Deutsche Telekom AG

Hannes Wittig - Head of IR Timotheus Hottges - CEO Thomas Dannenfeldt - CFO

Dominik Klarmann - HSBC Bank Ulrich Rathe - Jefferies International Mathieu Robilliard - Barclays Capital Akhil Dattani - J.P. Morgan Justin Funnell - Credit Suisse Tim Boddy - Goldman Sachs Ottavio Adorisio - Societe Generale Robert Grindle - Deutsche Bank Frederic Boulan - Bank of America Merrill Lynch

Good afternoon, everyone, and welcome to today's third quarter conference call. I have with me Tim Hottges, our CEO, and Thomas Dannenfeldt, our CFO.

Please find our disclaimer as part of our presentation. With this welcoming, I hand over to Tim who will share his thoughts before Thomas will dive into the financials.

Very fast, Hannes. Thank you very much and welcome everybody to this conference call here today and I'd like to start with my key messages on first slide.

In this quarter, like in the previous one, we made very good progress towards our guidance for this year and towards the strategic targets we communicated to you at this year's Capital Markets Day. We are very happy to reiterate our guidance and these targets today.

Our financials are growing strongly, most of them by the way double-digit. Our revenue grew by 9% year on year.

Our adjusted EBITDA grew by almost 13%. Our organic EBITDA growth was 8.1%, and even faster than the 6.7% growth in the last quarter.

Our free cash flow was EUR1.3 billion, up 16% year on year. It was another quarter of better than expected performance in our core KPIs.

In the U.S., we simply won't stop. We gained 2.3 million customers and extended our lead over Sprint.

We raised our 2015 subscriber guidance for the third time this year and again without changing our financial guidance. In Germany, we made good progress.

Our line losses of 83,000 were the lowest in 11 years, and we added 235,000 broadband subscribers in the nine months, of which 78,000 came in the third quarter. Remember, at the beginning of the year we promised that we'd come up with higher numbers than the quarters 2014.

Our strong KPIs are driven by our network investments, but also reflect the success of our Magenta1 bundle offers where we now have 1.6 million customers after one year. This is by the way already half the way towards the 2018 target we shared at the Capital Markets Day.

The success of our convergent offers impacts our headline service revenues, but our underlying trends remain healthy and our mobile service revenues are on track for our medium-term guidance. While we delivered strong financials, we added almost 3 million German lines to IP in the first nine months, on track for completion of this very ambitious project at the end of 2018.

As you know, we are not only investing in an industry-leading all-IP migration, we are also rapidly building out our LTE and fiber networks. We now reach half of German homes with fiber, a coverage increase of 10 percentage points within one year.

In the last 12 months, more than 1.6 million new German homes chose our fiber network. At the Group level, we invested almost EUR8 billion in the first nine months, a double-digit increase on the prior year, 15.5% increase.

As I have mentioned, while we are tracking ahead on many core KPIs, we are happy to confirm our financial targets. This is due to our strict cost control.

In the U.S., despite the faster than expected subscriber growth, we continue to expect $6.8 billion to $7.2 billion of EBITDA this year. In Germany, despite the faster than expected growth in fiber, all-IP and Magenta1, we still expect EUR8.8 billion of EBITDA this year.

At the Group level, we reiterate our guidance for EUR18.3 billion adjusted EBITDA and EUR4.3 billion free cash flow. As you know, our guidance is based on last year's average exchange rates and excludes the 175 million one-timer we reported in Q1.

If we were to use the year-to-date average dollar exchange rates, our EBITDA guidance would translate into EUR19.3 billion. And we remain happy with the current consensus expectations of EUR4.4 billion free cash flow this year, which compares to EUR4.1 billion in 2014.

We also successfully concluded a number of small but interesting transactions in recent months. Our deal with T-Online shows how we embrace the best ownership principle while we create strategic options.

The launch of our direct-air-to-ground project demonstrates our passion for seamless connectivity on the ground, on the move and in the air. And at the end of last quarter's call, I emphasized our commitments to cut costs and to monetize off our network, and I'm pleased that our cost discipline allows us to grow our cash flows while we are investing record amounts.

But we will always try to do more. As for the monetization of our network, clearly we are very pleased with our customer momentum, but again, there is clearly more that could be done.

In this context, let me say a word on our MagentaEINS convergence propositions which are attracting a lot of attention. MagentaEINS is tracking well ahead of our initial plans.

We have already more than half the customers after one year that we were hoping to have after four years. Our revenues per MagentaEINS households are higher than before due to successful cross and up-selling.

When it comes to the discounts, you have to look at the total picture. Rather than increasing our promotional spending, MagentaEINS bundled benefits have replaced other previous discounts.

And because of the success of MagentaEINS, we have since been able to additionally remove various discounts this year. To give you an example, for instance at the beginning of September, we have halved our promotional period for our VDSL offers, and since November we have also discontinued our regional broadband promotions.

But precisely because of the success of our MagentaEINS propositions, we now have the ability and will continue to increasingly shift the focus on monetization going forward. Slide 5 summarizes our core financials.

As already mentioned, we achieved strong headline and organic sales growth. Driven by our double-digit EBITDA growth, our earnings grew by 30%.

Despite our increased investments, our free cash flow grew by 16%. The year on year increase in our net debt is mainly the result of spectrum investments and currency effects, but our debt declined sequentially and as promised we are back within our target corridor.

In summary, we are very happy with our operational performance year to date. We are able to accommodate major long-term investments while we achieved some very strong customer metrics and confirmed our full year's financial guidance.

The next slide provides a bit more detail on three interesting transactions in the quarter. Before I touch on this, let me say that we are very happy with last week's decision by the U.K.

antitrust authority, CMA, to recommend the approval of the BT/EE merger without remedies. We believe this merger is a great opportunity to create value for our shareholders and deliver an ever better customer experience.

