Deutsche Telekom AG

Good afternoon everyone, and welcome to our first quarter 2016 conference call. With me today are our CEO, Tim Hoettges; and our CFO, Thomas Dannenfeldt.

Tim will first go through a few highlights of the quarter, followed by Thomas, who will talk about the quarter's financials. After this we have, as usual, time for a Q&A.

Before I hand over to Tim, please pay attention to our usual disclaimer, which you will find in the presentation. And now it's my pleasure to hand over to Tim for his highlights of the quarter.

Yes, thank you, Hannes, and welcome to everybody also here from my side. And let's start with the highlights for the first quarter.

And the strong momentum continued; strong momentum with investments, with customers, and with earnings. We remain well on track for our group targets we presented to you at our Capital Markets Day last year, and we also strongly reiterate our guidance for 2016.

The first slide is a quick reminder of our main strategic building blocks you might all know. This includes our focus on integrated IP networks, our commitment to create the best customer experience, our ambitions to lead in business and to work with partners where it makes sense.

And maybe later in the discussion I could show you that in each of these categories, we have tangible products and measures how we improved in these regards. Going to slide number four, I'd like to summarize the first-quarter highlights.

The biggest number might be the 5 million German homes which are now connected with fiber. The demand for our fiber products remains strong and even accelerated.

We added a new record of 660,000 fiber customers in the last three months alone. In the US, we gained 2.2 million subscribers this quarter, and our service revenue momentum accelerated to 14%, outstanding quarter.

We continued to have invest heavily in our networks and into innovation, in fiber, in LTE, and in our industry-leading Pan-IP network transformation. Our financial momentum remains positive, headline revenues grew by 5%, EBITDA grew by 13%, and our free cash flow was on track.

Without the contribution from US handset leasing and data stash on EBITDA, the number was up by 6.5% year on year. But if you also take into account last year's EUR175 million settlement with Liberty, the EBITDA grew by 10.6%.

Adjusted for the disposal of EE, free cash flow grew by 11%. So our double-digit momentum continues.

The next page shows you some examples of the strong momentum we are seeing with our customers. I mentioned already our success with fiber in Germany, where we added 2 million homes in the last 12 months, and our relentless customer growth in the US, where we gained 9 million subscribers in the last 12 months.

We continue to see good momentum with our convergence products, as well. We now have 3.3 million converged subscriptions here in Europe, of which 2.2 million only in Germany, and the Czech is well on its way.

In the cloud, we continued to grow at 30% year on year. Maybe some of you took part in our cloud webinar last month.

The replay is still available on our Investor Relations website. Page seven summarizes a few of my highlights this quarter.

Let me start with the innovations you know never lose the high end. Last time I told you about the many innovations we presented at this year's Mobile World Congress.

You may remember our demonstration of 1 millisecond latency in a wireless network, or our world record of 11 gigabit per second over a standard cable line. Our next big milestone was the year's CeBIT Fair, where we launched a number of innovative products, including our open telecom cloud and a portfolio of security solutions.

On the consumer side, we were happy to see YouTube joining the list of providers on our innovative BingeOn service platform in the U.S. And in Germany, late last week we announced our new consumer TV platform called Entertain TV Plus, which offers exciting features such as instant restart or a seven-day replay facility for selected content.

It's not needed to program it, you always are able to watch the content you would like to see. Our much-improved video aggregation platform, with SVOD partners, is available on this platform as well.

Our network deployment continues at pace. We now reached 56% of German homes with fiber.

Our LTE network covers 91% of the population, and we now have 43% of German homes on our peer-leading all-IP infrastructure, up from 40% at the end of last year. By the way, in LTE if you compare Germany with the rest of Europe, with 91% of the population covered, we are well ahead.

If you go into the countryside, we have now opened up a lot of areas where we had formerly EDGE available. We are significantly ahead of what you would might find in France or in Spain or in Italy, where the average coverage is around 30% to 40%.

In Europe, our networks were highly rated in recent tests. In the recent network test by P3, the company behind the connect test that many of you know, our Dutch network achieved the highest score ever awarded to any mobile operator.

In the last 12 months, P3 has awarded eight of our netcos, including those in Greece, Hungary, and in Poland. The Best in Test seal, and of course, we also won the German connect test for the fifth year in a row.

And as you know, the T-Mobile network remains the fastest 4G network in the US. I think you see how consequent we are executing along our strategic pillars.

Supporting our network leadership, our CapEx grew 12% this quarter. We also spent EUR1.1 billion on spectrum.

Of this, we spent EUR0.5 billion to boost our spectrum position in Poland, while the other half was spent in the US on one of the two A-block portfolios, which we talked about at the time of full-year results. As we have mentioned earlier, the two A-block transactions will boost our low-band coverage by 68 million pops.

The low-band spectrum will improve our service quality in the areas in which we already operate, and allow us to substantially increase the area in which we commercially operate. It was a quiet quarter for M&A, but it was a busy quarter for funding.

At the beginning of March, we raised bonds worth EUR4.5 billion to cover this year's maturities. The terms were very attractive, thanks to Mr.

Dragge [ph]. T-Mobile U.S.

meanwhile secured a further EUR5 billion towards its stated funding envelope. As you know, of this EUR5 billion, EUR4 billion were provided through note purchase agreements with Deutsche Telekom.

EUR1 billion were raised through a bond issuance in the public market. This approach marks a partial departure from our strict self-funding principle that we established a few years ago.

I have discussed it with a lot of investors in advance by the way. Given the fantastic progress of T-Mobile in recent years, we feel very comfortable in taking this step, which is accretive to our shareholders.

