DGAP-News:Telefónica Deutschland Holding AG: Preliminary results for January to March 2018

DGAP-News: Telefónica Deutschland Holding AG / Key word(s): Preliminary Results/Forecast Telefónica Deutschland Holding AG: Preliminary results for January to March 2018 25.04.2018 / 07:30 The issuer is solely responsible for the content of this announcement.

MUNICH, 25 April 2018 Preliminary results for January to March 2018 Telefónica Deutschland first quarter 2018 results show solid operational trends with strong OIBDA growth and continued margin expansion - O₂ Free continues to successfully feed customer demand for big data; partner trading benefitted from focus on 4G offers - Fixing the basics: O₂ placed #2 in connect customer service test in April; now full focus on network consolidation - Sustained revenue trends: Underlying[1] revenue +0.4% year-on-year supported by underlying[1] MSR growth of +0.4% year-on-year and stronger demand for handsets -Strong OIBDA[2] growth of +5.4% year-on-year driven by successful synergy capture and value focus; additional in-year savings of ~EUR 35 million at OIBDA and ~EUR 15 million of Capex level -Only minor impacts from the implementation of IFRS 15[3] on revenue and OIBDA -Reiterate full year 2018 outlook; solid cash flow dynamics support dividend commitment First quarter 2018 operational & financial highlights - Mobile postpaid registered 157 thousand net additions in the first quarter, with solid demand for O₂ Free portfolio and a strong contribution from partners (61% share of gross additions). Churn in the O₂ brand was slightly better year-on-year at 1.5%, while total postpaid churn of 1.7% was slightly higher (0.1 percentage points) year-on-year - The LTE customer base continued to grow to 16.1 million, up 15.2% year-on-year. Data usage for LTE customers in O₂ consumer postpaid was up 56% year-on-year to 2.8 GB per month, but was flat quarter-on-quarter as a result of seasonal effects - Underlying[1] Revenue was up 0.4% year-on-year to EUR 1,778 million (+0.2% year-on-year as per IAS 18 reporting). Including negative regulatory impacts of EUR 11 million (mainly roaming) revenue reached EUR 1,767 million, -0.2% lower year-on-year - Underlying[1] mobile service revenue continued to show a positive trend with +0.4% year-on year (+0.3% year-on-year as per IAS 18 reporting) with tailwinds from the O₂ Free portfolio. On a reported basis, mobile service revenue came to EUR 1,287 million (-0.4% year-on-year) - Handset revenue grew 10.8% year-on-year to EUR 280 million on the back of stronger demand for high-end devices - Fixed-line revenue fell 10.7% year-on-year as the planned decommissioning of the legacy infrastructure still weighs on wholesale DSL dynamics - OIBDA adjusted for exceptional effects[4] and regulatory effects[5] reached EUR 422 million, up 5.4% year-on-year driven by an additional ~EUR 35 million of Opex and revenue-related synergies. As per IAS 18 reporting, OIBDA[6] growth was 4.6% year-on-year. The positive effect of these synergies was partially reduced by negative regulatory effects of EUR 14 million. The OIBDA margin adjusted for exceptional effects and regulatory effects increased by 1.1 percentage year-on-year to 23.8% - CapEx[7] amounted to EUR 197 million (-5.6% year-on-year) including Capex-related in-year synergies of EUR 15 million, as we maintained our focus on efficient investments while progressing well with network integration and the subsequent rollout and densification of our LTE-network - Consolidated net financial debt[8] was EUR 1,085 million as of the end of March 2018, with a leverage ratio of 0.6x – well in line with our target of at or below 1.0x Progress of integration activities and network update We are fixing the basics to become Germany’s Mobile Customer and Digital Champion and have largely completed most of our integration project by the end of last year. In the connect magazine mobile hot-line test 2018 we ranked in second place and lead the board in the category "quality of statements“. Our service is also now "very good" with regards to quality, friendliness and cost. In addition, we have signifi-cantly improved accessibility and reduced waiting times. This is a clear confirmation of our execution strength as we managed to turnaround customer service perception during the integration process. Now, we are focussing on the finalisation of our network integration activities, which we aim to mostly complete by the end of 2018. We are making solid progress with a region by region approach in order to build the largest and most modern network in Germany. By the end of March, we have completed almost 70% of the consolidation process, with a total of approx. 