In August, we gave our T-Online general interest portal to Stroer, one of German's – by the way, the German's leading outdoor advertising company – in exchange for 12% of the equity and two Board seats. We are very happy with this strong partner and see sustainable strategic benefits from future collaboration, for instance the increased visibility of the 'T' brand in the out-of-home furnitures of Stroer.

This transaction shows again how we are happy to exchange control for strategic upside where it makes sense. In a much smaller transaction, we also did an exit from our phonebook publishing business, DeTeMedien.

In 2013, we had sold 70% of Scout24. We used the recent IPO to further monetize this asset and have now raised over EUR2.1 billion from this successful investment.

We are still participating in futures upside through our remaining 14% stake. In September, we announced a highly innovative partnership with Inmarsat to provide hybrid LTE satellite connectivity to European airlines starting with our launch partner, Lufthansa, in 2017.

Across whole Europe, we will operate 300 new base stations to provide a customer experience similar to the comfort of high-speed broadband at home. Like our hybrid router, this project shows how we deliver on our passion for superior and seamless connectivity.

By the way, this air-to-ground service is coming with bandwidth of 4G speed in the vicinity of 75 megabit per second in a flying plane, and there are 22,500 planes which are traveling across Europe every day. And finally, please let me use this opportunity to reiterate our stated European M&A policy.

We are not looking at major acquisitions outside of our footprint. We believe our recent transactions provide compelling evidence that we are highly committed to pursue M&A only where there is a clear opportunity to create value for shareholders.

And now, I hand over to Thomas for a more detailed review of this quarter.

Thank you, Tim, and as always I'm going to start with Germany. Our sales in Germany were stable.

While growth in our handset revenues was slower than in the previous quarters, obviously here due to less spot market sales, our total mobile and fixed service revenue momentum improved sequentially. The margin was 41% in the quarter with the year on year decline largely driven by growth in handset sales and transformational costs.

Adjusted EBITDA declined by 2.4% year on year as a result of cost phasing but we firmly reiterate our target to achieve stable EUR8.8 billion EBITDA this year. While our mobile service revenues declined slightly year-over-year, we believe nevertheless we outperformed our peers.

Our contract subscriber base momentum was steady with close to 400,000 net adds. So now let's have a look at the German mobile service revenues.

Year on year, our reported mobile service revenues declined marginally but we are not worried because this mainly reflects the success of our Magenta bundle offers and we're not seeing any major change in the market environment nor in our underlying trends. As you know, we report our Magenta1 bundle discounts in mobile service revenues as well as the migration from LTE broadband to our new hybrid router, which are then booked and fixed.

The combined impact from these convergent propositions on our reported mobile service revenue growth further accelerated for 1 percentage point last quarter to 1.4 percentage points this quarter, largely explaining the sequential slowdown. Now let's turn to the fixed line.

We had another excellent quarter of broadband net additions, and remember, Q3 is normally our toughest quarter. Last year we lost broadband customers, this year we added 78,000.

Tim has already mentioned our continued strong growth fiber momentum. 425,000 additional households opted for our network, bringing the year to date net additions to 1.3 million, with the majority in our brand.

Helped by our strong broadband momentum, our line losses diminished further to only 83,000, our best performance in over a decade. Positively, driven by our successful retail up-selling strategy, retail broadband revenue momentum has now turned firmly positive.

Benefiting from this, our core fixed revenue declined by 2% compared to minus 2.7% in the last quarter. On the next slide we want to provide some additional perspective on our German performance.

Last quarter we introduced the concept of Total German Service Revenues, defined as all mobile service, wholesale and core fixed revenues, excluding the devices. These were down only 0.6% this quarter, and that is an improvement compared to the last quarter, benefiting from a better broadband and better wholesale revenue momentum.

Bigger picture, we can see that as a result of steadily improving broadband revenue momentum, we are tracking around a 1% decline this year, which is more than half of a percentage points better than last year. Broadband revenues are well on track for our 2% annual growth guidance we provided at the Capital Market Days and wholesale revenues are well on track for stability as promised.

So, while there are many forces at work here, we see our KPI trends going in the right direction and we remain comfortable with our guidance for total annual German revenue growth of 0.3% between 2014 and 2018 we gave in Feb. As we discussed at our Capital Market Days, we are accelerating our investments in high-speed infrastructure.

By the end of the quarter we reached every second German fixed line household with fiber, adding 10 percentage points of coverage in one year. Our LTE coverage increased to 87%.

In the quarter, we added 0.9 million lines to our IP footprint and we now already have 8.6 million homes on this platform in Germany, one third of our total lines. With this, we are again well on track towards our 2018 target.

Now turning to the U.S., let me quickly summarize the highlights of the quarter. I think all relevant numbers were already reported and discussed by our U.S.

team, but it's helpful I think to summarize the key messages. T-Mobile US added 2.3 million customers this quarter.

Of these, 1.1 million were branded postpaid net adds. Importantly, TMUS raised its 2015 branded postpaid subscriber growth guidance for the third time this year to between 3.8 million to 4.2 million.

This is up from 3.4 million to 3.9 million at the half-year stage and compares to 2.2 million to 3.2 million at the beginning of the year. Again, while we raised our subscriber guidance, we did not change our EBITDA forecast.

Revenue growth slowed sequentially to 7% year on year. This was mainly due to the recent introduction of [stronger] [ph] demand on our equipment sales.

Leasing revenues were below 50 million in the quarter. Service revenue growth remained double-digit at almost 12%.

And our branded postpaid phone ARPU was stable sequentially. Despite the strong growth, U.S.

EBITDA growth accelerated further to 41% from 23% last quarter. Handset leasing contributed little to this improvement.

And let me again clarify here the treatment of handset leasing to avoid any misunderstanding. The impact from handset leasing will be excluded and is excluded from our restated guidance, and as we have promised, we will be fully transparent on the accounting effects here.

On the next slide, we are showing how some of the key drivers of our U.S. businesses are developing.