But let me stress three important points. First, there's no read-across to the other pillars of our stated US strategy.

We continue to look at T-Mobile as a king-maker asset. Second, there's also no read-across to the spectrum auction.

And thirdly, as you can see, we are following a case-by-case logic. Moving on to our group financials, we are very happy with our first-quarter 2016 performance, and we reiterate our stated guidance for 2016 as a whole.

We also reiterate the group targets that we stated at last year's Capital Markets Day. Our headline revenue grew by almost 5%, comfortably ahead of our medium-term guidance.

The sequential slow-down this quarter is largely due to lower handset revenues in Germany and the US due to the shifts in the commercial model. Despite our high investments, we were able to achieve double-digit growth in comparable cash flow and adjusted EBITDA, as I already mentioned.

Our financial metrics remain either in line or ahead, sometimes strongly ahead, of the run rates we committed at last year's Capital Markets Day. With this, I want to hand over to Thomas, who will provide you with more details regarding our first-quarter performance.

Yes, thanks Tim. Good afternoon from my side, as well.

My first slide show is the financial highlights for the group as a whole. And as you can see, our financial momentum remained very strong in the first quarter.

Our headline earnings benefited from a EUR2.5 billion book gain on the sale of our stake in EE2BT. Our adjusted earnings grew slightly, although Q1 2015 had benefited from a EUR175 million non-recurring item.

Now let's have a look at the segments. In Germany, our Q1 revenues were down by 2.5%, mainly as a result of lower handset sales, and to a lesser extent, due to a strong prior-year comparable in mobile services.

EBITDA was down slightly year on year, and this reflects the tough mobile service revenue comp, as well as cost phasing. For the year as a whole, we continue to expect stable EBITDA.

Our mobile service revenues declined 1.7% this quarter, and we will take a closer look at this in the following slide. We gained 231,000 contract customers, and the own-branded customer trends remain steady.

The next slide is by now familiar to you. As you can see, the direct from convergence on mobile service revenues is no longer growing, as expected.

Nevertheless, we are showing a 1.7% decline in our mobile service revenues. The weakness this quarter is largely a reflection of the exceptional strength we showed in the first quarter of 2015, and which we explained at that time with some unusual volatility in our large accounts.

What is important is that we do not see a change in German market fundamentals or in our online performance. We continue to expect a 1% annual CAGR in our mobile service revenues.

And we are confident that we will show a better trend next quarter. In the fixed-line market, we added 62,000 broadband customers.

This marked a sequential improvement. For the year as a whole we expect to deliver at least as many net adds as we did last year.

We added 53,000 new TV subscribers. As Tim has mentioned, we have now launched our new Entertain platform, which we expect to drive accelerating momentum later in the year.

Line losses ticked a bit, and this is a reflection of our broadband performance. Here again, for the year as a whole, we expect to do at least as well as we did in 2015.

Now let me talk a little bit about the really amazing part of the German section. I think it was another record quarter for fiber growth.

After 532,000 net adds in Q4, we provided a further 660,000 of fiber this quarter, almost 200,000 more than one year ago. As in the previous quarters, the majority of these customers were in our retail platform.

Our broadband revenues continue to improve as a consequence of this. We saw 1.8% growth in the first quarter, up from 1.3% in the fourth quarter.

And remember, we've seen a zero at the beginning of last year. Looking at what we call our German service revenues, fixed and mobile, the first quarter was down 0.9%, after a year-on-year decline of 1.1% in the last quarter.

This is a small sequential improvement, even despite the difficult comp I mentioned in mobile. The big picture is that underlying trends are going in the right direction, and that we see ourselves broadly on track for medium-term revenue targets that we've presented at the Capital Market Days last year.

We added more than 0.7 million German households to our fiber footprint, and now cover 56%. 43% of access lines are already in our IP platform, and we have reached, Tim mentioned that 91% LTE coverage; so far so good in Germany.

Let me now quickly present some highlights of our US business. T-Mobile has already presented very strong numbers last week.

The first quarter was the seventh quarter in a row in which we won more than 1 million branded post-paid customers. We also added more than 800,000 pre-paid customers.

Post-paid phone ARPU, excluding the data stash, was stable year on year and quarter on quarter. The strong subscriber growth and stable ARPU combined to accelerating mobile service revenue growth.

Despite much higher than expected subscriber growth, reported and core EBITDA grew strongly. As a result of the strong first-quarter growth, we raised our full-year branded post-bid subscriber growth guidance from 2.4 million to 3.4 million branded postpaid net adds, to a newer range of 3.2 million to 3.6 million.

On the following slide, we show some of the underlying T-Mobile performance metrics. After strong year-on-year declines in 2015, Q1 churn was marginally higher in the first quarter, but we still see scope for further improvement.

Our bad debt expense ratio, which we had temporarily increased, declined again as we have promised last year. Our LTE network is now almost nationwide, and due to the recent A-block deals, we now have access to low-band spectrum covering almost 80% of the US market.

This is great news for our customers, and will allow us to profitably serve additional markets. Now let's turn to Europe.

Our European performance continued to improve. Reported revenues were down 2.4%.

but adjusted for deconsolidations and currencies, our revenues were almost stable. Reported EBITDA was down 3%, and organic EBITDA was down 2.4%, which also marks an improving trend.

I think the bigger picture remains that excluding The Netherlands, our European business would again have been stable in the first quarter due to some ongoing strong performances, for instance in Greece and in Austria, offsetting some weaknesses elsewhere. As the next chart shows, in Europe we now have migrated almost half of our homes to IP, up from 40% one year ago.

