MUNICH, 7 November 2023

Telefónica Deutschland – Interim statement for January to September 2023

Telefónica Deutschland extended growth path – fully on track for FY23 outlook

• Maintained robust commercial traction both in mobile and fixed; +396k mobile postpaid and +31k fixed BB net adds, ‘value-over-volume’ focus
• Achieved +2.2% y-o-y revenue growth mainly on good MSR momentum
• Improved OIBDA[1] growth to +3.6% y-o-y on enhanced operating leverage and successful cost management
• Made excellent progress with 5G network roll-out within normalised C/S envelope – ‘5G Plus’ now on air in the entire 5G network
• Strong ESG commitment – well on track to deliver a sustainable digital future
• Fully on track for in Jul-23 upgraded FY23 outlook and to meet FCFaL consensus[2] for FY23

Operating performance 

Telefónica Deutschland delivered another quarter of robust growth in Q3 23 underpinned by its ‘value-over-volume’ strategy. The company’s sustained commercial momentum is building on the well-received ‘more-for-more’ tariff portfolios and normalised churn rates as well as enhanced quality of service. The renowned connect magazine awarded a ‘very good’ rating to the O₂ shops as well as the O₂ fixed BB hotline, the ‘myO₂’ App achieved even an ‘outstanding’ rating. 

In parallel, Telefónica Deutschland continued to make strong progress with the densification and further roll-out of its green 5G network. Since 10 Oct-23, O₂ customers can experience ‘5G Plus’ (i.e. 5G stand-alone) in the O₂ network. This marks the beginning of a new technology era with ‘5G Plus’ being available to >90% of the German population. The company is well on track for nationwide 5G coverage latest by YE25.

As part of its ESG-agenda, Telefónica Deutschland assumes responsibility also for its employees and the wider society. The company’s attractiveness as an employer rose to all-time highs in the recent employee survey. Telefónica Deutschland’s employees are highly engaged for society, i.e. by participating in the company’s ‘Volunteering Days’ or the annual ‘O₂ Telefónica Run’ where the joint sporting activities are translated into charity donations.

Moreover, Telefónica Deutschland remains committed to its climate protection goals and has been nominated as a finalist for the ‘16^th German Sustainability Award’. The Company strives to reduce its Scope 1 & 2 emissions by 95% and ultimately neutralising them no later than 2025. Also, the company is taking concrete actions to be net CO₂ neutral along its entire value chain (Scope 3) by 2040. 

Mobile business

Mobile postpaid posted +396k net adds in Q3 23 vs. +304k in Q3 22 (+1,066k in 9M 23, up +10.5% y-o-y). Commercial success in the market is driven by the continued O₂ brand momentum and a solid contribution of partner brands. O₂ postpaid churn stood at a low rate of 1.0% in Q3 23 (1.2% in Q3 22) reflecting the O₂ brand appeal in combination with enhanced network and service quality.

M2M recorded +55k net additions in Q3 23 vs. +32k in Q3 22 (+154k in 9M 23, up +49.1% y-o-y).

Mobile prepaid net disconnections slowed to -22k in Q3 23 vs. -58k in Q3 22 (-506k in 9M 23 vs. +213k in 9M 22 including some revenue neutral reactivations), mainly reflecting the ongoing German market trend of prepaid to postpaid migration.

As a result, Telefónica Deutschland’s mobile customer accesses grew +1.0% q-o-q[3] to 45.0m as of 30 Sep-23. The own-brand momentum combined with low churn rates are the main drivers of the strong increase of the mobile postpaid base (ex M2M), +5.1% y-o-y to 27.4m accesses (60.9% of total mobile access base, up +5.4 p.p. y-o-y). M2M accesses grew even +7.8% yoy to 1.8m whereas the mobile prepaid base accounted for 15.8m, down -17.8% y-o-y mainly due to some revenue neutral technical[4] base adjustments in the prior year.

O₂ postpaid ARPU growth accelerated to +2.0% y-o-y growth in Q3 23 (+1.2% y-o-y in 9M 23), reflecting customer demand for high value tariffs while partly offset by the reduction of MTRs as of 1 Jan-23; underlying[5] ARPU growth was even stronger at +2.6% y-o-y (+1.8% y-o-y in 9M 23).

Fixed business

Fixed broadband posted +31k net additions in Q3 23 vs. +19k in Q3 22 (+77k net additions in 9M 23 vs. +14k in 9M 22) reflecting the success of Telefonica Deutschland’s technology agnostic ‘O₂ myHome’ tariff portfolio and low churn rates. Fixed churn improved 0.3 p.p. y-o-y to 0.8% in Q3 23.

Fixed broadband customer base was up +4.2% y-o-y to 2.4m accesses as of 30 Sep-23, thereof 78.4% VDSL accesses, -1.9 p.p. y-o-y as cable and fibre are gaining further trading momentum.

