5% year-on-year), an acceleration over previous quarter performance, with more than 40% of the year-on-year evolution in the quarter already explained by savings from the integration. - CapEx (excluding investments in spectrum) amounted to EUR 242 million (+8.2% year-on-year). Investments continued to be focused on the development of one LTE network, with a good progression towards the coverage target of approximately 75% by the end of 2015. - Free Cash Flow (FCF) for the first half of 2015 amounted to EUR 94 million, mainly reflecting a good progression of the Operating Cash Flow (OIBDA-CapEx) and a contribution of EUR -306 million from changes in working capital, driven by prepayments, payments for CapEx from the fourth quarter of 2014 and other effects. - Consolidated net financial debt was EUR 1,778 million at the end of June 2015, reaching a leverage ratio of 1.2x. This increase in leverage mainly reflects the annual dividend payment of EUR 714 million after AGM approval in May 2015 and the one-off payment of EUR 976 million in June 2015 (out of a total consideration of EUR 1,198 million) for spectrum licenses with a 17 year term. Progress of integration and transformation activities During the second quarter of 2015, Telefónica Deutschland continued with the execution of the integration and transformation projects that are expected to release EUR 250 million run-rate savings (OIBDA-CapEx) for the full year 2015, with a visible impact in OIBDA from the second quarter of the year: - At the end of June, around 750 full time equivalents (FTEs) had accepted the terms of the redundancy program for a total of 1,600 FTEs by 2018. - As of 29 June 2015 the Company started the transfer of the 301 shops acquired by Drillisch, of which 102 were own shops and 199 partner shops. Drillisch is also taking over approximately 300 shop employees plus additional office and field staff. This transfer of shops will contribute significantly to the planned consolidation of the shop footprint of Telefónica Deutschland. The Company intends to further reduce overlaps with the divestiture of an additional number of more than 100 shops until year-end. - In July 2015, Telefónica Deutschland agreed to transfer approx. 7,700 mobile sites to Deutsche Telekom as part of the planned network consolidation, helping the Company to drive a more efficient site dismantling process over time. - As a result of the ongoing corporate structural simplification effort, at the end of June 2015, a number of operating companies were merged into Telefónica Germany GmbH & Co. OHG, with the respective transfer of contracts with employees and customers. - Telefónica Deutschland is further progressing with the inner-city consolidation of its facilities and offices, setting Munich, Düsseldorf and Hamburg as the main activity centres of the Company. Recent developments in Telefónica Deutschland's commercial offer and network Telefónica Deutschland has taken some important steps to enhance its network quality and stimulate mobile data consumption within the customer base, leveraging new commercial propositions to further monetise mobile data: - As a result of the completion of the 3G national roaming project, our joint network infrastructure now reaches about 90% of the population in Germany. It also gives the densest 3G coverage in urban regions while further expanding coverage in rural areas with download speeds of up to 42 Mbps. This is a major step in our goal to provide our whole customer base with the best network experience. - Telefónica Deutschland's new sales and service organisation has started to focus its distribution network under the O₂ brand, including the harmonisation of the consolidated shop footprint. - Since mid-April 2015, the "blau" brand is offered as well throughout the full O₂ shop footprint, strengthening our product portfolio in the discount price range. - Telefónica Deutschland secured a strong spectrum portfolio after June 2015 auction, particularly in the bands over 1 GHz, which are normally used to deploy high capacity mobile data network overlays. The Company acquired a 60 MHz package in the 700, 900 and 1,800 MHz bands for a total consideration of EUR 1,198 million. Reiteration of 2015 financial outlook

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Telefónica Deutschland's operating performance in the second quarter of 2015 At the end of June 2015, Telefónica Deutschland's access base reached 48.0 million, an increase of 1.6% year-on-year on the back of continued growth of the mobile base, which stood at 42.6 million (+2.4% year-on-year), while fixed accesses declined by 4.5% year-on-year to 5.4 million. Postpaid mobile net additions in the second quarter of 2015 amounted to 201 thousand, higher than in the previous quarter (141 thousand). This resulted from the higher contribution to gross additions from partners and Business connections, and the ongoing focus on customer base development, especially in consumer premium brands. Total postpaid mobile base reached 19.1 million accesses at the end of June 2015, with their share over total mobile customer base ending at 44.9%. Mobile prepaid net additions were strong with 237 thousand in the second quarter of 2015 (-87 thousand in the first quarter), with a strong contribution from partner brands. At the end of June 2015, the mobile prepaid base was 23.5 million. Postpaid