Our LTE coverage now stands at 72%, up almost 20% from one year ago. And Tim has already mentioned the excellent performance of Dutch and other European networks in the independent drive tests.

Now to systems; systems posted strong headline revenue and EBITDA growth, but please be aware that the performance this quarter benefited from an up-front payment related to our toll system operation in Belgium. Going forward, this operation will then continue on a more regular basis, contribute on a more regular basis.

We continue to expect that driven by innovative offers such as our new cloud initiatives, the momentum in our market unit will continue to improve. A few words on financials; free cash flow was slightly down year on year, but adjusted for the lower dividend from EE, it would have grown just over 10%.

This is consistent with our unchanged EUR4.9 billion free cash flow target for this year. Our adjusted net income was slightly up year on year, but as Tim has mentioned, last year's result benefited from a EUR175 million settlement that we disclosed at that time; hence, underlying net income grew double digit.

The next slide shows our financial metrics. And I'm pleased to say that at the end of the quarter at 2.3 times, we are comfortably within our net debt to adjusted EBITDA comfort zone of 2 to 2.5.

As a result of our ongoing strong EBITDA growth, we moved from slightly outside this range three quarters ago to now comfortably within that range. Our funding situation remains very comfortable, as was also evident in the success of our recent EUR4.5 billion bond issuance.

Tim mentioned that. My final slide summarizes the strategy we presented to you at the last year's Capital Market Days and I think we consistently continue to strongly execute against these targets.

And we remain very confident that we will keep delivering them going forward. Now, Tim and myself are ready to take your questions.

Thank you very much, Tim and Thomas. Now, we can start with the Q&A part.

[Operator Instructions] Alternatively, you can send us questions via webcast, just type your question into the box below the stream. And please would kindly restrict yourselves to no more than two question at a time.

So we're now taking questions. The first question we have is from Mathieu at Barclays.

Matthew?

Yes, good afternoon. Thank you for taking the questions.

First a question with regards to mobile in Germany, I do appreciate, obviously, that the comps were tougher, but if we look at the corporate segment, there seems to have been some sort of deterioration in the last quarter and certainly in Q1. And I was wondering if that was the result of renewed competitive pressure on that segment, or based on price, or is it that the quality gap between you and some of the other players is reducing, and therefore it's harder to justify the premium?

So basically, if you could give us a little bit of color on that dynamic? And second, looking at fiber on German fixed; obviously great results there, both on retail but also on the wholesale side.

Is that a dynamic on the wholesale side that you think is sustainable, and if you could give us a little bit of color as to how you think that can grow in the future? That would be great.

Thank you very much.

Yes, Mathieu. I'm going to start on the mobile in Germany.

As you mentioned, first of all the one impact is to comps. The other one is volatility.

We have in B2B anywhere is normal volatility you have in the market. Remember, a year ago we mentioned that it was a positive volatility.

Then we mentioned in Q3 there was a lot of big customer, and you have volatility by those kind of moves. But I think there is no reason to assume that there is any market heating up.

It is normal course of business we see in B2B, a normal course of volatility, driven by large accounts win or losses we are having here. And I'll turn over to Tim on the fiber and the fixed line.

Mathieu, thank you for your questions with regard to -- I'm sorry, Mathieu. Thank you for the question on fiber and German fixed.

Yes, I think we have seen a huge improvement, and interesting wise for the fiber product and the net additions in the first quarter was outstanding. I think the highest ones we have seen for ages here in this company, 660,000 net additions in the first quarter alone.

This is very successful, and that reflects that in the new vectoring areas that we have started commercializing, we see as well the tick-up of consumers. And what we see as well is we see the impact on our data revenues here in the business.

On the fiber side, two-third of the total business is retail, or one-third of the business is wholesale. I think this sounds like a sound mix here.

Interesting, a lot of our competitors are criticizing us for deploying copper on the last mile. But exactly these competitors are the ones who are selling our product best.

The 2.9% wholesale revenue we have seen, we expect is sustainable. We might even expect a slight improvement throughout the total year.

Overall, we are very optimistic that we see higher up-take rates on the fixed-line connectivity throughout the year.

The next question I have is from Andrew at Goldman. Andrew, can we please have your question?

Good afternoon, everyone. I had a follow-up question, Tim, on German fixed, and then a question on the TMUS funding, if that's okay?

On German fixed, are you seeing the fiber roll-out as the key driver of German broadband penetration accelerating? That's certainly seen in other European markets?

Is that giving you more confidence in the German broadband revenue growth outlook, or is it new content driving the up-tick? Any color on what's driving that acceleration and driving your positive outlook?

And then with TMUS funding, could you talk more about what else you can do to achieve more efficient TMUS funding? Would you ever look to buy in the minority to this asset, as to lower financing costs?

What do you mean on your comment that you're sticking to a case-by-case logic with regard to this? Thank you.

I think this question is an extension to Mathieu's question here, and where is the growth coming from? Look, there are new areas where we have higher bandwidth.

This is encouraging for customers. Second, we have MagentaEINS, and our commercial -- the branding, the presentation, the image of the product, is very well-received here from the customer sides.

So we have a higher footfall in the shops talking about this. What is it about, and what is the advantage for me?

The third one is we have recently launched a new TV Entertain platform. By the way, it has outstanding functionalities, as I mentioned.

Please have a look into that one. And this is something which we expect is in the upcoming quarters, in addition driving the sale of it.

It is a mixture of everything. There is on top of that more demand for customers on the Internet in general.

So even Germany starts digitalizing themselves. We see that, as well, with our smart home applications here, especially on the security features.