9,400 sites having been decommissioned al-ready. Throughout the project, our focus lies on access and reliability of our network for the majority of German customers, while subsequently rolling out one LTE network. Furthermore, we have taken another important step with regards to the 5G readiness of our network. At the Mobile World Congress in Barcelona, we extended our TechCity partnership with Huawei for another 3 years. TechCity was first launched in 2016. The test network with eight mobile stations in the north of Munich supports both companies in enhancing the research and development of different applications and services in order to drive 5G development. Moreover, in cooperation with NGN Fiber Network KG, Telefónica Deutschland will connect at least 1,500 mobile sites to fibre in the upcoming years to improve LTE performance and create preconditions for 5G infrastructure. Together with Nokia we have agreed to further develop 4G and 5G technologies and solutions in our lab in Munich. We focus on customer-relevant enhancements. Following this phase there will be a common pilot network called “Early 5G Innovation Cluster”, which is currently planned in Berlin.   Transformation: Simpler, Faster, Better At our Capital Market Day on 23 February 2018, we announced our digital transformation programme Digital4Growth. We will be executing a seamless transition from integration to transformation by making operations ‘Simpler, Faster, Better’ and becoming Germany’s Mobile Customer & Digital Champion. The Digital4Growth programme will further support our ambition to deliver superior shareholder remu-neration. We have strong confidence in our Free Cash Flow generation ability, which is underpinned by the targeted ~EUR 600 million of OIBDA[9] benefits by 2022. Although Digital4Growth will start to deliver financial results only from 2019, we are pushing ahead with the transformation already in 2018. We believe we can already show progress this year for the following KPIs: Increasing O₂ app penetration, higher sales in self-assisted channels and the share of eCare events. Among other things, we have also already launched the following initiatives as part of our digital trans-formation: - We rely on new technologies to further improve our customer service quality. Aura, the advanced artificial intelligence of the Telefónica Group, was launched in February and helps O₂ customers via Facebook Messenger with questions about their tariffs. - Our intelligent chatbot Lisa answers frequently asked questions from our O₂ customers and thus allows the hotline staff more time to help customers with more complex questions. Lisa already deals with >60% of online FAQs. Commercial update The first quarter of 2018 continued to see a dynamic yet rational German mobile market with a focus on profitable growth on the back of high data usage and the monetisation of big data bundles. We launched the following initiatives: - Customers of Telefónica Deutschland are now able to retrace their data usage in real time using an ‘Online Charging System’ based on a strategic partnership with Huawei. With this new technology the company meets the increasing challenges connected with billing of data usage in real time - In March, we have launched new O₂ DSL professional tariffs for business customers. The portfolio includes high-speed internet up to 100Mbps - Telefónica Deutschland had several temporal offers for selected bundles of high-value devices and tariffs during the first quarter of 2018, e. g. the Huawei P10 lite, the Samsung Galaxy S8 or the iPhone 8 - On 20 and 21 April, Telefónica Deutschland presented its innovative services, tools and products for the digital future of its business customers at the ‘Innovation & Style’ fair at the airport Munich. Part of the exhibition was also a joint pilot with the Munich airport for narrowband IoT. Together with Huawei and the IoT provider Q-Loud, Telefónica Deutschland has developed a smart energy solution for the air-port, which could in the future monitor all the counters for electricity and water which are distributed within a radius of ten kilometres around the airport.

Telefónica Deutschland operating performance in the first quarter of 2018 As of March 2018 Telefónica Deutschland had 47.1 million customer accesses (-5.0% year-on-year) and thereof 42.8 million mobile accesses (-4.2% y-o-y), driven by a 10.9% year-on-year decrease in the mobile prepaid base (21.3 million customers) on the back of changes in the regulatory environment. Mobile postpaid posted 3.5% year-on-year growth to 21.4 million customers. In fixed, the retail DSL customer base stood at 2.1 million accesses (-1.7% year-on-year). The migration of wholesale DSL accesses continues and is expected to be completed by the end of 2018 in line with the dismantling schedule of the legacy platform. Based on market standards for inactivity accounting, we had 45.3 million mobile customer accesses and 49.6 million accesses in total. Mobile postpaid registered 157 thousand net additions in the first quarter of 2018 compared to 172 thousand in the same period of the previous year. As a result of an increasing focus on 4G offers on the Telefónica Deutschland network, the performance of partner brands remained strong and contributed 61% of gross additions in the first quarter of 2018 compared to 58% of gross adds in the fourth quarter of 2017. At the same time, Telefónica Deutschland pursued a value-driven marketing approach and maintained its strategic focus on customer base development and retention, leveraging the positive customer response to O₂ Free. At the end of March, our mobile postpaid base (21.4 million accesses) represented 50.1% (+3.7 percentage points year-on-year) of our total mobile base. Mobile prepaid saw 535 thousand net disconnections in the first