We had another quarter of declining churn with branded postpaid churn again down a record 18 basis points year-over-year. Porting ratios remain positive against all carriers.

After meaningful decline last quarter, bad debt expenses ticked up this quarter but they remain under control. Our LTE network already now covers the 300 million POPs we targeted by the end of the year, and our low-band 700 MHz frequencies covering 60% of the U.S.

population has already been deployed for nearly 175 million people. They are beginning now to become commercially relevant.

Positively, the new iPhone supports these frequencies. Despite our network expansion, our cost of service declined more than 4 percentage points year on year benefiting strongly from MetroPCS merger synergies.

So back across the Atlantic to Europe, our European segment reported a 3.6% revenue decline. Compared to the previous quarters, GTS has now rolled over while the planned unwind of our discontinued business continues to be a headwind.

Organic revenues declined 3.7% year on year after 2.7% last quarter. On a country basis, we remain particularly pleased by our performance in Hungary and Greece.

Meanwhile, our Dutch business continues to be impacted by intense competition and the rollover of the split contract launch. We are responding to this through innovative product offers and through investment in what we believe is the leading LTE network in the country.

On a reported basis, adjusted EBITDA declined by 3% this quarter after 2.6% last quarter, mainly affecting the rollover and the deemphasizing of split contract plans. We continue to make good progress towards the targets we presented at our Capital Market Days.

45% of lines are now on IP in terms of our technology leadership, up from 35% last year. Our broadband customer base grew by 5%, our TV customer base by 4%.

Our LTE networks now cover 65% of the population, up from 42% one year ago, and we already cover 18% of homes with fiber. Now turning to T-Systems, our result reflect our ongoing restructuring at the market unit as well as continued cost savings delivered by Telekom IT.

Gross revenues grew by 2.3% after a decline of 1% last quarter. This benefited from 5% year on year growth at our market unit.

We are especially pleased with our cloud services where DT grew 30% and achieved 1 billion of sales in the first nine months. Revenue growth also benefited from the toll collection system in Belgium.

Systems Solutions EBITDA declined year on year this quarter but this reflects mainly the phasing of launch costs. When you look at the first nine months, the market unit has delivered 16% EBITDA growth.

Now let's move on to our group financials for the quarter. Free cash flow grew 16% year on year and we remain comfortable with the current consensus expectation for this year.

As mentioned, we were able to deliver this increase despite a significant increase in our investments. Our net debt diminished sequentially, mainly as a result of our positive free cash flow.

The adjusted net income grew by 30% to EUR1 billion, mainly as a result of our strong EBITDA growth. Finally, a few words to our balance sheet ratios.

At the end of this quarter, we returned to 2.5 net debt over adjusted EBITDA as we promised, down from 2.6 at the end of the last quarter. Our ratings remained stable at BBB+ and are well within our comfort zone with ranges from as you know BBB to A-.

We believe our debt ratios should be seen in the context of a very strong EBITDA growth in the U.S. and the Group level.

So, we believe this quarter shows that we are executing our strategy as we presented it to you at the recent Capital Market Days and as it is laid out on this slide. And with that, Tim and myself are happy to take your questions.

Thank you very much, Thomas. Now we are looking forward to your questions.

[Operator Instructions] Alternatively, you can send us questions via Webcast. Just type your question into the box below the screen.

Thank you. The first question is from Dominik Klarmann from HSBC.

Firstly, just on MagentaEINS, what's the up-selling momentum at the moment? So how much of the EUR10 discount are you able to offset versus I think about EUR5 run rate in previous quarters, and why do you still feel you need that EUR10 headline discount?

And then secondly just on German fixed, now that we have that rather positive decision by BNetzA on bitstream regulation last week, where do you want to price layer 2 versus layer 3 bitstream and what's your expectation on the still pending vectoring decision?

Dominik, this is Thomas. I'll take the first question.

The first part of your question was up-selling momentum in MagentaEINS. We are now talking about EUR6 to EUR6.5 up-sell after transaction.

So if you take the revenue of a household before the transaction, you take it after the transaction, actually there is a plus EUR6.5. So momentum is positively so to say accelerating versus what you've seen in February and the mid of the year.

On the discount, Tim mentioned that several times and the debate we're having here internally obviously is all around monetization, but the way we look at it is we look completely at every promotional element, and discount we've given, Tim mentioned that we've taken out the 24 months promotional period in I think it was September, moved it down to 12 months, we took out Q2 already the free routers, we're now removing the extra promotion in some regional areas. So the way we look at it is not solely on that specific discount element but the complete sum of all the parts, and we there is room to manoeuvre and that's why we're taking it off.

So far we keep that discount as it is because the transaction per se is very accretive. As I said, it's EUR6.5 after transaction, plus.

Dominik, first question on the bitstream access regulation here, the first thing, this is an ongoing process, it's a negotiating process, it's we make some recommendations here and we are in a discussion here with the different parties. The Bundesnetzagentur decided on October 29 that fees for the layer 2 and layer 3 bitstream access will be subjected to uniform regulation by the [centers] [ph] of the abuse of dominance.

So because of the future importance of layer 2 bitstream, Telekom Deutsche must submit the layer 2 bitstream charges always ahead to Bundesnetzagentur for approval. So this is let's say the formal wording on this one and we are in the middle of this process.

What my stomach tells me is the following. The market – the politicians enjoy seeing at least Deutsche Telekom investing heavily towards infrastructure.

And this is a good momentum. Overall we see more CapEx in the market due to the better regulatory framework, which we all enjoyed over the last two years.

So I do not see any kind of aggressive tendencies to negatively influence this track record. Now going to the third question of vectoring, look, I made that clear in the German press, we have a debate on regulatory and politically industry policies here, and we simply forget one thing, the customer.