So in principle, these are the drivers for the growth we have seen. Due to the fact that we have a lot of let's say areas where we still haven't sold the high bandwidth, the market potential is still quite big for us.

On the question of the team US funding, as we mentioned, it is a case-by-case decision for the following reason. So it doesn't mean we are not in principle funding or will fund in the future everything T-Mobile US is requesting, but it's case by case.

One reason is obviously we have a third of the companies owned by minorities, so we need to respect the right of the minorities, and do that always at arm's length perspective. That's number one.

Number two, we are trying to optimize the cost of financing on one hand, but also make sure that we keep the very good access T-Mobile US has to the funding market, keep that intact. So, we should always have a balance between both of them and obviously then also stay very disciplined in terms of the investments looking forward in spectrum and network.

So that is the reason why after we agreed on the EUR2 billion in -- I think it was March, yes it was March -- when we agreed about the EUR2 billion T-Mobile US. Then later, a month later, went into the market and raised another EUR1billion in the external market, as I said, to keep also the access to capital markets intact for the US.

And that's basically the philosophy behind it's a case-by-case decision.

The next question I have is from Robert Grindle. Robert?

Hi, there. Sorry, I was on my headset.

Yes, two questions. We talked about, you talked about the strong growth in fiber.

That's growing very strongly, particularly relative to TV customers. It does sound like you're updating your Entertain platform from a technology perspective.

Do you think that's sufficient, or are you now feeling the urge to also update your product from a content perspective, as well? And secondly, would you kindly say a few words about the Dutch markets and your options there, in light of the recent consolidation event in that market, and in your case, a deal didn't go through?

Many thanks.

So I'm going to start, Robert, I'm going to start on the Entertain and TV side. First of all, I think you're spot on.

We have a lot of ingredients for success at hand, meaning new infrastructure with higher bandwidth, the new platform. And I guess there should be an improvement in the run rate we show right now.

That's number one. Number two is I think what we're doing already is on the content side, looking where we can add some value by adding content like we've done that -- on ice hockey, on smaller parts of sports business in the past already -- basketball, ice hockey, those kinds of things.

And it is not a big topic, but it's adding value for some segments of customers, and we're always looking into opportunities where we can find another element of being more attractive to customers. But I think the key driver is having more infrastructure in hand that allows to provide a good TV service and a new platform that should be the big two drivers to increase the run rate.

Let me talk a second about, let's say, the main features of our new TV platform. I think we have seven-day replay.

We have instant restart. We have a total new interface.

By the way, not any more starting with the EPG, it starts with what is the hottest content on TV at that point in time? So what are people watching?

We have mobile TV capabilities, including cloud recording. Wherever you are, you could watch the content you are interested in and you could easily switch your mobile content on to any screen which is connected to our platform.

So there's a wide functionality which brings the content then from your pad or from your mobile device on to a screen. Entertain TV will be also available over hybrid.

So, it is not only over DSL. So over-the-top services are included into this one and we have new partners on block there, as well, so that the content is, as I've always told, it's aggregation platform.

When you look for something, you will see where this service is available, whether this is on TV, whether it's on video on demand, whether it's on SVOD, with partners like MaxDome or with partners like Netflix. So you could see the trailers, so you have a organized funnel for all the content, and you could get access to every content you are interested in.

The TV mobile functionality is USD6.95 per month. It is included in the normal data volume, so it is not a zero-rated service here.

And the product, Entertain will cost the same as the old one, which is the EUR40.95, which you put on top of the service which you currently have. Your question with regard to content is the same as to previous meetings.

Maybe your question is with regard to Bundesliga and the ongoing auction. The first, due to the rules of the process here, we are not able to comment or to signal any kind of details here.

What I could tell you is the content, football content, is an essential building block for our TV strategy, and we are the aggregator. So it is our intention to be able to stream the content with a partner directly from our side.

This is something which we have in mind. The conditions of the tender are released, and have been approved by the Bundeskartellamt.

A no-single-buyer rule has been implemented, but different than the rule in the UK. Here in Germany, if one bidder acquires all Bundesliga life packages, an additional over-the-top package will be sold.

So, this is let's say their way of designing the no-single-buyer rule. And our goal, as I said already, is to have fair access to the right content for our customers, but we are not dogmatic, whether it will be done via purchase of content or via partnerships.

And to add to the second part of the question, the second question on the Dutch market, first of all, as you know, we never comment on any M&A speculation. So, that's to the second part of the question about a failed deal.

But the first question is about what are our options. I think KPN has been successfully driving convergence very aggressively in the market place, and also LTE.

And to mention that in his speech in the beginning, we think we've been too late in our network investments by a year, roughly. But I think the good news is now we have a very good network.

If you look at the LTE network today, we've seen P3 tests, the guys who are performing the tests across Europe, with the highest score ever in LTE network in the Dutch network. We know that we have from a spectrum position roughly 2 times the capabilities and the capacity there.

So we have a very high-performing network, and we have very good spectrum position, National 4G coverage since Q4 last year, and so on. So, network is in a good shape.

Nevertheless, looking at Q2 for instance last year, our net adds have been minus 85. Last three quarters have been around 25K net adds per quarter.

So we improved from that minus 85 to plus 25. We restructured the tariffs.

We launched First to Fab T-Mobile together, opening up the whole thing to the family. We also de-emphasized split contracts, which on the other hand weighs on our margins, as you can see looking at the EBITDA in the Netherlands.

We do pilots in terms of fixed mobile substitution for the home. We call that -- oh no, my Dutch is not good enough -- the translation is For the House, whatever it means in Dutch.

