Telefónica Deutschland starts the new year with positive trend

Telefónica Deutschland has made a strong start in the new fiscal year despite the reduction of termination rates and the gradual elimination of EU roaming fees affecting the whole industry. After the first quarter, the company is fully on track to achieve its business objectives for 2017. Thanks to cost savings and revenue synergies, the operating income (OIBDA) rose 2.1 percent to EUR 401 million. Adjusted for regulatory effects, mobile service revenues (MSR) showed a decrease of 0.6 percent. This represents an improvement over the trend in the preceding quarters. One important factor driving this development was further gains in the monetisation of increasing data use, which continued to grow thanks to innovative products. Another was the unbroken strong upward trend in customer numbers. Telefónica Deutschland gained 355,000 mobile customers in the first quarter, and thus expanded its mobile customer base to 44.7 million accesses. "The first quarter went entirely according to plan," said Markus Haas, the CEO of Telefónica Deutschland. "We're delivering what we promised. This gives us a strong foundation to build on for the entire year. We used the first three months of the year to improve our operational performance in key areas. We are also continuing to push ahead with the transformation of Telefónica Deutschland and create value in our customers' everyday lives." Rachel Empey, the Chief Financial and Strategy Officer, added: "By the end of the year, as planned, we will have achieved around 75 percent of our 2019 target of 900 million euros in sustainable savings in operating cash flow. As the OnLife Telco we want to offer our customers an enabling environment for digital self-determination in line with their wishes and habits. We are making excellent progress towards that goal."

In the first quarter of 2017 the company implemented all of the measures aimed at improving operating performance. The task of physically integrating the networks of Telefónica Deutschland and E-Plus continued to move full speed ahead. Substantial progress has been made in southern German regions, many of which have already completed the network integration. Telefónica Deutschland plans to have the network consolidation largely completed by the end of the year. This will be accompanied by improved network performance as experienced by customers over the course of the year. At the same time, the company is already working on the technology for the coming 5G network. In the past quarter, working with Huawei, Telefónica Deutschland performed tests which achieved data transfer rates of 1.65 gigabits per second for the first time. Through the launch of a self-organising network (SON), the company will also facilitate more efficient network load distributions. In the quarter ended, Telefónica Deutschland completely revamped its O₂ prepaid offerings and complemented them with high-speed data and EU roaming services. Moreover, it has just launched new O₂ DSL tariffs with increased bandwidths. A few days ago, Telefónica Deutschland has launched its cooperation with the European start-up people.io. With the O₂ GET App, users can decide which personal information they provide for their O₂ GET account and which companies and brands they choose to interact with. For any information provided voluntarily, users are awarded with credits they can redeem for rewards. To mark the 15th birthday of O₂, the company plans to roll out attractive anniversary offers that will strengthen the premium brand and further stimulate data use.

Telefónica Deutschland attracted a large number of new customers in the first three months of the year. The number of mobile accesses increased by 355,000. Of that number, around 172,000 were in the post-paid segment, where Telefónica Deutschland has benefited from the positive customer response to O₂ Free and the continued strong partner business, among other factors. The company remains strongly focused on its existing customers. The churn rate for post-paid customers remained stable as compared with Q1 2016, at 1.6 percent. As per the end of March, Telefónica Deutschland had a customer base of 49.5 million (previous year: 48.3 million). Mobile accesses accounted for 44.7 million of that total (previous year: 43.0 million). Strong growth was seen in particular in the post-paid segment, where the number of customers increased by 7.5 percent to 20.7 million within a year. At the beginning of the year Telefónica Deutschland introduced an additional methodology for counting mobile accesses. It takes into account the prevailing market definition of the time window for counting inactive prepaid customers. Under this market-benchmarked method, the number of mobile subscriptions at the end of the quarter stood at 47.9 million. The total number of accesses amounted to 52.7 million.

The telecommunications industry in Germany remains fiercely competitive, although there are increasing indications that the situation is easing. In addition, the sales trend in the first quarter reflects the rising importance of the business with partners and regulatory burdens. This includes in particular the reduction in termination charges that went into effect at the end of last year. As a result, mobile service revenues (MSR) in the first quarter were slightly lower at EUR 1.29 billion (Q1 2016: EUR 1.34 billion). Excluding the effects of the lower termination charges and changes with regard to roaming, revenues would have increased by EUR 35 million. After adjustment for these regulatory effects, revenues were almost unchanged as compared with the previous year, with a 0.6 percent decrease, showing an improving trend as compared with the previous quarters. In the immediately preceding quarter, MSR was down 0.9 percent on a comparable basis. In the German device market, customers are waiting longer and longer before replacing their smartphones and tablets with new models. There is also a shift towards lower-priced devices. However, this trend is flattening out: In the opening quarter, hardware device sales totalled EUR 252 million. This was only slightly lower than the previous year's level (EUR 267 million). Fixed-line revenues contributed EUR 223 million to consolidated revenues (Q1 2016: EUR 253 million). This reflects the gradual implementation of the decision, taken in 2013, to exit the DSL wholesale business. The consolidated revenues of Telefónica Deutschland in the first quarter of 2017 amounted to EUR 1.77 billion. This represents a year-on-year decrease of 4.7 percent, which was in line with expectations.

Telefónica Deutschland continues to make good progress with the realisation of synergies following the take-over of E-Plus. Only in February, the company raised its target for long-term operating cash flow savings to be achieved by 2019 by EUR 100 million to EUR 900 million. The company still expects to achieve 75 percent of that amount by the end of this year. The most important factor in the current year will be the consolidation of the two mobile communications networks. The relentless push to implement the synergy plans is having positive effects on the operating income before depreciation and amortisation (OIBDA). Adjusted for exceptional effects, Telefónica Deutschland generated OIBDA ³⁾ of EUR 401 million in the first quarter. This represents a further 2.1 percent increase over the strong first quarter of 2016 – and was achieved despite the negative impact of regulatory changes. Operating cash flow synergies of EUR 45 million were also achieved in the reporting period, thereof EUR 35 million of OpEx savings and revenue synergies. However, expenditures in marketing and service were higher. The company achieved savings on investments (CapEx) of EUR 10 million. On that basis, the OIBDA margin improved 1.5 percentage points to 22.6 percent. As expected, the net income for the period under review was affected by write-downs related to the integration of E-Plus and the network consolidation. These had no effects on the company's liquidity and thus do not reflect the company's operational performance. Nevertheless, the net income for the period from January to March improved significantly, to a net loss of EUR 99 million (Q1 2016: net loss of EUR 170 million). The free cash flow (FCF)⁴⁾ in the first quarter amounted to EUR -1 million (Q1 2016: -20 million). In the first quarter of the year, the company makes annual advance payments for rent and services. Consolidated net financial debt ⁵⁾ stood at EUR 836 million at the end of March. With a leverage ratio of 0.5, Telefónica Deutschland is still well within the target range of a maximum of 1.0.