Deutsche Telekom AG

Good afternoon everyone, and welcome to our second quarter and first half 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 first half, followed by Thomas, who will talk about the quarter's financials in more detail. After this we have time for 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 is my pleasure to hand over to Tim for his highlights.

Yes, thank you, Hannes, and warm welcome to everybody also from my side. And let's start today's call with my summary of the first half of the year 2016.

Our strong momentum continued; strong momentum with investments, with customers, and with earnings. We are very happy with our year-to-date performance and we remain well on track for our group targets we presented to you at our Capital Markets Day last year.

We also reiterate our guidance for 2016. The first slide is our usual quick reminder of our main strategic building blocks.

These remain as valid as on the first day. Let me reiterate our focus on the integrated IP networks, our commitment to create the best customer experience, our ambition to lead in business and to work with partners where it makes sense.

Slide 5 summarizes some of my highlights for the year-to-date. The demand for our fiber products remained strong and even accelerated.

We now connect 5.6 million German homes and businesses with fiber. This is by the way an increase year-over-year by 27%.

We added a new record of 1.2 million fiber customers in the last six months. In the U.S.

we gained 4.1 million subscribers so far this year and we raised our full year forecast yet again. After our technology and product launches at the Mobile World Congress this year's CeBIT Fair the last three months were more focused on bringing innovative products to the market.

Our strong growth continues. Our revenues grew 3.4%.

In Germany we achieved stable fixed line service revenues for the first time since the full duration 20 years ago. Comparable EBITDA was up 6.9% in the first half on track for our full year target.

Headline free cash flow was slightly down year-over-year but comparable free cash flow grew 16% on track for our full year target of €4.9 billion. The next page shows some examples for the strong momentum we are seeing with our customers.

We continue to see good momentum with our Magenta's convergence product. We now have $3.6 million convert subscriptions in Europe of which 2.5 million in Germany.

I already mentioned our success with fiber in Germany, where we added 2.2 million homes in the last 12 months. 28% of our retail broadband homes are now on fiber up from 19% one year ago.

Our U.S. performance speaks for itself and in the cloud we grew 22% year-on-year on track for our ambition level.

Let me now look at some recent highlights and start with our innovations. As I said, after the many exciting technology and product launches earlier in the year, the last three months were focusing on bringing innovative products to the mass market.

A few days ago we finally launched our new EntertainTV product with its many innovative features. At the same time we also launched our new Test The Best promotion which gives customers the chance to experience our high-speed network for one year at no extra cost.

We added 40,000 customers to our Smart Home platform this year doubling our base. Our more for more tariffs were well received by new customers, but also by our existing customers.

German data users growth accelerated throughout the year. In the US we now have more than 100 content providers on our Binge On platform.

We extended our connected car partnership with BMW by offering worldwide 4G connectivity and the telecom Wi-Fi hotspot solution in the car. And we agreed to trial the new LTE [ph] for vehicles in our autobahn test bed.

And we are seeing good initial traction with our new Public Cloud product. On the technology side we recently demonstrated a record 1.2 gig LTE-Advanced Pro speed together with Nokia in our subsidiary in Poland and we agreed to build a 5G test network in Berlin.

Supporting our network leadership our CapEx grew 8% this year. We also spent €1.1 billion on spectrum so far this year.

Another highlight last quarter was our agreement to acquire the A-Block spectrum for Chicago. We were also able to secure 2.6 GHz spectrum in the Czech Republic and a second 800 MHz block in Poland.

We have been busy working on regulatory issues. We are happy that the German regulator and the European commission finally want to go ahead with the NABA [ph] wise vectoring.

This is a great opportunity for more than 6 million German homes and we are hopeful that the conditions will soon be in place for this roll out to proceed. As for level 2 Bitstream the Bundesnetzagentur has recently presented its draft proposal.

