DGAP-News:Telefónica Deutschland Holding AG: Preliminary results for January to June 2016

DGAP-News: Telefónica Deutschland Holding AG / Key word(s): Half Year Results/Preliminary Results Telefónica Deutschland Holding AG: Preliminary results for January to June 2016 27.07.2016 / 07:30 The issuer is solely responsible for the content of this announcement.

MUNICH, 27 July 2016 Preliminary results for January to June 2016 In an increasingly dynamic market, Telefónica Deutschland maintains operating momentum, moves from integration to transformation and provides mid-term dividend outlook - Reiterating full-year MSR outlook but narrowing range to 'slightly negative': MSR impacted by price competition in non-premium segment as well as regulatory and legacy base effects - OIBDA growth of +3.5% year-on-year (second quarter +1.2%) driven by successful synergy capture and transformation Opex effects; reiterating full-year OIBDA outlook - Operating cash flow synergies of approximately EUR 95 million (second quarter approximately EUR 40 million) primarily from 2015 roll-over effects; postpaid customer migration to be completed soon - Network focus shifts to 4G with start of integration on 1 July 2016 - Updating Capex outlook to 'mid to high single-digit % growth' on the back of more efficient Capex spend and network roll-out phasing; improving Operating Cash Flow - Announcing annual dividend growth over next 3 years, starting with a dividend proposal of EUR 0.25/share for the financial year 2016 Second quarter 2016 operational & financial highlights - Mobile postpaid registered 339 thousand net additions on the back of an increasingly strong performance of partners. The company maintained its focus on retention and customer base management; as a result contract churn improved by 0.1 percentage points year-on-year to 1.6% in the quarter. - Mobile prepaid posted 71 thousand net additions on the back of strong partner trading. - The LTE customer base saw a strong quarter-on-quarter increase again of 8.2% to a total 9.4 million accesses as of the end of June, reflecting the continued high demand from customers for high speed mobile access. Data usage for LTE customers in O₂ consumer postpaid continued to benefit from the demand for music and video streaming services and grew 16% quarter-on-quarter to 1.4 GB per month, up 42% year-on-year. - The retail DSL business sustained its trading momentum from the prior quarter with 2 thousand net additions as VDSL broadband demand continues to be solid. - Revenues came to EUR 1,834 million (-5.9% year-on-year), primarily reflecting lower year-on-year mobile services and handset revenues, with the latter driven by a marked slowdown in the demand for handsets. - Mobile service revenues amounted to EUR 1,358 million (-1.7% year-on- year, and -1.5% excluding regulatory effects). Results continue to be affected by the increasingly strong performance of the partner business plus legacy base and regulatory effects. We maintain our focus on retention and the development of the customer base. - OIBDA excluding exceptional and special effects grew 1.2% year-on-year to EUR 459 million as a result of approximately EUR 40 million of savings from synergies as well as the higher year-on-year Opex effects relating to transformation activities. - CapEx totalled EUR 212 million (-12.6% year-on-year), as Capex phasing throughout the year is back-end loaded due to the intensification of network integration efforts in the second half of 2016. - Consolidated net financial debt was EUR 1,356 million at the end of June 2016 and with a leverage of 0.8x, in line with the stated target of at or below 1.0x. Progress of integration and transformation activities Telefónica Deutschland progressed further with the integration of E-Plus and is executing according to plan, now moving the focus from integration to transformation. Important milestones reached in 2016 include the second wave of the leaver programme, building the future multi-brand portfolio and optimising the IT and customer service landscape. From 1 July 2016 onwards the network focus has shifted towards the integration of the 4G networks. - We have now finalised the future target organisation of the company. After constructive negotiations with the workers' council another 500 FTE have been given clarity about their employment situation. Thus, Telefónica Deutschland has already executed more than 80% of the total company target (a reduction of 1,600 FTEs) by 2018 - To further simplify and optimise IT operations, we extended our partnership with Atos Deutschland. Atos has taken over the responsibility of operating our IT systems and our employees from the Service Operations department from 1 July 2016 - We created a new common customer service & sales structure to simplify and combine previously independent customer service entities. As of 1 April 2016, customer service agents in the customer service entities in Hamburg, Bremen and Nuremberg are being transferred to independent subsidiaries within the company - We have also started to unify our brand and tariff portfolio while maintaining our successful multi-brand strategy to maximise customer reach - The company will henceforth focus on the O₂ brand in the premium sector and is making good