quarter of 2018 (+183 thousand in the same period of 2017) as customer demand remains lower on the back of regulatory changes introduced in the summer of 2017 (legitimation check and RLH). Thus mobile prepaid accesses fell 10.9% year-on-year to 21.3 million. Postpaid churn was slightly higher at 1.7% in the first quarter of the year (1.6% in the same period of 2017), while O₂ consumer postpaid churn again improved year-on-year to 1.5% in the first three months (1.6% in Q1 2017). Smartphone penetration[12] across brands and segments was 5.0 percentage points higher year-on-year at 62.0% as of the end of March. The LTE customer base continued to benefit from the increasing demand for high-speed mobile and reached 16.1 million accesses as of 31 March 2018, up 15.2% year-on-year. ARPU was impacted by the regulatory changes which outweighed accretive effects from O₂ Free in the first quarter of 2018. The blended mobile ARPU came to EUR 9.8, up 2.1% year-on-year. Postpaid ARPU fell -4.6% year-on-year to EUR 14.8 in reported terms, driven by regulatory effects and the ongoing mixshift within the customer base. Prepaid ARPU rose by 11.4% year-on-year to EUR 5.6, mainly as a result of the base correction in the last quarter of 2017, which was however neutral for mobile service revenue. The retail fixed broadband customer base was 1.7% lower year-on-year at 2.1 million accesses. The quarter saw 12 thousand net disconnection. The demand for VDSL remained strong with 92 thousand net additions. Fixed wholesale accesses continued to decline as expected, with 125 thousand net disconnections in the quarter due to the planned decommissioning of the ULL broadband access infrastructure. Thus, we expect to finalise the migration of the remaining 63 thousand wholesale accesses over the course of the year.   Telefónica Deutschland financial performance in the first quarter of 2018 Revenue trends continued to improve and revenue totalled EUR 1,767 million in the first quarter of 2018, -0.2% year-on-year in reported terms. Excluding a regulatory drag of EUR 11 million in the quarter, revenue was up +0.4% year-on-year to EUR 1.778 million (+0.2% as per IAS 18 reporting). Mobile service revenue totalled EUR 1,287 million, -0.4% year-on-year on a reported basis. Excluding the before-mentioned regulatory effect, underlying mobile service revenue trends remained positive with +0.4% year-on-year growth in the first quarter of 2018 (+0.3% as per IAS 18 reporting). The latter reflects tailwinds from the O₂ Free portfolio as well as remaining headwinds from OTT-trends and the ongoing legacy base rotation. Mobile data revenue was 2.1% lower year-on-year at EUR 701 million in the period January to March, reflecting the demand from customers for higher data bundles as well as sustained OTT-trends on SMS-revenues. Non-SMS data revenues as a percentage of data revenues increased 5.6 percentage points year-on-year to 85.0% and amounted to EUR 596 million, an increase of +4.8% year-on-year. Handset revenues rose 10.8% year-on-year to EUR 280 million, benefitting from stronger demand in hardware. Fixed revenue continued to fall to EUR 199 million (-10.7% year-on-year), mainly as a result of the decline in fixed wholesale revenues, which contributed -10.2% to the year-on-year. Fixed retail revenue trends showed a further improvement supported by the strong performance of VDSL (-1.1% contribution to the year-on-year decline, compared to -2.1% in the prior quarter). Other income was EUR 35 million compared to EUR 28 million in the first quarter of 2017. Operating expenses were broadly flat (-0.1% year-on-year) at EUR 1,408 million as a result of the additional integration savings and a focus on value over volume in the quarter. Operating expenses include restructuring costs of EUR 14 million in the first quarter of 2018, which were mainly related to the network consolidation project. - Supplies came to EUR 587 million, 0.4% higher year-on-year. Hardware cost of sales (48% of supplies in the first quarter) were also higher year-on-year in line with the demand for handsets. Connectivity-related cost of sales (40% of supplies in the first quarter) were lower year-on-year, as higher wholesale costs for outbound roaming were offset by lower costs for voice termination - Personnel expenses came to EUR 151 million compared to EUR 148 million (adjusted for restructuring costs) in the first quarter of last year, up 2.4% year-on-year. This was mainly the result of inflation-related salary adjustments with effect of 1 Jan 2018, which partly offset the savings related to the successful completion of the employee restructuring programme - Other operating expenses totalled EUR 669 million and were broadly stable year-on-year (+0.1%) including restructuring costs of EUR 14 million. Commercial costs and non-commercial costs made up 57% and 39% respectively Operating Income before Depreciation and Amortisation (OIBDA) reached EUR 394 million in the first three month of 2018 compared to EUR 390 million in the previous year. OIBDA adjusted for exceptional effects and excluding regulatory effects grew 5.4% year-on-year to EUR 422 million (4.6% as per IAS 18 reporting). Exceptional effects amounted to EUR 14 million and were mainly driven by network