Fixed broadband ARPU[6] maintained its growth path mainly driven by the increasing share of higher value customers in the base, +2.2% y-o-y to EUR 25.6 in Q3 23 (+1.9% to EUR 25.5 in 9M 23).

Financial performance

Revenues posted solid growth of +2.2% y-o-y to EUR 2,131m in Q3 23 (+4.8% y-o-y to EUR 6,323m in 9M 23) driven by ongoing mobile service revenue momentum.

Mobile service revenues[7] recorded strong growth of +3.4% y-o-y to EUR 1,523m in Q3 23 (+4.0% y-o-y to EUR 4,394m in 9M 23) with the negative impact from the MTR glidepath[8] more than offset by continued own-brand MSR-momentum and a solid contribution from partners.

Handset sales slowed to -2.1% y-o-y to EUR 395m in Q3 23 (+9.1% y-o-y to EUR 1,298m in 9M 23). High value smartphones remained popular while, as expected following record quarters, the overall customer demand for ‘O₂ myHandy’ contracts was somewhat softer in line with German market trends.

Fixed revenues grew +1.8% y-o-y to EUR 208m in Q3 23 (+2.3% y-o-y to EUR 616m in 9M 23) with fixed retail BB revenues recording even stronger growth of +6.1% y-o-y in Q3 23 (+5.0% in 9M 23).

Other income was EUR 45m in Q3 23 (EUR 115m in 9M 23, +1.9% y-o-y).

Operating expenses[9] were slightly higher +1.6% y-o-y to EUR 1,512m in Q3 23 (+5.5% y-o-y to EUR 4,517m in 9M 23) mainly reflecting the anticipated inflationary impacts.

• Supplies were slightly lower (-2.6% y-o-y) to EUR 631m in Q3 23 (up +3.3% y-o-y to EUR 1,931m in 9M 23) reflecting the positive effects from the MTR-cuts7 and volume related hardware cost of sales. In Q3 23, connectivity-related cost of sales and hardware cost of sales accounted for 39% and 58% of supplies, respectively.
• Personnel expenses were up +12.7% y-o-y to EUR 168m in Q3 23 (+9.4% y-o-y to EUR 494m in 9M 23) mainly reflecting the increase of base salaries as a result of the y-o-y general pay rises in FY22/23 in combination with a slightly higher FTE-base y-o-y driven by insourcing of key capabilities to support transformation and growth ambitions.
• Other operating expenses (other Opex) were slightly up +2.6% y-o-y to EUR 688m in Q3 23 (+6.6%
  y-o-y to EUR 2,020m in 9M 23) mainly reflecting commercial activity in the quarter (e.g. ‘O₂ Mobile’ portfolio) as well as continued technology transformation while energy costs as expected presented a small tailwind to Q3 23. Commercial and non-commercial costs accounted for 66% and 31% of other Opex in Q3 23, respectively. Group fees were EUR 9m in Q3 23 (9M 23 EUR 28m vs EUR 26m in 9M 22).

OIBDA[10] growth improved to +3.6% y-o-y at EUR 665m in Q3 23 (+2.7% y-o-y to EUR 1,922m in 9M 23). Improved MSR quality on continued own brand momentum was partly offset by the anticipated and above mentioned Opex increase. OIBDA⁹ margin expanded +0.4 p.p. y-o-y to 31.2% in Q3 23 while contracting -0.6 p.p. y-o-y to 30.4% in 9M 23 with the latter mainly due to the strong growth of broadly margin-neutral hardware revenues in the 9M period.

Depreciation & Amortisation was slightly higher y-o-y (+2.2%) at EUR 1,736m in 9M 23 mainly driven by useful life reduction of PPE due to IT-transformation.

Operating income was EUR +185m (+10.4% y-o-y) in 9M 23.

Net financial expenses accounted for EUR -59m in 9M 23 compared to EUR -20m in 9M 23.

Income tax was at EUR +5m in 9M 23. As a result, total profit for the period improved to EUR +125m in 9M 23, up +17.4% y-o-y.

CapEx[11] was lower -9.7% y-o-y at EUR 312m in Q3 23 (-9.5% y-o-y to EUR 816m in 9M 23) with a CapEx/Sales ratio of 14.7% (12.9% in 9M 23). Telefónica Deutschland continued to make excellent progress with densification and further 5G network roll-out within its normalised C/S envelope. The company is well on track for nationwide 5G coverage latest by YE25. 

Operating cash flow (OIBDA minus CapEx¹⁰) rose by +14.5% y-o-y to EUR 1,105m in 9M 23 as a result of both, strong operating and financial performance as well as Capex normalisation post the successful completion of the Company’s ‘Investment-for-Growth’ programme.

