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

DGAP-News: Telefónica Deutschland Holding AG / Key word(s): 9-month figures/Preliminary Results Telefónica Deutschland Holding AG: Preliminary results for January to September 2016 26.10.2016 / 07:30 The issuer is solely responsible for the content of this announcement.

MUNICH, 26 October 2016 Preliminary results for January to September 2016 Telefónica Deutschland shows strong operating momentum with launch of o2 Free and generates incremental synergies; full-year outlook reiterated - Completion of postpaid customer migration; new premium portfolio o2 Free successfully launched on 5 October with a focus on 'more-for-more' - Underlying mobile service revenue (MSR) excluding regulatory effects improving versus prior quarter; continued headwinds from partner trading - OIBDA growth of +3.3% year-on-year driven by operating cash flow synergies of approx. EUR 125 million - Reiterating full-year outlook for MSR, OIBDA, CapEx and synergies Third quarter 2016 operational & financial highlights - Mobile postpaid saw 426 thousand net additions , mainly driven by strong partner trading. Contract churn improved by 0.2 percentage points year-on-year to 1.5% on the back of successful retention activities. - Mobile prepaid posted 231 thousand net additions2 driven by summer seasonality in the partner business. - The LTE customer base came to 10.6 million access at the end of September, a strong quarter-on-quarter increase of 12.4% 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 15% quarter-on-quarter to 1.6 GB per month, up 46% year-on-year. - The retail DSL business remained stable with a net loss of 2 thousand lines, while VDSL broadband demand continues strong with 63 thousand net additions. - Revenues showed a slightly improving trend with a year-on-year decline of 5.2% to EUR 1,876 million compared to -5.9% year-on-year in the second quarter, 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 (MSR) amounted to EUR 1,394 million, down 1.8% year-on-year and -0.9% excluding the effects from mobile termination and roaming rate cuts. MSR continues to be affected by the retail to wholesale shift resulting from price competition in the non-premium segment, plus legacy base effects. Underlying trends improve versus the prior quarter (-1.5% excluding regulatory effects), driven by a sustained focus on retention and the development of the customer base. - OIBDA excluding exceptional and special effects grew 3.0% year-on-year to EUR 467 million, as a result of approx. EUR 30 million of savings from incremental synergies mainly relating to employee restructuring and site decommissioning. - CapEx came to EUR 314 million, up 30.3% year-on-year, driven by phasing effects and intensified 4G network integration efforts in the second half of 2016. - Consolidated net financial debt was EUR 1,195 million at the end of September 2016. Leverage stood at 0.7x, in line with the stated target of at or below 1.0x. Progress of integration activities Telefónica Deutschland continues to execute on the integration of E-Plus, delivering milestones and the targeted synergies. At the same time, we are moving the focus from integration to longer-term, strategic transformation, gradually building our vision of the leading digital onlife telco in Germany. - Telefónica Deutschland continues to execute the second wave of its FTE restructuring programme, which encompasses 80% of the total targeted reduction of 1,600 FTEs by 2018, with a subsequent significant reduction in personnel expenses over time. - We have also now completed the postpaid customer migration of the former BASE and E-Plus customers to our premium brand O₂ as of the end of September. We now focus on the prepaid customer migration, which we expect to complete by the end of the year. - Having started the physical integration of the 4G networks of O₂ and E- Plus on 1 July, Telefónica Deutschland is pushing ahead quickly, with a region-by-region approach and a prioritisation of metropolitan areas to ensure an effective and fast transformation. We are also now executing the decommissioning of mobile sites to reach our target state of approx. 25 thousand mobile stations, thereby generating additional synergies. - We continue to optimise other infrastructure by further reducing our shop and facility footprint. We have now completed approx. two-thirds of our targeted shop reduction and approx. a third of our targeted facility reduction. Transformation: New business concepts and opportunities beyond connectivity Parallel to our core business, we are working on innovative digital solutions. In the new Advanced Data Analytics (ADA) division, the company is focusing on the considerable social and economic benefits from the analysis of large data pools. Big data will drive the business solutions of the future. Our 44 million mobile customer base generates four billion data points per day. We are also committed to ensuring that our customers retain sovereignty over their data and can shape their digital life with confidence. - We subject customer