churn was 1.7% at the end of June 2015, a stable performance over the previous quarter. This was mainly driven by Telefónica Deutschland's focus on retention of its customer base, where the specific O₂ consumer brand reached a churn level of 1.3% at the end of June 2015. Smartphone penetration at the end of June 2015 reached 76% in the O₂ premium consumer postpaid base (4 percentage points year-on-year increase) as a result of the continued commercial focus on data monetisation and a value-based approach to handset sales from the beginning of the year. Smartphone penetration, including prepaid brands, reached 51.3% (an increase of 1.5 percentage points over the previous quarter). This improvement was mainly driven by the stimulation of the adoption of smartphones and usage of mobile data within the prepaid customer base, particularly in partner brands. LTE customer base stood at 6.093 million at the end of June 2015, with a strong sequential improvement over previous quarters as a result of a conscious approach from the Company to maximise the usage of the LTE network through a very focused commercial approach and the opening of the LTE network to the whole O₂ postpaid customer base. Mobile ARPU in the second quarter of 2015 was EUR 10.8 (-2.2% year-on-year). Postpaid ARPU9 was EUR 17.2 in the same period, stable over the previous quarter and lower by 4.7% year-on-year, with a higher weight of wholesale customers from partner brands added to the network. Prepaid ARPU for the second quarter of 2015 was EUR 5.9, showing 5.0% year-on-year growth and +4.7% over the previous quarter. The retail fixed broadband access base declined by -3.5% year-on-year to 2.1 million at the end of June 2015, showing a lower number of net disconnections (-13 thousand) than in previous quarters. VDSL net additions continued to be strong at 58 thousand in the second quarter, similar to the 66 thousands added in the previous quarter. Wholesale broadband fixed accesses registered 26 thousand net disconnections in the quarter in a context of progressive decommission of our unbundled local loop (ULL) broadband access infrastructure. Telefónica Deutschland's financial performance in the first half of 2015 Revenues for the first half of 2015 totalled EUR 3,849 million, an increase of 2.1% over the previous year, while in the second quarter they increased 1.3% year-on-year to EUR 1,949 million. Mobile service revenues in the first half of 2015 showed a 0.8% year-on-year growth to EUR 2,735 million, while in the second quarter they maintained a positive momentum (+0.2% year-on-year) to EUR 1,382 million. The evolution of mobile service revenues since the beginning of the year is the reflection of our conscious strategy to drive value through the development of our customer base, particularly in premium consumer brands. Almost two thirds of the growth rate deceleration seen from the first quarter (+1.5% year-on-year) is driven by a lower year-on-year postpaid trading in the retail business. Mobile data revenues totalled EUR 1,400 million in the first half of 2015 (EUR 707 million in the second quarter). The share of mobile data revenues over total mobile service revenues in the first half of 2015 and in the second quarter was 51.2%, while the share of non-SMS data revenues over total data revenues was 71.0% in the same period and 71.5% in the second quarter. Mobile data usage for LTE customers continued to show strong growth (+22% quarter-on-quarter to 959 Mb/month ), driven by the steady adoption of LTE-enabled handsets by customers and the growing usage of audio and video streaming applications. The Company continued to see a sequential improvement in the adoption mix of tariffs under the new O₂ Blue portfolio, with approx. 35% of gross additions in the second quarter of 2015 taking a tariff with more than 1 Gb monthly allowance (approx. 32% in the previous quarter). The new data automatic feature, which provides an unrestrained mobile data experience for the customer, already consolidated as the market-leading tool for mobile data monetisation. Since February 2015, the rate of automatic extensions of monthly data allowance increased to 34% of the opted-in customer base. Handset revenues amounted to EUR 586 million in the first half of 2015 (+23.4% year-on-year), while in the second quarter they reached EUR 303 million (+18.7% year-on-year), reflecting a good acceptance of the Company's value-based approach from the beginning of the year and the growing amount of handset sales to partners. Fixed business revenues amounted to EUR 521 million in the first half of 2015, a decline of 10.2% year-on-year, while in the second quarter they reached EUR 260 million (-9.5% year-on-year). The better revenue performance over the previous quarter reflects the ongoing balance between retail DSL dynamics and a declining fixed business for wholesale ADSL and voice carrier business, where the contribution from retail DSL revenues to year-on-year decline of fixed business revenues improved from -6.9 in the first quarter to -4.8 percentage points in the second quarter of 2015. Operating expenses in the first half of 2015 totalled EUR 3,087 million (flat year-on-year) while in the second quarter they amounted to EUR 1,535 million (an improvement of 2.1% year-on-year); including restructuring costs of EUR -3 million: - Supplies amounted to EUR 1,306 