There are areas in the vicinity from 65% to 80% of the POPs in Germany who are not able to enjoy high broadband connectivity. And Deutsche Telekom made clear, we see a way to invest almost 1 billion into these areas and to support broadband infrastructure up to 250 megabit, so this is vectoring and vectoring plus technologies in these areas, just from our house.

And the only thing what we need is the allowance from the Bundesnetzagentur for this so-called [indiscernible]. Now that said, I think there are no good arguments so far from our competition because we simply need these investments.

If they are able to do it, fine. We make it legally binding to the government that we are committed to this one that this is not just getting any kind of regulatory advantages here, that we are really committed to do so after 2018, and now we will see how the decision is getting taken.

We expect something coming faster than waiting longer, but we have to admit that there is the Bundesnetzagentur and a separate decision body within this Bundesnetzagentur who is in charge of that, and we should wait for the decisions from this [body] [ph].

Thank you, Tim. Okay we have got a question from Simon Weeden at Citi.

Simon has asked us, could you please comment on the fall in German contract net adds and the increase in contract churn and whether there are any technical factors behind this?

Maybe I'll start with the contract churn side. Reported contract churn was 1.9%.

I can't split it up for you, so it's easy to understand what's going on here on that level. The contract churn on B2C on branded side last year was 1.0 and is 1.0, so there is no change on the B2C side basically on the contract churn.

There are two elements which influenced that number and moved it up. One is, the big one is MVNO element in churn here, a big chunk of that one.

Then there is a smaller one which is 20,000 of hybrid router – LTE router to hybrid router, and then there is a large account we lost in Q3 which was roughly 25,000, and that is influencing the churn in Q3. So there is no general negative trend behind, but as I said, MVNO element and that specific large customer, and that is also related then to the net adds, You've seen the net adds declining roughly year on year by 90,000.

As I said, 20,000 is LTE relative to hybrid router, 25,000 is the major account we have lost and then there is another 40,000 roughly on a promotional tariff plan from last year where we had very low level of ARPU behind which is booked out. So that are the elements on the net adds.

Okay. So I understand that we are back with the ability to take your questions in person.

While you get ready for that, let me just read out a question from Jon Dann at RBC. Jon asks, first, do you expect the German broadband momentum to continue beyond the year 2015?

And secondly, he would like to know whether our CapEx in Germany could possibly drop below 4 billion given our technology benefits that we have from vectoring? So, Thomas, maybe you can help us with that?

First question was momentum in 2016, is yes. And second question, below 4 billion, is no.

We clearly said on the Capital Market Days, we're going to grow free cash flow while we grow the CapEx because investment need for more bandwidth is there and we will go for that.

Thank you, Thomas. The next question, we now go back to Ulrich Rathe.

Can you please ask your question once more?

Two questions please. The first one is, could you comment on the mix of the subscriber intake in mobile, particularly between the branded ones, between sort of the Magenta and the congstar one, and I would be interested to know of course where the mix currently is but also whether that has changed over recent times?

My second question is with regards to the MagentaEINS discounts and the fact that you simply add them back in totality to sort of compare that to the mid-term growth. I understand it's a mid-term growth, it's not a quarterly growth.

But if one – I mean if these discounts are permanent, if one adds back some fair share to the mobile trends, it still looks as if your mobile growth currently is running a bit below the mid-term trend. So would you agree with that, and if yes, what would take the trend back up really towards that 1%, even after sort of the fair location of MagentaEINS discounts also to the mobile business?

Thank you.

We're going to start with a question on Magenta versus congstar on that 144 net adds. It's 50 to 60 is Magenta and roughly 90 is congstar.

That's in terms of net adds. That's not in terms of value obviously.

The value mix is different. It's much more towards Magenta.

It was your first question I think. And the second question was, obviously what will happen is, I think it is towards the guidance we've given on the mobile service revenues, 1% guidance.

We'll stick to that guidance. We think we will see that 1% growth in the next year and in the mid-term as we said.

Obviously what will happen is that kicking in an acceleration of that positive 1% of Magenta discounts will have a rollover effect after four quarters and then decline again on the comparison year on year.

And maybe if I can add a word to this, I would highlight that of course our guidance was based on the assumption that we will have 3 million MagentaEINS subscribers by the year-end 2018. Now we have 1.6 million at the end of the third quarter 2015.

So clearly the drag is far higher because our growth in Magenta is faster, but if you adjust for that, we are completely in line with our medium-term guidance. And if of course the Magenta1 growth were to slow down beyond the rollover effect, you would also get less of a drag from that.

But of course we enjoy the growth in Magenta. So that's something you should see in the total picture.

So I hope that answers your question, Ulrich?

On the mix question, you answered that very clearly for the current mix, has there been a material shift in the mix recently in the third quarter or sort of this year that's between the first and second and third quarter?

No. It's kind of stable [trending] [ph] because of last quarters.

Genuinely I think what you should also appreciate when you look at the trends is that last year in September we decided to start the Magenta propositions only at EUR30. So we moved them up in the market.

And of course with that clear brand positioning, you get a bit of an extra momentum in congstar, but that's a very deliberate choice. So in terms of the quality of the intake, there's no difference to what we have seen or are hoping to see.

So with that, maybe the next question is from Mathieu at Bar Cap.

First, in terms of the German cost-cutting as you highlighted, cost-cutting has been started in the Q3, you do expect to make that up in Q4. Can you give us a little bit of color as to what happened in Q3 and how these can improve in Q4?

And the second one has to do again with mobile service revenue trends and then the traditional data. One of your competitors has indicated that the proportion of customers that take more than 1 gigabyte is increasing nicely this quarter.

Can you give us a little bit of color as to how these trends are, and also can you [indiscernible] in terms of the competitive environment going to the Q4?