Free cash flow (FCF)[12] amounted to EUR 761m in 9M 23 (EUR 710m in 9M 22). Lease payments for antenna sites and leased lines were EUR 553m in 9M 23 (EUR 520m in 9M 22). This reflects a combination of network densification including new BTS sites to cover white spots and some anticipated y-o-y increases. As a result, FCFaL shows the usual back-end loaded profile while improving +9.5% y-o-y to EUR +208m in 9M 23 (EUR 190m in 9M 22). FCFaL adjusted for payments for investments in associated companies[13] amounted to EUR 223m, up +12.6% y-o-y.

Working capital movements were on broadly similar levels as in the prior year, EUR -264m in 9M 23 vs.
EUR -239m in 9M 22. The development in 9M 23 was mainly driven by a decrease in capex payables
(EUR -148m) as well as other working capital movements of EUR -117m, especially driven by higher pre-payments (EUR -50m) and increase in inventories (EUR -10m).

Consolidated net financial debt[14] as of 30 Sep-23 was EUR 3,535m with the increase vs YE22 mainly reflecting the company’s dividend payment of EUR 535m in May-23. Still, leverage ratio of 1.4x[15] remained well below the company’s self-defined upper limit of 2.5x; leaving comfortable leverage headroom with regards to the company’s BBB-rating with stable outlook by Fitch which has been confirmed on 19 Oct-23.

Financial Outlook FY23

Telefónica Deutschland continued its robust growth path in 9M 23 with its ‘value-over-volume’ focus underpinning its growth ambitions. Consequently, the company is well on track to achieve its in Jul-23 upgraded FY23 outlook and to meet FCFaL consensus[16] for FY23.

	ACTUAL 2022 (1)		OUTLOOK 2023 (2)		ACTUAL 9M 23
Revenues	EUR 8,224m		Upper-range of low single-digit percentage y-o-y growth		EUR 6,323m, +4.8% y-o-y
OIBDA Adj. for except. effects	EUR 2,539m		Upper-range of low single-digit percentage y-o-y growth		EUR 1,922m, +2.7% y-o-y
CapEx to Sales Ratio	14.7%		Around 14 %		12.9%

(1) Revenues and OIBDA include non-recurrent special factors in the amount of EUR +26m million in Q4 22.

(2) As updated in Jul-23 and unchanged incl. regulatory headwinds of ca. EUR -50m to -60m at revenue level and ca. EUR -10m to -15m at OIBDA level in FY23.

Link to detailed Data Tables

Further information

Telefónica Deutschland Holding AG
Investor Relations
Georg-Brauchle-Ring 50

80992 München

Christian Kern, Director Investor Relations; (m) +49 179 9000 208

Marion Polzer, CIRO, Head of Investor Relations; (m) +49 176 7290 1221

Eugen Albrecht, CIRO, Senior Investor Relations Officer; (m) +49 176 3147 5260

(t) +49 89 2442 1010

[email protected]

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]  Adjusted for exceptional effects. In Q3 23 exceptional effects amounted to EUR -0m of restructuring costs (EUR -4m in Q3 22)

^[2] Company compiled consensus, for details please refer to financial results section for Q3 23 on Telefónica Deutschland’s website.

^[3]  -4.2% y-o-y mainly on a revenue-neutral technical base adjustment in prepaid in Q4 22.

^[4]  Introduction of a stricter active SIM-card definition in Q4 22 post some revenue neutral reactivations of SIM-cards over the course of FY22.

^[5]  Excluding MTR-cut from EURc 0.55 to EURc 0.40 as of 1 Jan-23.

^[6]  Definition adjustment of fixed BB (FBB) ARPU calculation as of 1 January 2023 to fully reflect all fixed revenue streams; for comparability reasons including adjustment of previous year's values.

^[7]  Mobile service revenue includes base fees and fees paid by the company’s customers for the usage of voice, SMS and mobile data services; it also includes access and interconnection fees as well as other charges levied on partners for the use of the company’s network.

^[8]  MTR-cut from EURc 0.55 to EURc 0.40 as of 1 Jan-23.

^[9]  Operating expenses include impairment losses in accordance with IFRS 9 in the amount of EUR 25m in Q3 23 and EUR 73m in 9M 23 (EUR 22m in Q3 22 and EUR 66m in 9M 22).

^[10]  Adjusted for exceptional effects. In Q3 23 exceptional effects amounted to EUR -0m of restructuring costs (EUR -1m in 9M 23). In FY22, exceptional effects were restructuring costs of EUR -4m in Q3 22 and EUR -5m in 9M 22 respectively.

^[11] CapEx includes additions to property, plant and equipment and other intangible assets while investments for spectrum licenses and additions from capitalised right-of-use assets are not included.

^[12] 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.

^[13] +/- Proceeds/payments for investments in associated companies amounted to EUR -15m in 9M 23 and EUR -8m in 9M 22.

^[14] 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 payables for spectrum.

^[15] Leverage ratio is defined as net financial debt divided by OIBDA of the last twelve months adjusted for exceptional effects.

^[16] Company compiled consensus, for details please refer to financial results section for Q3 23 of Telefónica Deutschland’s website.