data to an elaborate anonymisation procedure before developing data statistics. Our Data Anonymisation Platform (DAP) ensures that customer data cannot be traced back to any individual. The platform has been certified by the TÜV Saarland. - We are also currently running research projects in Stuttgart and Nuremberg to evaluate the potential application of learnings from mobile data analysis to the optimisation of traffic planning and the prevention of air pollution. With our new Internet of Things (IoT) division we are focusing on the optimisation of business processes by connecting machines and vehicles to enable them to communicate with each other. Here we are currently building an IoT platform which helps companies develop their own IoT propositions in a fast and cost-efficient manner. Commercial update In the commercial space Teléfonica Deutschland was able to maintain market momentum throughout the third quarter in a highly competitive market environment. We launched our new premium portfolio o2 Free on 5 October with a focus on 'more-for-more'. We also remain well-positioned via a range of retail brands and partnerships in the non-premium segment. At the same time, various independent surveys showed that Telefónica Deutschland is progressing well with the development of the mobile network. - Telefónica Deutschland successfully launched the new o2 Free portfolio for retail and business customers. Our 4G smartphone proposition offers more content for higher price points. We thus aim to satisfy growing customer demand for more data and at the same time monetise this trend. All tariffs include LTE at maximum speed up to the data allowance included, as well as a 3G flat throttled to 1 Mbps after exceeding the 4G allowance. Existing o2 Blue All-in customers can buy an upgrade package. All tariffs include European roaming up to 1GB. - Independent, customer perception-based network tests have confirmed significant quality improvements of the network, even during the 4G network integration. Connect 'Netzwetter' confirmed this improvement as well as attesting Telefónica Deutschland the best signal strength across all technologies. Connect also showed that voice drop call rates have reduced significantly to 0.3%. The Telefónica Deutschland UMTS network again ranked second place in the SMARTPHONE Magazine test, specifically showing a significant improvement of download speeds. - We also continue to develop our products and services portfolio to add value for our customers. - Our O₂ Banking App won the 'Diamond Star' award from Handelsblatt and Euroforum in the category 'digital retail banking' for outstanding digital innovation, showing our company's focus on innovation and the implementation of digital trends in everyday life. The O₂ Banking App is the No.1 of direct bank apps in the google appstore category "Finance" in October. We are also continuing to develop our O₂ TV and video app with the intention of integrating Live TV, Catch-up TV and Video on Demand services. We will offer personalised recommendations based on viewing behaviour as well as guided and direct search options. There will also be direct links to partner content from within the app, including exclusive services for O₂ customers. Financial outlook 2016 We reiterate our outlook for the financial year 2016, as published in the Interim Group Report 2016 (page 47).

Operating performance in the first nine months of 2016 Telefónica Deutschland's access base grew by 1.1% year-on-year to 49.2 million as of the end of September 2016. The mobile customer base stood at 44.1 million, a 1.8% year-on-year increase. Mobile postpaid continued to show good momentum in the market, registering 945 thousand net additions in the nine months period and 426 thousand9 in the third quarter of 2016 versus 511 thousand and 169 thousand respectively in the same periods of 2015. Partner brands showed an increasingly strong performance, delivering 53% of postpaid gross additions in for January to September and 59% in the third quarter. As a result, the postpaid customer base was up 4.7% year-on-year to 20.2 million accesses as of the end of September, 45.8% of total mobile customers (+1.3 percentage points year-on- year). Mobile prepaid posted 107 thousand net disconnections for the nine months period but 231 thousand net additions9 in the third quarter, mainly driven by summer seasonality in the partner business. As a result the customer base fell 0.5% year-on-year to 23.9 million accesses. Postpaid churn on an underlying basis improved by 0.1 percentage points year-on-year to 1.6% in the period until September and by 0.2 percentage points to 1.5% in the third quarter. The O₂ consumer brand reported a stable churn of only 1.3% for both periods, a reflection of the success of our continued retention focus even during the ongoing postpaid customer migration. Smartphone penetration was 59.2% at the end of September, up 6.3 percentage points year-on-year and rose across all brands driven by the steady increase of data demand both in the postpaid and the prepaid customer