So I think the key focus now is having a good network in place, utilizing it, finding the right proposition to attract those customers who are very akin to a mobile proposition, and turning not only net adds around, as it happened already the last three quarters but also then over time, the revenues and finally also the cash contribution to the free cash flow.

Thank you, Thomas. The next question is from Simon from Citi.

Hello, folks. Thank you very much for taking the question.

Number one I think, and just looking at Germany again, could you contrast and compare the acceleration in voice line losses to the network performance on the broadband side, and just say if there's any price implication of seeing that coming through this quarter? Thanks.

Absolutely. I think what we expect with regards to the line losses for the remainder of the year is a number where we expect should be in the vicinity of last year's numbers.

Remember last year it was something on 280K that was on the broadband side. And so the line losses and the broadband net adds, they should be balanced to be straightforward here.

I expect higher broadband sales throughout the year compared to the first quarter. Remember last year we were almost stable, now we are up 60,000-plus.

But I think the run rate could be higher throughout the next quarter, at least my internal measures, while at the same time the line losses would be in the vicinity of what we have seen last year.

Okay. Thank you, Tim.

And the next question I have is from Jon Dann at RBC. Jon?

Hi, there. Two questions, the first was I think there have been some price -- there's been quite a lot of price movements on the front book -- removal of discounts, recently re-introduction of say regional discounting.

Do you think there's a moment when you can put through a back book price increase, so a price increase through the whole base? And then secondly, is there any update on the process toward receiving regional subsidies for fiber rollout?

I think first of all what happened last year is that we in several steps pulled back promotional activities in the fixed line. That's what we're basically talking here.

We started in Q2 and then Q3, and finally in Q4 we pulled out the regional promotions. I think it's quite normal type of behavior in a market place.

That's the way you test the water, how far you can go in terms of getting prices up or removing promotional elements. We found out the first two ones have been, two and a half ones to say have been quite accepted by the market.

The last one, the regional promotions, maybe was too far to go. So what we decided to do is from I think mid of March on, we would put them back again into the market place to get the run rate up to mentioned that should see higher run rates during the course of the remainder of the year.

I consider that as a normal type of behavior. You test the water, you see how far you can go, and then if you are too far, you move a little bit back.

That's what basically happens around the regional discounts. I don't think there is a huge and big back-book element in the whole game here.

Churn is low. We're looking forward to a churn expectation this year.

There is no expectation that there is an up-tick here. And as you see, the broadband revenues are increasing by – or have increased by 1.8% in this quarter.

So I think we should be good.

By the way, I think to add one sentence here to Thomas. It is our clear intention, and give us some credit for more initiatives.

Interesting while Vodafone has followed this initiatives here to increase the value on our mobile site, and increased the value due to the heavy investments in infrastructure and we're trying to do the same on the broadband side. One intention is to do it by up-selling, the other side is it by taking out subsidies out of the initiatives.

But we always said we have to balance our net add market shares toward these value assumptions. That is what Thomas just described.

At the end of 2015, we had reduced a lot of discounting like router promotions, regional promotions, some shortening promo periods, and other things. We have seen that this has an impact, so we have slightly re-balanced that.

But in principle, what we want to see here is a growing German business, both on mobile – both on fixed and both on B2C, and both on the B2B side. That is what we are striving for, and I hope we're going to be successful by what we bring into the market.

Let me come to the [indiscernible], and let me come to the decision on the subsidization of fixed and infrastructure. The first thing is that our intention is to build 80% of the country with fiber build-out, build on the vectoring technology, so that means up to 150 megabit, but then very soon after that following by super-vectoring, which is software update, going to 250 megabit per second, as the primary let's say step towards the Gigabit Society.

We do not want to have a split between the countryside and the cities, because a lot of customers are sitting in the countryside, and we want to cover them as well. We do not want to end like in Sweden, where you have good bandwidth in the cities, but only 30% of the countryside is properly coveraged.

This was the intention behind the discussion with the Bundesnetzagentur, and the vectoring decision which is now pending in Brussels, and I hope that we get soon get feedback on that one. For the remainder of the 20%, there is commercially for all, by the way, players in this market is subsidization needed.

The German Federal Minister of Transport and Infrastructure published the detail of the NGA state aid in the vicinity of EUR2.7 billion for supporting build-out in these areas. In the meanwhile, 55 regional projects have been launched, and have been subsidized with a total amount of around EUR500 million.

And what we see is here the first tenders will be decided in May-June time period. And it looks quite positive with regards to Deutsche Telekom's roll in this regard.

So the money is now coming to these regions. I think this is good for customers, good for Germany, and it's the right way going forward.

In principal, it's technically agnostic. So it's not only related to fiber – to the building of fiber to the apartment roll-out, it is agnostic to this one.

It depends on the area where the RFQ or the tender has been launched. So we are quite comfortable that at the end of the day, with the vectoring decision and with the subsidies which are coming to the market, that Deutsche Telekom will have in the vicinity of 90% coverage with their fiber network across Germany by 2018.

Maybe a few additions on the financial impact of those activities, I think our current assessment is that the majority of CapEx needed to make that subsidized roll-out happen will occur in ‘17. It will be a smaller chunk in ‘16, a smaller one in ‘18, and a big chunk in ‘17.

Our guess is that somewhere between EUR700 million and EUR1 billion is the vicinity we're talking about between 2016 and 2018, so in total, as I said, roughly EUR100 million, EUR200 million this year, EUR100 million, EUR200 like this in 2018, and the remainder in ‘17. That was obviously not part of our guidance we've given last year in the Capital Market Days around the CapEx, because at this time there was no subsidy available.