consolidation. The negative regulatory effect totalled EUR 14 million and was mainly related to higher wholesale cost due to the European roaming legislation. In-year savings from OPEX & revenue-related integration activities amounted to approx. EUR 35 million. Thus, the OIBDA13 margin increased by 1.1 percentage points year-on-year to 23.8%. Group fees amounted to EUR 9 million in first quarter of 2018. Depreciation & Amortisation amounted to EUR 467 million in the first quarter of 2018, a slight decrease of 3% year-on-year compared to the same period of 2017, mainly due to the extended useful life of network equipment due to network integration measures. The operating loss for January to March 2018 was EUR 73 million compared to an operating loss of EUR 91 million in the same period of 2017. The net financial expenses for the year were broadly stable year-on-year at EUR 9 million. The Company reported no material income tax expenses in the first quarter of 2018. The net loss for the three months period of 2018 was EUR 82 million, compared to a net loss of EUR 99 million in the same period of the prior year. CapEx[13] fell 5.6% year-on-year to EUR 197 million, as we pushed ahead with network consolidation and the further roll-out of LTE while generating approx. EUR 15 million of Capex-related synergies, mainly in relation to network integration. Operating cash flow (OIBDA minus CapEx14) in Q1 2018 reached EUR 197 million, an increase of 8.7% year-on-year. Free cash flow (FCF)[14] amounted to EUR 15 million until March 2018 versus a negative EUR 1 million in the prior year. Working capital movements and adjustments were negative in the amount of EUR 184 million, primarily as a result of seasonal prepayments for leased lines and rental contracts for mobile sites of EUR 185 million, partly compensated by other recurring working capital movements, in this case mostly driven by silent factoring transactions in the amount of EUR 166 million partly offset by a reduction in payables. Consolidated net financial debt[15] was broadly stable at EUR 1,085 million at the end of March 2018 (EUR 1,064 million as of 31 December 2017), with an unchanged leverage ratio of 0.6x well below the stated target of at or below 1.0x.  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/publications/financial-publications.html Further information Telefónica Deutschland Holding AG Investor Relations Georg-Brauchle-Ring 50 80992 München Dr. Veronika Bunk-Sanderson, Director Communications & Investor Relations Marion Polzer, Head of Investor Relations Eugen Albrecht, Senior Investor Relations Officer Abigail Gooren, Investor Relations Officer Pia Hildebrand, Investor Relations Officer Saskia Puth, Office Manager 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 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. [1] Excluding the negative impact from regulatory changes (mainly the European roaming regulation) [2] Adjusted for exceptional effects and excluding the negative impact from regulatory changes (mainly the European roaming regulation) [3] Unless indicated otherwise, all financial KPIs and year-on-year comparisons published in this document are prepared in accordance with IFRS accounting standards as adopted by the European Union. Financial KPIs for 2018 therefore include the effects of the implementation of IFRS 15 as of 1 January 2018 [4] Exceptional effects were EUR 14 million of restructuring expenses in the period January to March 2018 [5] Regulatory effects amounted to EUR 14 million in the period January to March 2018 [6] Adjusted for exceptional effects and excluding the negative impact from regulatory changes (mainly the European roaming regulation) [7] Including additions from capitalised finance leases and excluding capitalised costs on borrowed capital for investments in spectrum [8] Net financial debt includes current and non-current interest-bearing financial assets and interest-bearing liabilities as well as cash and cash equivalents and excludes the payables for the spectrum auction [9] Adjusted for exceptional effects and before the implementation of IFRS9, IFRS15 and IFRS16 [10] The effects from the implementation of IFRS15 as of 1 January 2018 and IFRS16 as of 1 January 2019 are not reflected in the financial outlook. For more information, please refer to the materials of the quarterly reporting during the period [11] Exceptional effects such as restructuring costs or the sale of assets are excluded [12] Defined as the number of active mobile data tariffs over total mobile customer base, excluding M2M and data-only accesses [13] Including additions from capitalised finance leases and excluding capitalised costs on borrowed capital for investments in spectrum [14] Free cash flow pre dividends and payments for spectrum (FCF) is defined as the sum of cash flow from operating activities and cash flow from investing activities and does not contain payments for investments in spectrum as well as related interest payments [15] Net financial debt includes current and non-current interest-bearing financial assets and interest-bearing liabilities as well as cash and cash equivalents and excludes the payables for the spectrum auction

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