So let me start with the EBITDA, and as I think was very clear that we stick to our 8.8 stable EBITDA development for Germany, which obviously does mean Q4 on a year on year basis needs to look much better in 2015 than in 2014, and we are very comfortable with that and confident that we will reach that, A, because basically last year's comparison was very low to be fair, secondly in Q3 we had a heavy load on the indirect costs very much related to IP transformation and rollout, the preparation of new infrastructure. We will roll out 2.0, we'll bring 2.4 million new households in place in Q4, which were prepared in Q3 already.

That is the size of all households in Denmark, just to give you the kind of color of what that size means. So that kind of preparation caused higher indirect costs in Q3.

That's a simple question of phasing we have in here within the year. What we will not do is reach that 8.8 stable EBITDA by doing compromises on the commercial side.

We will not compromise there. So we will stay with our I think competitive setup of products and offers we have and we'll reach that 8.8, and as I said it's a matter of phasing of infrastructure buildout in IP.

It was number one question. Second question was on…

So I'll help you out here, Thomas. The question was on the data usage in the marketplace, and what we're seeing is the moment customers are using LTE, their data consumption is going up.

By the way what we've seen on the consumer side is that with LTE devices, there is 169% higher data [indiscernible] customer without an LTE device. So what is the message for us on that one?

The first one is, data consumption is increasing. The second conclusion is, there's Moore's Law in our market that the more consumption it is, you have to produce the gigabyte cheaper.

And the third one is, it has to get balanced in the way that you over time increase your ARPU by – so overcompensating the volume effect by price stability. That is that same intention which we have.

And so it might be that we increased the data volumes over time but obviously now with the assumption that we could make money out of it.

Thank you, Tim. And with regard to the competitive environment in the fourth quarter, I think we're seeing some promotions right now, but of course fourth quarter is a quarter that usually has a fair promotional intensity.

I think there's attempt to sell iPhones, et cetera, but when you look back over the last six to eight quarters, there is no major shift in terms of the commercial propositions that we are seeing in the German market and we are of course hopeful that this will remain the case.

So we have a question from Akhil, J.P. Morgan please.

Two things please. Firstly, just to follow up on the question on competition, you've talked about how you're unwinding some of your price promotions as an offset to MagentaEINS, and if we look for your result sheet, you've also seen quite a nice reduction in your SAC and SRC as well.

So can you just comment, is that purely just a function of that or is that also reflective of kind of a more positive view in terms of competition? And I guess related to that, Telefonica Deutschland on their call earlier today seem to suggest that some of the promotional activity, the low end of the market is eased off and some of these promotions haven't been repeated and continued.

So, just kind of any thoughts and updates around that would be useful. Secondly, just on MagentaEINS and the discount there, you've given us a helpful slide in terms of the overall drag and the way that that's been increasing on the mobile service revenue performance.

Just wondered if you could help us understand the evolution of that? Obviously the momentum is continuing, but next quarter starts to annualize that.

So should we think we're through the bulk of the dilution on service revenues and it's stable to improving? And then just the very last one on a follow-up from the previous question on mobile data usage, if you have any stats in terms of the overall year-over-year growth in Germany, whether it's accelerating or slowing, that would be helpful as well?

First of all on the SRCs, SAC/SRC development, I think one element is in the comparison between last year and this year is for sure that the run rate and the take-up rate of iPhone 6 versus iPhone 6S, so last year's versus this year's in especially prolongation of contracts is reflected in the [SRC] [ph] spend here. So part of the reduction you see is related to lower run rates 6 versus 6S, and the same holds true by the way on the Samsung side.

Another one is that churn is in a good shape that loyalty is increasing also, especially by Magenta1. So, there is also some positive upside element from Magenta1.

As Hannes said on Magenta1 discount a minute ago, on the mid-term perspective we've given that guidance of 1% service revenue growth on mobile, and that implies that over time we will see that negative impact becoming lower or diminishing. So we stick to that 1% mid-term perspective on the mobile services revenues.

And the third one on mobile data usage, Tim mentioned that the question was, are there – what about the more than 1-gig usage in the marketplace? It is basically driven by the new equipment you have in the marketplace.

Samsung S is with 1.1 gig average use of our customer, iPhone is 1.2 gig, iPhone 6s Plus is with 1.6. So those handsets are by their capabilities consuming more bandwidth, and so it's moving up the consumption obviously.

Just to add a bit of data to that, the usage has grown by about 100 megabytes a month since a year ago in the residential customer base and a bit faster in the business customer base, and the growth is pretty steady quarter on quarter. With that, the next question is from Justin at Credit Suisse.

Justin, can we have your question please?

Just small ones please, as you said on the call, you believe now you've got the best network in the Netherlands and certainly some of the tests, these are tests to support that. What are you going to do with that?

Are you going to push harder now at the market share or try and achieve the greatest story [indiscernible] of the assets or perhaps both? Secondly, there's been a few stories in the last few weeks about looking at quality service in light of net neutrality laws.

Just wondering if you could give us big picture a size of the opportunity of that please? And finally, would you consider doing a tower spinout given the recent valuations of these assets?

The first question is on the Netherlands. Look, it's a bit like deja vu from the U.S.

situation. Over the last one and a half, two years, we have built the network on LTE.

We have now a great network. The network has now reached to 95% coverage by the end of October, latest LTE standard here.

We have restructured the total let's say layout and the network is almost empty, so the bandwidth is very high, and you saw that in the tests. Now what we have to do now is to create the connectivity experience around that, that we have restructured our tariffs.

We have encouraged more commercial momentum in the market and we have done some promotions to announce our infrastructure and the capabilities which we have recorded the transfer weeks, which brought us back into the net base growth. So we are doing something now to get a proposition around it.

I think price is not the ultimate answer for us, especially if we have a leadership in some categories. And it's anyhow not the smartest answer if you have a fixed mobile convergence play against you.

So it is about let's say the total proposition, it has a lot to do with the service, it has a lot to do with the branding. So if you give me let's say a ranking, it would be value on services than rather going for the quick gross add numbers here.