million. In the second quarter, they were EUR 646 million, of which 45% were hardware costs of sales and 46% connectivity cost of sales. - Personnel expenses amounted to EUR 345 million. In the second quarter, personnel expenses were EUR 166 million, with base salaries making up 77% of total. - Other operating expenses amounted to EUR 1,436 million. In the second quarter they were EUR 723 million, of which commercial and non-commercial costs represented 58% and 38%, respectively. Operating Income before Depreciation and Amortisation (OIBDA) improved significantly throughout the first half of 2015 to EUR 845 million, registering EUR 450 million in the second quarter. Excluding EUR -3 million restructuring costs, OIBDA before exceptional effects and after group fees would have grown 9.8% year-on-year in the first half of 2015 and by 13.5% in the second quarter. The better performance seen over the previous quarter (+5.7% year-on-year) is the result from our focused commercial approach and the first benefits from integration synergies, the latter driving more than 40% of the OIBDA year-on-year development in the second quarter. OIBDA margin was 22.0% for the first half of 2015, and 21.6% before exceptional effects , with an improvement of 1.5 percentage points over the previous year. In the second quarter of 2015, OIBDA margin before restructuring costs and after group fees was 23.3%, a sequential improvement over the previous quarters mainly related to the increased sales of handset with a significant turnaround in hardware margin. OIBDA excluding group fees amounted to EUR 869 million in the first half of 2015 (22.6% margin) and EUR 461 million in the second quarter (23.6% margin). Before exceptional effects, it was EUR 854 million (22.2% margin), and EUR 464 million in the second quarter, reaching a margin of 23.8%. Depreciation & Amortisation totalled EUR 1,087 million in the first half of 2015, compared to EUR 534 million reported in the same period of 2014. Depreciation & amortisation in the second quarter 2015 was EUR 532 million, similar to previous quarter's figure (EUR 555 million). The strong increase over last year's reported numbers is mainly driven by the incorporation of E-Plus Group in 2014 and the first impacts from the consolidation of both networks. With respect to the spectrum assets acquired in the auction (with a book value of EUR 1,194 million at the end of June 2015), the renewed licenses in the 900 and 1800 MHz bands will begin to be amortised from January 2017, while the newly acquired spectrum in the 700 MHz band will contribute to amortisation expenses after its final release by the Authorities. Operating income was EUR -242 million for January to June 2015 (EUR -82 million in the second quarter), as depreciation & amortisation charges still exceeded OIBDA. Net financial result for the first half of 2015 was negative in the amount of EUR 34 million (EUR -18 million in the second quarter). This was mainly the effect from the different financing activities executed in the past (the bonds issued in November 2013 and February 2014), the promissory note executed in March 2015 as well as interest expenses from finance lease obligations. The Company did not pay significant current income taxes for January to June 2015. The result for the first half of 2015 was EUR -276 million (EUR -100 million in the second quarter), mainly due to the above-mentioned performance of the operating income. CapEx (excluding investments in spectrum) in the first half of 2015 amounted to EUR 463 million (+5.6% year-on-year) while in the second quarter, it reached EUR 242 million (+8.2% year-on-year). Investments continued to be focused on the development of one LTE network, with a good progression into our coverage target of approximately 75% by the end of 2015. Operating cash flow (OIBDA minus CapEx excluding investments in spectrum)15 for the first half of 2015 was EUR 383 million (EUR 208 million in the second quarter). Before exceptional effects, operating cash flow showed strong year-on-year growth rates of 15.7% and 20.4%15, respectively for the first half and second quarter of 2015. Free Cash Flow (FCF) for the first half of 2015 reached EUR 94 million, of which EUR 61 million were proceeds from the sale of yourfone GmbH in the first quarter. Working capital movements of EUR -306 million were mainly driven by the prepayments (mainly rents) of EUR -158 million until June, a CapEx reversal of EUR -136 million from the fourth quarter of 2014, as well as the usual working capital movements which included silent factoring transactions for O₂ myHandy receivables. Consolidated net financial debt was EUR 1,778 million at the end of June 2015, reaching a leverage ratio of 1.2x. This was mainly due to the effect from the EUR 714 million dividend for the financial year 2014 paid in May 2015, and the payment in June for long-term investments in spectrum licenses (EUR 976 million out of a total consideration of EUR 1,198 million) with a 17 year term. 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/q2- 2015.html Further information Telefónica Deutschland Holding AG Investor Relations Georg-Brauchle-Ring 23-25 80992 München Victor J. García-Aranda, Director Investor Relations Marion Polzer, Senior Manager 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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