progress with the transfer of BASE and E- Plus postpaid customers to O₂ which is expected to be completed in the third quarter - Over the coming months we will also execute the migration of simyo customers to Blau, our primary value brand in the non-premium market - BASE was relaunched as an online only proposition aimed at value- conscious contract customers - We also pushed ahead with the preparations for the physical integration of the O₂ and E-Plus 4G networks in the second quarter of 2016. With this focus shift from 3G to 4G, we are preparing for the future - We have also sold our passive tower infrastructure of approximately 2,350 towers to Telxius, Telefónica S.A.'s infrastructure company for a purchase price of EUR 587 million, taking advantage of favourable market conditions for infrastructure assets. The transaction will have no impact on the targeted synergies related to the merger with E-Plus Commercial update Teléfonica Deutschland maintained market momentum in an increasingly dynamic market environment while at the same time maintaining a clear focus on retention and the development of the customer base. We continue to improve in customer and network surveys. - Telefónica Deutschland has reinforced campaigns for existing customers, rewarding them for their loyalty with benefits in mobile and fixed-line - We also continue to restructure our brand portfolio: - Relaunch of BASE in July: The new online proposition targets value- conscious customers - Transfer of customers from simyo to Blau as the new core non- premium brand - O₂ Mobile Banking is Germany's first mobile-only bank, created in cooperation with Munich-based Fidor Bank, and was launched commercially in July. The product offers added-value services to O₂ postpaid customers and supports customer retention - Moreover, we also signed a cooperation with Sky Deutschland in July 2016, enabling us to offer our customers exclusive, unbundled access to content such as the Bundesliga or Champions League football - In June Telefónica Deutschland launched the O₂ TV & Video App in cooperation with German TV magazine TV Spielfilm. The app enables O₂ customers to watch over 50 TV stations free in live stream and to receive over 70 stations plus HD options for a monthly fee - Moreover, Telefónica Deutschland and Huawei are currently running a 4.5G network trial near Munich - In terms of network tests, we also continue to perform well. In the annual 'connect' fixed-line test Telefónica Deutschland maintained its third rank and significantly narrowed the gap to the number one compared to last year Updated financial outlook 2016 We reiterate our full-year MSR outlook, but are narrowing the range from 'slightly negative to broadly stable' year-on-year to 'slightly negative' year-on-year on the back of increased dynamics, especially in the non- premium end of the market. As expected, we also continue to see MSR headwinds from legacy customer base effects and regulatory effects. In contrast, data usage and our LTE customer base continue to grow, and we still expect this data growth to drive an inflection point in our MSR trajectory in the future. At the same time we are reiterating our OIBDA outlook of 'low to mid single-digit' year-on-year OIBDA percentage growth (post Group fees, before exceptional and special effects ). The narrowing of the MSR outlook range has no impact on our OIBDA outlook, as we continue to benefit from the roll-over effects of the successful integration initiatives in 2015, as well as pushing ahead with employee restructuring, customer migration and network integration efforts in 2016. We thus continue to expect incremental Opex and revenue-related in-year savings from synergies of approximately EUR 150 million, as well as a cumulated savings level of approximately EUR 430 million (>50% of total OpCF target of EUR 800 million) by year-end 2016. We are also adjusting our Capex outlook (excluding spectrum) from 'percentage growth in the low tens to mid' to 'high single-digit growth' in year-on-year terms in 2016. This is largely the result of more efficient Capex spend as well as phasing topics related to the network integration. We reiterate our general dividend policy. We view ourselves as a dividend- paying company with the intention to support a high payout ratio in relation to FCF. More specifically, over the next 3 years we intend to grow our dividend annually, starting with a dividend proposal of EUR 0.25/share in 2016. The company leverage target of 'at or below 1.0x net debt/OIBDA over the medium term' remains unchanged and will be continually reviewed. Updated financial outlook 2016:

Telefónica Deutschland's operating performance in the first half of 2016 At the end of June 2016 Telefónica Deutschland's access base grew by 1.2% year-on-year to 48.6 million driven by a 1.9% year-on-year increase in the mobile customer base, which stood at 43.4 million. Mobile postpaid continued to show good momentum in the market with the customer base growing 2.5% year-on-year to 19.6 million accesses at the end of June. The share of total mobile customers was up 0.3 percentage points to 45.2%. The company registered 520 thousand net additions in the first six months of 2016 and 339 thousand in the second quarter, compared to 342 thousand and 201 thousand in the same periods of 2015 respectively. Partner brands showed an increasingly good performance, delivering 49% of postpaid gross additions in the first half of the year (Q2: 53%). The mobile prepaid customer base was up 1.3% year-on-year (23.8 million accesses) while 165 thousand net disconnection were registered for the period January to June 2016 (71 thousand net additions for April to June); this was mainly driven by the seasonal disconnection in the first three months of the year. Postpaid churn was stable year-on-year at 1.7% in the six months period and even improved slightly by 0.1 percentage points year-on-year to 1.6% in the second quarter. Supported by our continued retention focus, the O₂ consumer brand reported an even lower churn of 1.3% and 1.2% respectively (both down by 0.1 percentage points year-on-year) again. Smartphone penetration rose 5.0 percentage points year-on-year to 56.2% as of 30 June 2016 and continued to rise across all brands driven by the steady increase of demand for data both in the postpaid and the prepaid customer base; within the O₂ consumer brand smartphone penetration stood at 74.3% as of 30 June 2016. The LTE customer base was up 8.2% quarter-on-quarter to 9.4 million as of 30 June2016, reflecting the continued high demand for high speed mobile access from customers. The mobile ARPU came in at EUR 10.4 in the second quarter (-3.8% year-on- year after -3.3% in Q1) and EUR 10.3 for the first half of 2016. The postpaid ARPU10 came to EUR 16.6 in the second quarter with the year-on- year decline improving to -3.3% (compared to -3.8% and -4.3% in the previous quarters), reflecting the success of upselling mechanisms in the legacy customer base mix. Prepaid ARPU was EUR 5.7 both for the six months period (-0.8% year-on-year) and the second quarter (-2.7% year-on-year) with a continued high demand for data amongst prepaid customers. VDSL momentum was strong with 152 thousand net addition until June (76 thousand in both the first and second quarter of 2016), which more than offset DSL disconnection and resulted in 2 thousand positive net additions (6 thousand in the six month period). Consequently, the total retail DSL customer base is now stabilising at 2.1 million. Fixed wholesale accesses continued with their expected decline (122 thousand net disconnections until June thereof 60 thousand in the second quarter), a reflection of the progressive decommissioning of the ULL (unbundled local loop) broadband access infrastructure. Telefónica Deutschland's financial performance in the first half of 2016 Revenues totalled EUR 3,691 million, lower 4.1% year-on-year (-5.9% year- on-year in the second quarter to EUR 1,834 million) mainly as a result of the performance of mobile service revenues and the handset business. Mobile service revenues (MSR) declined 1.5% year-on-year for January to June to EUR 2,694 million and -1.7% in the second quarter to EUR 1,358 million (-1.5% excluding regulatory effects). This is a reflection of the increasingly competitive dynamics across segments in German mobile and the associated strength of the partner business, which resulted in a higher share of wholesale revenues. In addition, the company continues to see regulatory headwinds in the form of an MTR cut from EUR 1.72 to 1.66 in December. Customer base and OTT effects also continue to have a decreasing effect, as we focus on the development of our customer base through retention and upselling mechanisms. Mobile data revenues rose 5.6% year-on-year to EUR 1,478 million for the six months period (+5.8% year-on-year to EUR 749 million in the second quarter) with the share over MSR increasing to 55.1% in the second quarter (up 3.9 percentage points year-on-year). Sustained revenue growth in non- SMS data outweighs the continuous decline in SMS revenues. Non-SMS data revenues amounted to EUR 1,124 million (+13.1% year-on-year) for the first half year and EUR 574 million in the second quarter, up +13.6% year-on- year. As a result, share of non-SMS data revenues over total data revenues was up 5.2% year-on-year to 76.7% for April to June. Handset revenues fell 15.9% year-on-year to EUR 493 million in the first six months (EUR 226 million, -25.5% year-on-year in the second quarter), reflecting longer replacement cycles and handset saturation in the German market in line with broader European markets. Fixed revenue fell by 4.5% year-on-year in the six months period (EUR 498 million) and by 5.9% year-on-year in the second quarter (EUR 245 million) with continued good traction for VDSL in the retail business. We continued to benefit from spot trading opportunities in the carrier voice business, while wholesale DSL declined in line with expectations. DSL retail revenue contributed -7.5% to the overall quarterly decline on the back of a customer base reduction of 0.5% year-on-year and the phasing of promotional effects. Other income was EUR 436 million until June with the year-on-year growth mainly driven by the capital gain from the sale of the passive tower infrastructure in the second quarter of 2016. Operating expenses including restructuring costs of EUR 37 million (14 million in the second quarter) amounted to EUR 2,958 million in the first half year 2016, down 4.2% year-on-year