Now coming to the second question on net neutrality laws, funny thing because I wrote a blog after the decision and there was some heavy reactions here in Germany from network activists on this kind of quality classes which are now allowed. This specialized service with improved quality in addition to the good Internet access services is the compromise which was achieved in the discussion between the different Internet cost.

I think this decision is represents the very balanced compromise. So the optionalities are now given.

It's much too early to talk about let's say a monetization on that one at that point in time. I think there are certain [industries] [ph] who would have a need for this specialized service.

I don't want to reiterate the health industry or the connected car industries, but it could be as well for some of the smaller companies starting up with specialized service who cannot afford having [indiscernible] data centers like Google & Co. have today that these kind of companies are interested on improving their bandwidth and their quality here.

So this is something we're going to offer. Honestly it's too early to say because so far no service have been launched, but I think the first big step has been taken, promised and delivered from the commission and from the European Parliament, and we could be sufficient or let's say satisfied with the outcome of it.

And maybe an answer on the tower question from my side, there are two parts of the answer. One is, obviously towers, we own the towers in Germany, a big tower company, and it's a part of what I call a lineup of deleveraging opportunities we have, and it's like the towers, it's like the remaining [is called] [ph] and so on and so on.

So that's obviously one part of it. The other part of the answer is, tower company first of all has nice margin per se, number one.

Number two, it will become more and more important to what's 5G that you have control on your locations on the antennas, on what you can put there, et cetera, et cetera. So it's not just like they are nice valuations right now, let's go for it.

That's obviously an opportunity and we consider it, but there is another strategic element of the question which is looking at 5G and locations, is that the right way looking forward. So as I said, we consider it but not more so far.

Thank you, Thomas. The next question is from Tim Boddy at Goldman.

I wanted to ask a bit about the impact of super vectoring and potentially over time G.fast and how you see that playing through? Obviously it's very encouraging that you hopefully wouldn't have to do fiber-to-the-home at huge cost in the near or even in the medium term.

So I guess the first question is, has this pushed out fiber-to-the-home deployment by a decade or more? Secondly, do you think you have enough room in your CapEx envelope to fund super vectoring, which I think you are looking at late next year or into 2017, and then G.fast, or could we see a near-term acceleration in CapEx to achieve that?

And then finally, do you see that as an up-selling opportunity for the market to sell high speeds at high prices or is it an opportunity to attack cable more vigorously and further accelerate your growth? My second question is around the move to All-IP.

This is a cost you are bearing that virtually all of your peers are not. I wanted if it's possible to talk about your EBITDA growth in Germany year to date if you stripped out that cost of the migration.

I would imagine you'd be growing low single-digits.

Let me take the first question, Tim. We go our own way, and by the way the idea was how could we cover Germany with 50 megabit per second by 2018, and what we see was all that say the technical developments these days going to VDSL, going to vectoring, going to vectoring plus, and now we are working on G.fast as well.

We see that we could at a significant lower cost and in a much faster way, we could ramp up bandwidth up to 250 megabit per second in this piece of copper-based technology. This is by the way satisfying more customers immediately.

If you talk for instance about the vectoring area which is now under investigation from the Bundesnetzagentur, we are talking about 6.2 million households in Germany which we could ramp up until 2018 with this technology. Now that said, the moment where we are ramping – and by the way this year fiber-based 3.8 million households in Germany only, so to see how many households we have already ramped up here, and there's another million plus coming by the end of the year, gives us a huge opportunity and we see that that customers are willing to take that.

They are interested in getting let's say the bandwidth, and the moment we do that, we could even up-sell new services. The classical one is entertain.

We have seen 55,000 net adds in Germany on entertain in the quarter, and if you would ask me now openly and honest, that's not enough, we should do better, we have to do better, because the functionalities of entertain is great and on top of that the bandwidth is given. So that is definitely something what we are internally discussing how to improve.

Now the answer is simply, yes, there is more to come. On top of that, we are looking very deep into technical developments.

G.fast is another opportunity up to 500 megabit per second which we could provide already today in the labs, and if you go to bonding you could double up that speed. So there are a lot of interesting technologies which could help us to accelerate the buildout without let's say going cheap on fiber-to-the-home.

Second, there's 5G coming, and I think what we haven't discussed in the community yet is, the question is, how much of the fiber buildout especially in the rural areas could be substituted by 5G technologies? With receivers on the houses and indoor coverage coming from the repeaters, you could go up to high bandwidth.

I have seen a coverage of 3.8-gig already with 5G in the labs and this might be as well our technology. I think there is not a black-and-white, there is not a fiber or non-fiber world, I think there is going to be a hybrid world and we have to be let's say smart on how to combine the right technologies for the right customers.

Before I answer the question to all-IP, the remaining element, question was, up-selling opportunity for the market or attack of cable. I think that's clear, it's an up-selling opportunity for the market.

That is what you see already in the marketplace that people are willing to pay more if they get more and if it's really of value for the customers. So on all-IP, your assumption was right, it's a single-digit number up if you strip it out, correct for the quarter, correct for the year.

You know you've seen the profile we've given in the Capital Market Days, in 2015 and 2016 it will peak the effort in terms of all-IP. From 2016 to 2017 onwards, it will start to decline.

Remember the curve we've given you. But your assumption here is correct, yes.

Thank you, Thomas. The next question is from Ottavio at Soc Gen.

Ottavio, can I have your question please?

It's a very simple question regarding pricing. Looking through all the slicing on pricing, I can say that you almost changed nothing from quarter to quarter but one price, and that is MagentaEINS L, you reduced by EUR5.

But when I look at the mobile components, MagentaMobil actually remain unchanged. So the EUR5 looks that have been taken out to the fiber element.

That is almost a 20% reduction. So my question is, first of all, how much of the fiber lines have been sold through MagentaEINS and if this has been changing over the last four quarters?

And second, the rationale behind the discount, it's basically an effort to up-selling to move the customers with the value chain, or second, better economics considering now the coverage of fiber starts ramping up and therefore you can afford to be migrating on fiber without any impact on the bottom line?