That is additional, but I think it's important to understand that the free cash flow guidance for this year and the 10% CAGR growth stays intact, so there is no change on that one.

Thank you, Thomas. Our next question is going to be from Justin at Credit Suisse.

Thank you. Two questions, please.

Just coming back to Germany again, I think we've seen over the last year a bit of a competitive setback. You said Vodafone doing Project Spring and closing some of the gap and set out to starting to build 4G, so they could start to catch up as well.

I'm just wondering what you can do, what you're planning to do to stay ahead of the game in the mobile race. Obviously you've got this rural coverage.

What about your speeds in the cities? Are you going to start building more cell sites?

Are you going to roll out 2.6 gigahertz? Do you think you can maintain a speed premium?

Secondly, a similar sort of question in fixed line. United Internet somehow won the P3 connect test for fixed line last year.

It appears to be due to the modems they were offering. What are you doing to win that award back again this year?

And then finally there's been a price move by Vodafone on Otelo where they appear to have come down on price. It is just a 3G product, but do you consider that to be a potentially disruptive move?

Thank you very much.

I think I'm going to start on the mobile side, the first question. First of all, Tim is complaining because I started to answer the question.

If you want to jump in, jump in. Come on.

Okay. The first part of the question, on the German mobile infrastructure, first of all I think we've been in a superior position on the spectrum side due to the LTE auction 2010, it was on 1.8.

We used that to gain competitive advantage. Again, we have a low-band advantage from last year.

Looking forward, next year there is an opportunity for us on low band to utilize the spectrum advantage we have in here, number one. Number two, we have by far the highest level of back-hauling by fiber in the infrastructure, which plays a very important role.

I think number three is, and you mentioned that, it's not only coverage but it's also what kind of stable and good bandwidth you get within rural areas, within buildings, exactly the same story line, by the way, we're pursuing in the US by acquiring low-band spectrum, improving there, not only a signal outdoor but what customers really experience. So we are heavily and aggressively investing in those areas I mentioned.

Additionally, as you know, one important driver for differentiation from our point of view is also our converged product, with MagentaEINS. You know we're doing very well on that side here.

That's basically keep going and aggressively investing on the mobile infrastructure in those areas, plus do the converged stuff. By the way, the last measurements I have seen on bandwidth Voda versus Deutsche Telekom in Germany, the gap was not declining, it was widening.

So I think that's important to understand as well. I think, Tim, you've been so keen to answer the next question, I'm going to stop now.

No, look, we like competition. And I like the next drive test with Vodafone, and I like the next competition or benchmark with United Internet on the modem side.

Look, if we are not number one, we have a discussion here. So I like that, because it's our ambition in every category to be leading and to be number one.

To give you an example today, we are quite proud to say that we have won a very big shop comparison from Connect in 250 shops here in Germany and Deutsche Telekom is clearly number one compared to the other players. Interesting statement was the shoppers were impressed by the enthusiasm of people about that product.

I think we're on the right track, and I promise you we will do everything to win this number one position back. If it's router or it's bandwidth or whatever, we are working on that one.

The second question was with regard to the pricing of Otelo and whether this is disruptive. The first thing what I mentioned already is that Vodafone seems to adhere to the more for more logic, and to focus more on retail over wholesale.

And I think this is the right move towards an infrastructure competition than rather just going on prices. I think that's a positive sentiment here.

However, recent MB&O pricing actions look quite aggressive with big data bundles already in the anti-tariff, being it on UFone, Smartmobil with 2-gigabit for 12 months for EUR7.99, and EUR14.99 afterwards. So in this smart shopper segment, there is more competition.

We clearly have to state that. In the top premium segments everything looks good.

But in this smart shopper segment, there is a dynamic. And we read the Otelo data volume increase the way to stay competitive in this landscape.

For us, this is the area of Congsta, where we are present and competing here. We have to look how we – how this will impact the business over time, but this is focusing very much on the smart shopper side.

So I hope this is answering your question. We have a very comprehensive overview about all usage and price promotions here in the market, and maybe our Investor Relations team could share that.

Then you get an overview about the dynamic of the market quite easily.

Thanks, Tim. The next question I have from Emmet at Morgan Stanley.

Emmet?

Yes, thanks very much, Hannes. Thanks for taking the questions.

I've just got two quick ones. The first question is on the debt refinancing opportunity.

I think you mentioned you refi'd EUR4.5 billion since the beginning of the year. Could you maybe just give a quick update on what debt maturities are coming up at the Deutsche Tel AG level over the next couple of years, and at what rate you believe you could refi at?

And then the second question is an area we probably don't get many questions, it's on GHS. Just looking back over 2014 and 2015, I guess you burned about EUR250 million, EUR270 million of cash each quarter throughout ‘14 and ‘15, but it's a lot better in Q1 of 2016.

There's only cash burn of about EUR160 million, EUR170 million. Is there a step change there now or is this just a timing question?

Thank you.

Let me start on that GHS question here. And, by the way, I hope that the people in the GHS not have burned the money, so that they have created value for that money.

Nevertheless, I think I sit on that payroll, as well. I'm kidding.

Here, look, I think what is very important here is that in the GHS we are driving heavy headcount reduction already over the last year, but even in the next years. We are trying to reduce redundant structures', complexity and non-contributing elements out of this asset.

We will have less people sitting in the vehicles of Vivento and other areas, so the placement service areas where we see further cost reductions going on. We are reducing heavily the floor space and the rents of ours locations.