base. Within the o2 consumer brand smartphone penetration for postpaid customers stood at 77.7% as of 30 September 2016. The LTE customer base was up 12.4% quarter-on-quarter to 10.6 million as of 30 September 2016, reflecting the continued high demand for high-speed mobile access from customers. Mobile ARPU came to EUR 10.4 in the in the period until September (-3.6% year-on-year) and EUR 10.5 for the third quarter 2016 (-3.8% year-on-year, stable quarter-on-quarter). The postpaid ARPU10 came to EUR 16.6 both for January to September and the third quarter, a year-on-year decline of 3.9% and 4.7% respectively. This decline reflects the increasing share of wholesale customers in the customer base. The prepaid ARPU came to EUR 5.8 for the nine months period (-1.1% year-on-year) and EUR 5.9 in the third quarter (-1.8% year-on-year), partly driven by prepaid to postpaid migration. VDSL saw 215 thousand net additions up to September 2016 (+14.6% year-on- year) and 63 thousand in the third quarter (-2.5% year-on-year) as a result of continued solid demand for VDSL broadband. Retail DSL thus posted 4 thousand positive net additions in the nine months period (-2 thousand in the third quarter). The total retail DSL customer base remains stable at approximately 2.1 million. Fixed wholesale accesses continued to fall with 181 thousand net disconnections until September and 59 thousand in the third quarter, as a result of the progressive decommissioning of the ULL (unbundled local loop) broadband access infrastructure. Telefónica Deutschland's financial performance in the first nine months of 2016 Revenues totalled EUR 5,567 million until September, 4.5% lower year-on- year, mainly as a result of the mobile service and handset revenues declines. The third quarter saw a slightly improved trend of -5.2% year-on- year to EUR 1,876 million versus -5.9% year-on-year recorded in the second quarter of 2016. Mobile service revenues (MSR) fell 1.6% year-on-year for January to September 2016 to EUR 4,088 million and -1.8% in the third quarter to EUR 1,394 million. This is a reflection of the competitive intensity in the partner business, which also drives a slightly higher share of wholesale revenues. We continue to focus on the development of our customer base through retention and upselling mechanisms. In addition, Telefónica Deutschland continues to see regulatory headwinds after the MTR cut from EURc 1.72 to EURc 1.66 in December 2015 and a stepdown in the glidepath for European roaming fees in April 2016. Excluding those regulatory effects, MSR fell -1.2% and -0.9% for the nine months and third quarter period, respectively. Mobile data revenues totalled EUR 2,245 million in the nine months period (+5.5% year-on-year) and EUR 767 million for July to September (+5.4% year- on-year), as sustained revenue growth in non-SMS data outweighs the continuous decline in SMS revenues. Mobile data revenues share over MSR was up 3.8 percentage points year-on-year to 55.1% in the third quarter. Non- SMS data revenues were EUR 1,717 million (+13.2% year-on-year) in the January to September period and EUR 592 million in the third quarter (+13.2% year-on-year). As a result, share of non-SMS data revenues over total data revenues in the third quarter was up 5.3 percentage points year- on-year to 77.2% in the quarter. Handset revenues came in 18.8% lower year-on-year at EUR 720 million for January to September 2016 and 24.5% lower at EUR 227 million in the third quarter. This reflects lower demand from customers and longer replacement cycles in line with broader European market trends. Fixed revenues fell by 4.4% year-on-year in the nine months period to EUR 743 million and by 4.3% year-on-year in the third quarter to EUR 245 million with continued good traction for VDSL in the retail business. On the one hand wholesale DSL continued to decline as we are dismantling our legacy infrastructure, while on the other hand we benefitted from spot trading opportunities in the carrier voice business. DSL retail revenue contributed -8.0% to the overall quarterly decline in fixed on the back of a broadly stable year-on-year customer base and the phasing of promotional effects. Other income was EUR 469 million for January to September with the year-on- year growth mainly resulting from the capital gain related to the sale of the passive tower infrastructure in the second quarter of 2016. Operating expenses including restructuring costs amounted to EUR 4,430 million in the nine months of 2016, down 6.0% year-on-year mainly as a result of the savings from integration projects. For the period July to September, operating expenses came to EUR 1,473 million, 9.5% lower year- on-year. Restructuring costs of EUR 59 million in the period until September and EUR 22 million in the third quarter were mainly driven by the leaver programme and network consolidation. - Supplies came to EUR 1,778 million, 9.5% lower year-on-year in the nine months period and EUR 572 million, down 13.3% year-on-year in the third quarter. This was mainly driven by lower hardware costs of sales (41% of