mainly driven by savings from integration projects (EUR 1,448 million for April to June; -5.6% year-on- year). Restructuring costs were mainly related to the leaver programme. - Supplies came to EUR 1,206 million, 7.6% lower year-on-year (578 million, -10.6% year-on-year in the second quarter) mainly on the back of lower hardware costs of sales (42% of supplies vs 45% in the first six months of 2015) and lower connectivity-related cost of sales (49% of supplies). - Personnel expenses totalled EUR 333 million (including restructuring costs of EUR 28 million) for the six months period (EUR 160 million in the second quarter) with a stable year-on-year decline of 3.2% mostly resulting from the successful execution of the first wave of the employee restructuring programme in 2015. - Other operating expenses were down 1.3% year-on-year to EUR 1,418 million in the six months period, including restructuring expenses of EUR 8 million and EUR 6 million from higher operating lease expenses related with the sale of tower assets. In the second quarter other operating expenses amounted to EUR 710 million (down 1.7% year-on-year) with commercial and non-commercial costs making up 60% and 34% respectively. Savings resulted from the 2015 synergy initiatives, but were partly offset by commercial and other investments related to customer and brand migration activities in the first half of 2016. Operating Income before Depreciation and Amortisation (OIBDA) in the period up to June 2016 benefitted from the net capital gain related to the sale of the Company's passive tower infrastructure in the second quarter of 2016 of EUR 352 million as well as the before-mentioned cost reductions. OIBDA in reported terms amounted to EUR 1,170 million (EUR 791 million for April to June). Excluding exceptional and special effects OIBDA in the first six month of 2016 grew 3.5% year-on-year to EUR 860 million (EUR 459 million, +1.2% year-on-year in the second quarter). In-year savings from integration activities (OPEX & revenue) amounted to approximately EUR 95 million (approximately EUR 40 million in the second quarter). The OIBDA margin increased by 1.7 percentage points year-on-year to 23.3% in the half year and +1.8% year-on-year to 25.0% for April to June. Group fees amounted to EUR 26 million in the first six months of 2016 and EUR 13 million in the second quarter of the year. Depreciation & Amortisation amounted to EUR 1,069 million in the first six month of 2016, a 3.5% year-on-year increase compared to the same period of 2015 (EUR 1,033 million), mainly resulting from higher software investments due to IT integration measures. Operating income for January to June 2016 was positive in the amount of EUR 100 million on the back of the net capital gain from the sale of tower assets. However, depreciation & amortisation charges still exceed OIBDA excluding exceptional and special effects. The net financial result for the six months period was negative in the amount of EUR 18 million mainly resulting from various financing activities including the bonds issued in November 2013 and February 2014, a promissory note executed in March 2015 as well as interest expenses from finance lease obligations. The Company did not report income tax expense for January to June. The result for the first half of 2016 came to EUR 83 million. CapEx was EUR 430 million (-7.1% year-on-year) in the first half of 2016 and EUR 212 million in the second quarter of 2016 (-12.6% year-on-year) on the back of back-end loaded Capex phasing through the year. Operating cash flow (OIBDA minus CapEx) for the first six months of 2016 was EUR 740 million. Excluding exceptional and special effects, operating cash flow was EUR 430 million, up 16.9% year-on-year. Free Cash Flow (FCF) for the first six months of 2016 reached EUR 599 million and includes the proceeds from the sale of passive tower infrastructure to Telxius of EUR 587 million. Working capital movements of EUR 360 million were mainly driven by prepayments for rental contracts of EUR 111 million, restructuring expenses amounting to EUR 43 million as well as other working capital movements which include silent factoring transactions for O₂ myHandy receivables. Consolidated net financial debt stood at EUR 1,356 million at the end of June 2016, maintaining a leverage ratio of 0.8x.The slight increase compared to year end 2015 mainly results from the EUR 714 million dividend payment for the financial year 2015 paid in May 2016, partially offset by the proceeds from the sale of passive tower infrastructure to Telxius amounting to EUR 587 million. 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/q2-2016.html Further information Telefónica Deutschland Holding AG Investor Relations Georg-Brauchle-Ring 23-25 80992 München Veronika Bunk-Sanderson, Director Investor Relations Marion Polzer, Senior Manager Investor Relations Abigail Gooren, Investor Relations Officer Pia Hildebrand, Investor Relations Officer (t) +49 89 2442 1010 ir-deutschland@telefonica.com www.telefonia.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 summarised 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, Tradegate Exchange; Terminbörse EUREX TecDAX End of News DGAP News Service

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