We would not expect us to be happier with regulation and we are not. There are some aspects in the proposal that are logical in the overall context, but there are also aspects which are counterproductive if you want to encourage infrastructure investment.

Finally, the German Government has recently decided to increase its broadband subsidies by around 50%. We welcome this extension and will again look to participate wherever it makes sense.

We do not expect the new programs to contradict our free cash flow guidance for this year or our capital market day targets of 10% average annual pre-cash flow growth from 2014 to 2008. Finally, let me mention our recent governance changes.

We decided to complete our convergent network, innovation and IT activities in a separate Board of Management department which will be led by Claudia Nemat, who has the best possible background for this role. We believe this is the right step and the logical step that technology and IT increasingly come together as we accelerate our network transformations and prepare for 5G.

The overall responsibility for the segment Europe stays with our new board member Europe and I'm delighted that we were able to recruit Srini Gopalan who joins us from Bharti for this position. This is a clear signal for the internationalization and to better focus on marketing and sales.

Moving on to our group financials on Slide 8, we are happy with our first half performance and we reiterate our stated guidance for the year. We also reiterate the group targets that we stated at least year's Capital Market Day.

Our headline revenue grew by over 3%. The slight slowdown this year reflects changes in the commercial model in Germany and the U.S.

but we are comfortably ahead of our medium term guidance. Our EBITDA grew 7% on a comparable basis and despite our high investments we were able to achieve double-digit growth in comparable cash flow.

To sum it up, our financial metrics remain either in line or ahead, sometimes strongly ahead of the run rates we committed at last year's Capital Market Day. With this, I want to hand over to Thomas who will provide you with more details on our second quarter.

Yes, thank you, Tim and I am going to start with my first slide which shows the financial highlights for the group as a whole and as already mentioned our financial momentum remained strong in the second quarter. Our revenue momentum was impacted by changes in the commercial model for German spot market deals and through handset leasing in the U.S.

But your service revenues continue to growth double-digit and in Germany we sold a bit of growth in our fixed line services revenues for the first time in 20 years, Tim mentioned that already. Our adjusted earnings were almost stable and our underlying free cash flow momentum is in line with our full year targets.

Moving on to Slide 11, in Germany our sales were down by 3.1% this quarter, mostly due to lower revenues from spot market handset deals. However, our total sales revenues improved sequentially and were stable year-on-year.

Our German EBITDA was stable year-on-year as well in line with our unchanged guidance for this year. Our mobile service revenues declined 0.8% this quarter showing the expected sequential improvement despise a meaningful drag from roaming.

And our fixed line service revenues continue their stead improvement and grew 0.4% this quarter. While this [indiscernible] this is the best performance since our deregulation 20 years ago.

Together, fixed and mobile service revenues were stable year-on-year. We gained 156,000 contract customers.

While this is slightly below last quarter, our most valuable own branded contract customer intake improved sequentially. So in sum our commercial momentum was very steady.

We are seeing good tractions with our new More for More tariff with new and with existing customers. With More for More we also increased the data allowance for our existing customers for free of charge, but many of them already chose to upgrade their plans.

So data usage growth almost doubled to 61% this quarter. Slide 14, these are some of the factors impacting our reported mobile service revenues.

As expected our performance improved to minus 0.8 year-on-year this quarter. This is in spite of much greater regulatory drag.

On top of the small headwind from last year's MTR costs we experienced a headwind of around 1 percentage point due to the roaming cuts at the beginning of May. The accounting headwind related to all convergent offers was similar magnitude to the prior quarters with 1.1.

While the market has recently been dynamic, not all the news has been bad and we continue to expect 1% annual CAGR in our mobile service revenues excluding the impact of EU roaming regulation. Moving on to fixed line on Slide 15, we added 64,000 broadband customers.

For the year as a whole we continue to expect at least as many broadband net adds as we did the last year. While our first half run rate is a little bit below that we need for our target, we have expected our momentum this year to be somehow back loaded in the fixed line due to the timing of our planned commercial initiative.