Next time you're here maybe in the headquarters, you will see that we are rebuilding the entire landscape here into open office spaces, which are significantly more efficient and will enable us to reduce rents outside of the areas. So it is our clear intention and we did several benchmarks on that one.

This is affecting GHS as well to reduce costs and headcount within the central headquarters and the GHS functions.

Emmet, on the first question on refinancing, first of all, the numbers for 2017 and 2018, 2017 is around EUR3.5 billion, 2018 is around EUR1.2 billion, so not really very much. In terms of this year, we are done except we've agreed with T-Mobile US facilities of in total $4 billion, or EUR3.5 billion.

Depending on how the outcome of the auction will be, there will be some additional need for this year. But other than - this year is done, and then as I said next year is EUR3.5 billion and EUR1.2 billion for ‘17 and ‘18.

The next question I have is from Dominik at HSBC. Dominik, please?

Thanks, can we get an update on BT and your discussions around the potential cooperation? Thanks.

Sorry, Dominik, we couldn't hear you just now. Could you maybe ask the question once more?

Can you hear me now? Hello?

I think I got the question. I think the question was update on BT and how we are progressing in this regard.

First, we are a happy shareholder in BT, and I am a happy Board member of BT, so that was a nice start with these folks. We believe in the EE merger activities and the synergies here, we have seen a good quarter, I think.

Sorry, I cannot talk about that in the numbers, but about the developments which have been announced from this company. We see multiple opportunities for mutual beneficial collaboration, for instance in purchasing, in technology, and even investigation on how we cooperate in the global service businesses.

So we are talking with BT about a number of collaborations here. It's too early to say what are the next tangible steps we are taking.

Clearly it's one thing, this is a very early stage, very early days with BT. We know that BT is quite busy with integrating EE, and there are various regulatory reviews, so don't expect something in short-terms here.

Thanks, Tim. Now I have a question from Mandeep.

I think it's the last or second-to-last question that we are going to take, depending how long we take to answer it. But Mandeep, could you please ask your questions?

Okay, thank you. Two questions, I have please.

First of all is similar to what Emmet was asking. How do you relate to the ongoing heavy restructuring costs, whether you look at it within GHS or events, or wherever they're booked, with the progress towards all IP, where you're planning to have 100% lines IP by 2018?

Is that the time or right number where we should expect the restructuring charges to peak and then start coming down dramatically, or do we – should we think of these as ongoing feature? That's the first question.

The second question is just on the general health of the mobile market. Everyone talks about German market repair post-consolidation, data monetization, rational behavior.

I know you've alluded to some points where the extra competition is. But from where we're sitting, Telefonika Deutschland is shrinking mobile service revenues, you're shrinking mobile service revenues.

We're not sure what Vodafone will bring, but consensus is looking for the correct side of flat. FreeNet's numbers were not great.

Can you help us understand why the German market is such a great market, because we can't really see it in the numbers?

Mandeep, I'm going to start on the restructuring costs. I think last year in the Capital Market Days I've shown a profile of how the total restructuring costs should develop.

I think one key message was they should decline and not peak towards 2018. And the second message was ‘16 will be much lower level than ‘15, and 2017 up.

Now what has changed in the course of the last 12 months is that the German state decided to have a kind of last round of early retirement exits for civil servants. That was a decision by the government.

So what we did is deviating from a message last year is we decided to use that last exit opportunity to offer it to each and everyone who wants and is willing to leave based on that scheme of the company. So, what basically will happen is this year will be a little bit higher than last-year announcements.

Not with impact on the cash side, but with impact on the special factors on the EBITDA side. And then from there on towards 2018 we should see lower levels.

Why, because we're moving a lot of work force into partial retirement schemes already. We are using the time of the IP migration to flexiblize the work force or to have external work force or the internal ones more flexiblized toward 2018.

So I think there is no different news and that's on the restructuring side.

Look, your question with regard to the mobile market, is Germany is great market or not? Look, it's big.

Whether it's great is something different. But now, what is Germany?

I think first thing is we have always said it's not that we have guided the market towards an insignificant improvement, nor we have guided the market into a significant deterioration here. What we always have said is this Moore's law has to stop at one point in time, that you build additional capacity year-over-year, invest into infrastructure for both B2C and B2B, but at the same time, you're not able to monetize on the data.

And this is to say I think an economical reasoning, which we are just trying to follow. And for this, our strategy going forward was we want to differentiate.

And there are two areas where I'm more positive than you are, where I see differentiation. I see the differentiation on the upper end.

I see it on the LTE high-bandwidth Magenta customers, Magenta Mobil customers, who are willing to pay a premium for good coverage and high bandwidth. That is to say one thing what we are seeing and where we are very encouraged about.

The second differentiation what we see is on the B2B side. Yes, the B2B side was a little bit more competitive on the classical telephony side.

But on the data consumption we see an up-tick year, as well, and we see new market opportunities which are driven from the connectivity. Be it cloud services, being the combination with security service, being the Internet of Things services, our cloud service combined with the telecommunication service is growing by 30%.

This is a very nice number in this huge segment, where we have a very strong market share. What I'm more worried about is irrational behavior of MVNOs, but even the MVNOs are not as capable as they were in the past because of the lack of good LTE services.

So I very much understand the decision here from Vodafone towards United Internet. And second, this MVNO segment, and we have seen that in other markets, is yes, very competitive.

But from a total service revenue market share perspective, it is not as relevant. So clearly, we are more optimistic with regards to the mobile revenues going forward, but you're absolutely right.

This market is still shrinking. It is less shrinking than in the past.