supplies in 2016 vs 47% in the first nine months of 2015), while connectivity-related cost of sales were slightly higher in percentage terms (50% of supplies in the period January to September 2016 vs 47% in the same period of prior year). - Personnel expenses totalled EUR 488 million in the period until September (EUR 155 million in the third quarter), down 2.4% year-on- year mostly on the back of the successful execution of the employee restructuring programme in 2015. This includes restructuring costs of EUR 37 million for the nine months period and EUR 9 million for the third quarter. Excluding restructuring costs, personnel expenses fell 9.8% year-on-year in the nine month period. - Other operating expenses were EUR 2,164 million, down 3.8% year-on-year and included EUR 15 million from higher operating lease expenses related to the sale of tower assets. In the third quarter other operating expenses amounted to EUR 746 million (-8.1% year-on-year) with commercial and non-commercial costs contributing 52% and 44% respectively. Savings resulted from 2015 synergy initiatives as well as incremental gains in the third quarter, 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 September 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. In reported terms OIBDA amounted to EUR 1,606 million in the nine months period and EUR 436 million in the third quarter. OIBDA excluding exceptional and special effects grew 3.3% year-on-year to EUR 1,327 million in the first nine month of 2016 and 3.0% year-on-year to EUR 467 million in the third quarter. In-year savings from Opex & revenue- related integration activities amounted to approximately EUR 125 million in the nine months period and approximately EUR 30 million in the third quarter. The OIBDA margin increased by 1.8 percentage points year-on-year to 23.8% for the nine months period and 2.0 percentage points year-on-year in the third quarter to 24.9%. Group fees totalled EUR 46 million in the nine months period and EUR 20 million in the third quarter of the year, with the latter resulting from phasing. Depreciation & Amortisation amounted to EUR 1,602 million in the first nine month of 2016, a 3.7% year-on-year increase compared to the same period of 2015, resulting from higher software investments due to IT integration measures and the accelerated amortisation of certain software assets. Operating income for the period January to September 2016 came to EUR 4 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 nine months period was negative in the amount of EUR 26 million mainly resulting from the interest costs of various financing activities including the bonds issued in November 2013 and February 2014, a promissory note executed in March 2015, a syndicated credit facility issued in March 2016 as well as interest expenses from finance lease obligations. Telefónica Deutschland did not report income tax expense for January to September. The result for the first nine months of 2016 came to negative EUR 22 million. CapEx was EUR 743 million (+5.7% year-on-year) in the period up to September and EUR 314 million in the third quarter of 2016 (+30.3% year-on- year) on the back of the expected back-end loaded CapEx phasing through the year, driven by the network consolidation. Operating cash flow (OIBDA minus CapEx) came to EUR 863 million for the first nine months of 2016. Excluding exceptional and special effects , operating cash flow was EUR 584 million (+0.4% year-on-year). Free Cash Flow (FCF) for the first nine months of 2016 reached EUR 951 million and includes the proceeds from the sale of passive tower infrastructure to Telxius of EUR 587 million. Working capital movements of EUR -125 million were mainly driven by prepayments (mainly for rental contracts) of EUR 55 million, changes in restructuring provisions amounting to EUR 62 million as well as other working capital movements, which include silent factoring transactions for O₂ myHandy receivables. The consolidated net financial debt stood at EUR 1,195 million at the end of September 2016, maintaining a leverage ratio of 0.7x. The decrease over the nine months period mainly results from the fact that the FCF including the before mentioned proceeds from the sale of tower assets amounted to EUR 951 million and exceeded the EUR 714 million dividend payment for the financial year 2015 paid in May 2016 and payments relating to spectrum amounting to EUR 114 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/q3- 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.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 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.

26.10.2016 Dissemination of a Corporate News, transmitted by DGAP - a service of EQS Group AG. The issuer is solely responsible for the content of this announcement. The DGAP Distribution Services include Regulatory Announcements, Financial/Corporate News and Press Releases. Archive at www.dgap.de

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 TecDAX End of News DGAP News Service

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