I'm not sure whether I got it all right, but I'll try and you give me feedback whether it fits, it answers really your question. First of all, if you look at the numbers in terms of our broadband numbers, roughly 10% are supported by Magenta1.

That's the share of Magenta1 in the uptake of the fiber broadband numbers. Number two, second part of the question was the reduction.

Let me remind you that we are talking about the MagentaEINS L here, that is from EUR70 a month upwards. So we are talking high-end pricing here, not low-end pricing.

Basically I think what we have changed is the entertain premium part which was EUR10 up into EUR5 up. So the component which was pricing-wise changed was the TV part to make that more attractive, because obviously, Tim mentioned that, we're doing okay-ish I would say on entertain on TV.

It's like 10% to 15% year on year growth every quarter, but we should do better. And obviously if we are talking about EUR70 upwards, what you should also do is consider whether you create just by pricing barriers to enter.

So our assessment here was we need to make television more attractive. We are talking about high-pricing segments and we moved from 10 to 5 on the television side.

Not sure, maybe you give me feedback whether that answers your question really.

Ottavio, did that answer your question?

Yes, it does, and I probably want to use my second question here if I can. Specifically, if the idea is to push TV, why you only changed the price on the one package and not all the three MagentaEINS packages?

And the second is, going back to the first question, the fiber mix, you say that MagentaEINS only 10% of the package is taken with fiber. Have you seen any sort of changes since you launched MagentaEINS or it's been around that particular share?

First of all on television first, the logic of Magenta packaging is that TV starts with the M package. So you have S, M, L and in S it's excluded.

So in S it's just mobile and broadband. From M upwards you have television in there because obviously TV is a relevant element in our up-selling scheme.

So we don't want to give it for free away, but it should up-sell, but we also need to make sure that the up-selling price component is not too high. So that's the reason why we changed there and not further on, on the lower end.

And the second question was fiber mix of Magenta1, [indiscernible] out there, I don't have it at hand.

MagentaEINS, we've just answered, we have answered that question from my perspective. If that's not clear, Ottavio, please contact me and we'll sort it out.

Maybe the only one element I can tell you is that in the vectoring rollout areas, we have a higher share of Magenta1. That's the mechanic.

But I'm not sure whether that ultimately answers your question. We will follow up.

Okay so with that, I previously had a question by e-mail kindly provided by Emmet from Morgan Stanley, and the question was – maybe you ask it directly again now if you could have a question from Emmet Kelly at Morgan Stanley. Emmet, can we get you?

Out. In that case, Emmet has asked, the closure of the BT/EE deal has been provisionally approved by the CMA.

This will see Deutsche Telekom owning a 12% stake in British Telecom pending final regulatory approval. Do you view this as a financial investment or is it a first step in the cross-border consolidation that you have mentioned in the past?

So first we are indeed very happy let's say with the future stake in BT, which has already gone up by the way [indiscernible] since we acquired or agreed to acquire the 12% stock here. I think taking up the business to the next level by partnering, this does not mean for us to have the majority.

More generally, I think we have communicated a clear and attractive plan for our existing portfolio at the Capital Markets Day, and yes, we are creating a pan-European network in the next few years but primarily purpose of this is improving efficiency and our internal customer experience. And I think it is clear from our track record, please give us here some credit, with any transaction we would be committed to create value for our shareholders.

And so we have no decisions to stepping up on BT. We are just in the approval phase.

We are building a more intense relationship after the merger approvals and I will go into the Board of this company if I get voted here, and as expected, and then we will see. But nothing else planned.

I think the opportunities we have created in other business with minority shareholders have created a lot of let's say shareholder value already.

Okay since we had the technical difficulty earlier in the call, we are just extending the call by a couple of minutes. So we take two more questions.

The first one from Robert Grindle at Deutsche Bank. Robert, please?

Couple of my questions were answered, but I was curious to see whether you felt, and perhaps it's earlier at this stage, but whether you felt any impact from the two big sort of news events in Germany recently, i.e., Volkswagen, is that a big customer of yours, and immigration, is that starting to have a material effect on your mobile business for example?

So let me take the immigration issue first. I think it's a big challenge for everybody, for the municipalities here, for the government [indiscernible] and Deutsche Telekom has taken very early, let's say, position here.

We have started to build out wireless LAN hotspots in every refugee camp here. That is by the way a service which we provide for free because we think it is very important for the refugees to stay in contact with their families.

This is something which we are driving. We have already, let's say, covered more than 50 of the refugee camps in Germany with wireless LAN.

The second one what we do is we have built a platform, an online platform where people could document their biographies which we could use then for recruiting purposes. The third one is, we are discussing with the government that for the registration processes within the refugee camps, you need civil servants, and we have civil servants onboard, so we could maybe transfer civil servants from Deutsche Telekom into these refugee camps.

And by the way, we are not talking small numbers here. They really have a need to accelerate the registration processes within these camps.

And on top of that, we have 100 new – created new apprentice jobs within Deutsche Telekom for people who get allowance to stay. So that is, let's say, the situation.

We are doing what we can do from Deutsche Telekom's perspective here and this is highly appreciated from our stakeholders. The second question is with regard to Volkswagen.

Look, I think what we see here is that the CEO, Muller, is taking a strong direction, he is working on cultural change, he is addressing the right topics. You know that we have made some parallel experience in the early 2000s, and so I think he is addressing this topic.

It's not something where we would say this is a German issue or let's say relevant for all companies here in Germany. And with regard to the cars and to anything of our fleet, we are in discussion with Volkswagen to understand let's say where the investigation stands and what that means for the fleet management of Deutsche Telekom.

Thank you, Tim. The last question for today is goes to Fred Boulan at Bank of America Merrill Lynch.