And on top of that, what we should always anticipate and what we have anticipated in our numbers is that the roaming revenues are disappearing now over the next years. We have said the net impact for our European and German activities in the vicinity of EUR150 million.

The net-net, we do not know the elasticity yet, the full elasticity yet, but we expect kind of value of EUR70 million to EUR80 million revenues, which might go out of the business for the next 1.5 years. So that is, let's say, our internal calculation for Deutsche Telekom, but this is maybe eating – will eat some of the revenues out of the mobile market from a negative element here.

Okay, thanks, Tim. The roaming impact that Tim has just mentioned relates to 2016, and there will be a further impact in 2017, and it's about – it's split almost equally between Germany and Europe.

I think we take one or two more questions. One question is via email from Stefane Beyazian, and it is, Verizon is starting to be – from Raymond James, sorry.

Verizon is starting to be vocal on 5G, and wants to go early on 5G. How big do you assess the financing needs to go 5G in the US?

And would you be ready to accelerate CapEx at the expense of group free cash flow?

By the way, the 5G standardization is something, which is not defined by Verizon alone. This is an industry standard, which is worked out by the GSMA and other constituencies.

The real 5G deployment is something where we earliest expect something in the vicinity of 2018. From a standardization perspective, 2019.

Maybe from an early supply, we expect South Korea with the Olympics coming first, and maybe then mass-market deployment something in the vicinity of 2020. When Verizon is talking about 5G, they are not talking about real 5G.

They're talking about 5G.3 or 5.4, whatever software standards in their network, this is not real 5G. And this is a marketing geck how to – trying to own this category.

Honestly, I would be cautious on this kind of advertising because we met our experience. I remember pretty well previous to the on-carrier management, we launched 4G, but at the end of the day, not being able to launch real 4G in the marketplace, and the reaction of the customer was quite rude.

So with fairness and with transparency, I would launch 5G the moment I have really let's say a step-up function in the --quality in the bandwidth, and the quality of service, and the latency in specific.

Okay. And please be aware that of course in the US we have a dense network already, because it's a high-frequency network historically.

We have small cells, and we even have some high-frequency spectrum that is suitable for 5G. So when it comes, we'll be prepared.

And the final question maybe – sorry, Thomas?

Let me just add one thing, because there was one element of the question was related to the free cash flow impact. Last year, I was very clear in the Capital Market Days that we do not expect the need for additional CapEx to go away, but that our planning is based on incremental additional CapEx year-by-year, so there is a CapEx growth envelop in the US anticipated.

Yes, thanks Thomas. And final question maybe just one in the interest of time.

Ulrich from Jefferies, can we have your final question please?

Thank you, okay. It's on, I'd say your Magenta tariffs under the new pricing have been running for some time, I was wondering if you could share with us the initial sort of momentum, the traction that you're seeing.

And particularly in that context, comment maybe – one of your resellers has commented today that they have seen all that upside from the higher prices actually reinvested in higher commissions by Deutsche Telekom. Specifically, they named Deutsche Telekom in this context.

Can you confirm that? And if yes, is this just a temporary measure?

I think the intention of the new tariffs with the more for more concept was to address pain points of customers, being the data relevance, in terms of having that in an appropriate size for the customers' demand, the roaming, and the Wi-Fi. And I think one of the big reasons why that basic price increase resonated well in the marketplace for the customers was because it was addressing those pain points.

That's number one part of the answer. The second part of the answer is, we always have dealer provisions.

There is nothing new in this. And I think what you normally do if you launch a new product, you do some promotional activities to make some buzz and make that hype, and then obviously you also play around a little bit with promotions.

So that's a kind of normal situation. There is nothing special about this one.

I think the key element is, as I said, that it is addressing the customers' pain points, and it's resonating well with the customers.

Okay, thanks Thomas. And I think I now hand over to Tim for a few final sentences.

Thank you, Hannes.

I got used to them, sorry.

Thank you, Hannes. Thank you, everybody.

Look, this was, I think from my reading, a very solid working quarter at Deutsche Telekom. There was no fancy stuff around let's say M&A activities.

It was very much focused internally. What is now the main subjects for diminishment for me personally for the upcoming quarter, I think there is high attention on the US auction.

That is one major topic. I think supporting the US team to keep on working the market share was of what they gained, something in the vicinity of 189%, so outstanding performance, what the US team is doing here.

Our main focus on the operations is on Germany. I think what we have to work on is on the fixed-line side to better monetize our infrastructure.

We will drive the net-net numbers on the fixed-line side. We will drive our new TV platform because that's a very nice up-selling opportunity.

And we will very carefully maneuver in the mobile space, where we want to create additional value as the leader here in this market environment. My last sentence is on Europe.

We have not had any question on Europe, but I would like to draw your attention to the development here, because what we see is we had growing revenue. If you take the Netherlands out of the equation for a moment, we talked about the Netherlands, but we have seen in all markets increasing revenues on fixed line, which is a very good development.

MagentaEINS is paying back here, as well. A swallow doesn't make a spring.

It's a say we have here in Germany, but I think we see the development in Europe quite encouraging. And the same is true for IT systems.

I think the master plan and our turnaround plan is taking improvements and signs of significant turn-around now over some quarters. And the order entry with all the new propositions on cloud is very strong, with all the digitalization moves we've seen in the adjacent industry.

So the final message with regard to Deutsche Telekom, and with regard to the Management commitment is we won't stop. Thank you very much.

However, the conference call is about to stop. So should you still have further questions, we kindly ask you to contact us at the Investor Relations department, and as you know, we will be out on the road quite a lot in the next few weeks, as well, so we look forward to seeing you then.

And with that, I hand back to the operator.