Telefónica Deutschland starts new year with strong earnings and revenue performance

Telefónica Deutschland is on track to meet its annual targets after the first quarter. In the first three months of the year, the company increased the operating income before depreciation and amortisation (OIBDA) adjusted for exceptional and regulatory effects by 5.4% to EUR 422 million. The sharp rise was due in particular to the continued success in realising synergies from the merger with E-Plus and to efficient marketing spending. In addition, mobile service revenues developed positively. This was due to a further increase in data usage and the growing demand for higher-end tariffs. Adjusted for regulatory effects ⁴⁾, mobile service revenues increased by 0.4%. The positive development in the company’s core business contributed to a positive turn in total revenues. Adjusted for regulatory effects ⁴⁾, they climbed by 0.4% to EUR 1.78 billion. From January to March, Telefónica Deutschland added 157,000 additional mobile subscriptions, partly thanks to strong demand for O₂ Free tariffs. On the basis of the strong results in the first quarter, the company is confirming its outlook for the year as a whole. “We are picking up speed and, after the first quarter, we are right on track for the year as a whole,” said Markus Haas, CEO of Telefónica Deutschland. “Guided by our mid-term strategy, we’re working tirelessly to become Germany’s Mobile Customer and Digital Champion.” Chief Financial Officer Markus Rolle added: “We aim to become simpler, faster and better in order to continue to grow profitably.”

In the first quarter 2018, Telefónica Deutschland continued the strong performance of the preceding quarters. Growing mobile data usage in particular continued to drive revenues. The company’s mobile network transported 126,000 terabytes between January and March, an increase of 46% on the same quarter of the previous year. On average, LTE customers from O₂ used 2.8 gigabytes (GB) a month and thus 56% more than a year ago. The O₂ Free tariffs in particular encouraged growth in data use. In parallel with the sharp rise in data consumption, Telefónica Deutschland recorded further growth in contract customers in the quarter. 157,000 net additional connections were acquired here. The churn in this segment remained low at 1.7%, highlighting the attractiveness of the network, service and products for existing customers. The churn at O₂ was even lower at 1.5%. The number of connections in the prepaid segment continued to decline as a result of the mandatory identification introduced last summer and the removal of roaming charges in the EU. At the end of March, they amounted to 23.5 million on a market comparable basis. At the end of the quarter, the customer connections on a comparable market basis totalled 49.6 million, of which 45.3 million were attributable to the mobile business. Around 98% of the SIM cards are used by people. This means that no mobile service provider connects more people in Germany than Telefónica Deutschland. In addition, more than 80% of the mobile customers have a direct contractual relationship with the company, which provides enormous business potential. Telefónica Deutschland is therefore in an excellent position to actively increase revenues with improved tariffs and additional offerings. In the fixed line business, the exit from the wholesale DSL business is largely complete. In contrast, the marketing of VDSL connections to end customers continued to develop positively. The number of connections increased by 92,000 to over 1.24 million.

In the first quarter, the German mobile telecommunications market was again negatively affected by regulatory effects, chief among them the removal of roaming charges in Europe. Adjusted for these effects, Telefónica Deutschland increased its mobile service revenues by 0.4%, corroborating the positive turnaround in the core business. This was due primarily to the successful monetisation of the further rapid rise in data usage. Including the negative effects of regulation, mobile service revenues fell by 0.4% to EUR 1.29 billion. Revenues from devices increased by 11% to EUR 280 million in the first quarter thanks to growing demand for high-end smartphones and tablets. In the fixed-line business, revenues fell by 11% to EUR 199 million. The withdrawal from the wholesale DSL business was still making itself felt here. Adjusted for regulatory effects, Telefónica Deutschland increased its revenues in the quarter by 0.4% and is therefore right on schedule to meet its annual targets. Unadjusted revenues declined by 0.2% to EUR 1.77 billion. In the previous quarter, revenues had fallen by 1.6%.

Thanks to the improved development of revenues and the successful realisation of synergies, Telefónica Deutschland increased its operating income for the 14th quarter in a row. From January to March, the operating income (OIBDA) adjusted for exceptional and regulatory effects increased by 5.4%. Including regulatory effects, adjusted OIBDA increased by 1.8% to EUR 408 million. The respective OIBDA margin rose by 0.5 percentage points to 23.1%. In the upcoming quarters, the company plans to invest more in the marketing of products and services in order to continue supporting the positive revenue development and, as announced, to grow in step with the market. Telefónica Deutschland remains on track with regard to the 2019 synergy target of EUR 900 million at the level of operating cash flow. In the first three months of the year, investment (CapEx ⁵⁾ ) amounted to EUR 197 million (Q1 2017: EUR 208 million). The ratio of CapEx to revenues was therefore 11%. As in previous years, Telefónica Deutschland plans to increase its investment levels over the course of the year and is thus on track to achieve the range of 12 to 13 % targeted for the year as a whole. Telefónica Deutschland’s net result for the first quarter improved to EUR -82 million (Q1 2017: EUR -99 million). The result was attributable to depreciation and amortisation on network components being removed and the book value of the E-Plus customer base following the merger. The company’s liquidity and operating performance were unaffected by this accounting-related change. Free cash flow ⁶⁾ (FCF) amounted to EUR 15 million in the first quarter (Q1 2017: EUR -1 million). Consolidated net financial debt ⁷⁾ amounted to EUR 1.09 billion at the end of December. At 0.6, the leverage ratio remained significantly below the defined upper limit of 1.0.

Telefónica Deutschland announced medium-term strategic targets at the Capital Market Day in London at the end of February. With the Digital4Growth transformation programme’s extensive package of measures, the company is aiming for profitable growth for the period up to 2022. With a clear focus on customer experience in the digital age, the company is planning to make its operating processes simpler, faster and better. The company is making use of new technologies in order to improve its ability to advise its customers in the future. Since February, the Telefónica Group’s advanced artificial intelligence, Aura, has been helping O₂ customers with questions about their tariffs via Facebook Messenger. Meanwhile, Lisa, the self-learning chatbot, answers O₂ customers’ frequently asked questions independently. This gives hotline employees more time to help customers with more complex issues. With regards to its customer service, Telefónica Deutschland is on its way to reclaim its position as the leader within its sector. The O₂ hotline has considerably improved its availability and impressed in the “connect” service test in April with a very good rating for quality of advice, friendliness and cost. Telefónica Deutschland is continually making progress with the network expansion and is on schedule to complete the integration of the E-Plus network by the end of the year. The network integration is at an advanced stage in many cities and regions, and Telefónica Deutschland has already completed it successfully in some regions. The network integration is also soon to be completed in increasing numbers of large cities, including Munich and Stuttgart, and will thus further improve customers’ network experience. In addition, the company took further important steps during the quarter to take a lead in the next generation of network technology. At the Mobile World Congress in Barcelona, Telefónica Deutschland extended the TechCity partnership with Huawei, which is developing and testing the mobile telecommunications technology of the new generation. Together with NGN Fiber Network KG, Telefónica Deutschland will hook up at least 1,500 mobile tower sites with fibre optic cables in the years to come, in order to improve LTE performance and lay the foundation for 5G infrastructure. Important policy changes must be made again this year so that Germany generally remains internationally competitive with powerful 5G networks and so that network operators can ensure better coverage for people in rural areas. The federal government and the states should sign a mobile communications pact to create investment-friendly conditions and, in the upcoming process to distribute mobile spectrum, ensure that the crucial investment is made in infrastructure instead of mobile communications licences.