Firstly on the mobile in Germany, if you could discuss your network differentiation strategy, is it something you can maintain in the medium-term considering what [Board] [ph] is doing with spring and the current merger of – 20 plus mergers and do you think you're in a position to extract premium pricing in the long run here? And secondly on your data, mobile data strategies, you have increased its allowance by 30% in a couple of price plans in September [indiscernible] pricing, is it something which is necessary to stimulate the growth and eventually monetize data or are you not essentially postponing the data monetization process?

And then a different question around content as a differentiating factor in mobile or fixed, what are your thoughts here in Germany and the U.S. where I think you see your competitors investing in dedicated mobile content?

Look, the entire purpose of Deutsche Telekom strategy, and this is now in place since two years, is that we do not want to compare on high street prices. On stupid 9.95 or 15.95 that we want to have, we are selling connectivity, and people say, I trust into Deutsche Telekom, they have a better service, they have a better connectivity, it is easier to [indiscernible] to different networks and there is additional service which I only get with Deutsche Telekom.

So we really want to be different in the way how we're doing. The basis for that one is the network.

And what you see is – and by the way, I think you give us some credit for that one, nobody in this industry is investing at a speed as we are doing, 87% high LTE, already 7 million LTE customers on it. We have opened up 3.8 million new households with high bandwidth.

We are going to vectoring and vectoring plus up to 250 megabit per second very soon. We go into the rural areas where people really are in a more difficult situation than in the big cities.

So we have the connectivity and we build the connectivity. The hybrid router is an innovation which we brought forward, highly appreciated especially from customers who do not have the bandwidth today.

And on top of that, we have launched new tariffs at the IFA consumer fair here in Germany where we have now integrated family packages especially for the kids so that the kids are always approachable, they do not have to pay for that one on voice side and their data volume is growing with their age or by the decision of their parents, how much they allocate to these kids. And on top of that, maybe you've not seen that product, but I think that is a real innovation in our industry, we are trying to substitute the old DECT or the old fixed line telephone by a tablet in the household.

So on this tablet – by the way, it costs only EUR49 for MagentaEINS customers, it is nicely selling around 15,000, we are trying to sell a tablet and on this tablet you find your bills, you find an immediate let's say SMS, e-mail or a chat with our customer service desk. You could do all Internet services and could use, and all these applications are preinstalled, you could use all let's say additional service from Deutsche Telekom, being it Smart Home, being it the entertain services or just being this HomeTalk or conference calling.

So all of this is preinstalled on this tablet and this is, let's say, kind of new digital kit for families at home. So this is the idea how we are trying to differentiate our services in up-selling the new categories into the household.

So I think that gives you the idea. I think we are on a good way with regard to our differentiation strategy, and compared to the other players in the market, we earn already a premium in the market, and our brand, brand recognition, our customer satisfaction scores are significantly higher than the ones of our competition here in Germany.

Fred, on your specific question on the allowance increase by 30%, that's basically I think the blueprint for monetization, because what we have done is we kept the allowance of the S tariff plan, which is 0.5-gig, where it was and we increased it on the M and the L tariff plan. So the increase of the allowance was on a price plan if you buy this price plan together with a Samsung handset or an iPhone, you pay EUR60 for that, and basically what we are doing is by spreading between the low and the mid and high end to make that mid and high-end more attractive by that data allowance and moving the people up from that lower price plans like the S into M and L.

That's the intention and I can tell you, with the current numbers we have seen, it works. So it's the blueprint, the positive blueprint and not the postponement of monetization process here.

Okay. So with that I want to hand over to Tim for some closing comments.

First, excuse me for the inconvenience at the beginning of the call. I think we took 50 minutes longer, so I think we have plenty of time to discuss the current situation.

We are very happy with the development in the quarter, especially on the free cash flow side and the OpEx side. I think the market is doing well.

It could do always better. What is, let's say, last time I mentioned what are the tasks which we are working on, and you have seen that we have taking out discounts to improve the revenue and that we have improved our cost base here.

And let me stress a little bit what is the direction for the team here for the upcoming weeks and months going forward. The most important thing for us is the monetization of our data buildout.

So we are doing heavy investments and we want to earn the money back. We could do that by good take-up rates and utilization of our infrastructure, we could do that by up-selling in our tariff structure, and we could do that by differentiating by new services, just to give you three examples on that one.

So the monetization of the investments is our primary focus. Secondly, we are very intensively discussing efficiency steps within the organization, on the cost side but as well on the way how we utilize our processes in the organization and how we could bring the e-company into the online service proposition in a much more broader way as we are doing that one.

On the strategy side, I think we are focusing on spectrum in the U.S. That's a very important thing for us and we are focusing on CapEx because you have seen that the opportunities that the moment we build up networks, the moment we are able to monetize and to create a differentiated towards customers, so this is something which we are discussing intensively.

And as well on the partnerships, we are doing a lot of efforts. This quarter was very much about partnerships in B2B, and I urge you to really look into our cloud service businesses because apart from the Intercloud we have launched the One Telekom Cloud which is a model which is able to really compete with AWS.

And this is based on a German cloud, this is based on the German security and data standards and this is based on an individualized sales force which we have here on the ground. I think this could be a very interesting significant value driver going forward.

And on the portfolio side, I think there are three areas which we are looking into that one this moment. The one is, as you mentioned, Netherlands, the second one is Romania, and the third one is our Poland activities where we are not happy with the performance currently.

I think this is an operational issue which we internally have to address, and this is our way going forward but we are very confident that we are going to achieve let's say our target for 2015 and confirm the Capital Markets guidance going forward.

Thank you, Tim. Just on the subject of cloud services, we are planning to do a Webinar on cloud services sometime earlier in 2016, so please be aware of that.

And again, our apologies for the technical difficulties we had halfway through the call, and also apologies we couldn't take all the questions that were presented to us. So please contact with any further questions, contact the Investor Relations department and we look forward to helping you out and explaining what may be left to explain.

With that, I give back to the operator.