At the beginning of August we finally launched our excellent new TV platform in the mass market and as Tim has mentioned we also launched a new test the best promotion to encourage customers to use our high-speed tariff and to participate better toward a stronger-than-expected German broadband market. It was another great quarter for fiber growth.

We added 578,000 fiber customers this quarter compared to 430,000 one year ago. Just over half of these new customers were on our retail platform.

Our broadband revenues grew 1.8% again this quarter helping to reduce our retail revenue decline from minus 1.7 last quarter to minus 0.8 this quarter. We have already highlighted that after two decades of decline we finally achieved slight fixed service revenue growth this quarter.

This was driven by improving retail revenues and ongoing strength in our wholesale revenues. On Slide 18 you can see that we could add another 0.4 million German households to our fiber footprint and now cover 57%.

And we remain on track for our milestone to cover close to two thirds of German homes by end of this year. 47% of access lines are already on our IP platform, so we are almost half way there.

Within the mix we now have migrated also 1 million German B2B lines and we have reached 91 percentage coverage in LTE. Moving on to our usual two slides and on T-Mobile you have that already presented their very strong numbers two weeks ago.

We won 890,000 branded postpaid customers. We also added almost half a million prepared customers.

Total branded net adds of 1.4 million in the quarter compared to 1.2 million one year ago. Strong subscriber growth and broadly stable ARPU combined to 12.5% mobile service revenue growth driving another quarter of strong EBITDA growth.

As a result of the strong second quarter growth we raised our full year branded postpaid subscriber growth guidance again and now expect 3.4 to up to 3.8 million branded postpaid net adds this year. Next we showed some of the underlying T-Mobile performance metrics.

Branded postpaid phone churn at 1.27% was the lowest ever. Our bad debt expense ratio which had temporarily increased last year further declined.

LTE network is now almost nationwide and due to our recent A-Block deals including the Chicago deal agreed in May, we now have access to log on spectrum covering more than 80% of the U.S. market.

This is great news for our customers. It will allow us to profitably serve additional markets.

In Europe our reported revenues were down 3.2%. Adjustment for deconsolidation and currencies, our revenues were down only 1.2%.

Roaming stood for an additional 0.5% drag this quarter. Reported EBITDA was down 4% and organic EBITDA was down 2.9%.

The slight sequential deterioration was mainly due to the impact of European roaming and some winter revenue phasing in Poland. I think we mentioned that already in Q1.

Our customer momentum was positive with 153,000 contract net adds in mobile, 67,000 in broadband and 39,000 in TV. Bigger picture remains, that excluding the Netherlands, our underlying European business is almost stable, due to some ongoing strong performances for instance in Greece and Austria, offsetting some weaknesses elsewhere.

Talking about the Netherlands we were clearly, where we are clearly in a turnaround mode, we are pleased to see that we now achieved positive contract net adds for four quarters in a row. As chart 22 shows, in Europe we now have migrated more than half of our homes to IP, up from 43% one year ago.

Our LTE coverage now stands at 75%, up 15 percentage points in the last 12 months. Now on to systems; the systems posted a slight revenue decline this quarter.

Half of this was related to currency effects and we also had a difficult comp due to high project related revenues in the prior year quarter. While our first quarter had benefited from a large payment related to the launch of our toll collect system in Belgium our second quarter was impacted by a few nonrecurring items.

We are clearly still in a transformation mode, but there are a few bright spots, that is our cloud initiative. So we remain confident that our market unit will continue to improve.

Free cash flow was slightly down year-on-year, but adjusted for the loss of dividend from EE and the last year's settlement it would have grown 19% in the quarter or 16% in the first half of this year. Our year-to-date trends are consistent with our stated around €4.9 billion free cash flow target for the year.

Next slide shows our financial metrics at 2.3 times our net debt is well within our comfort zone of 222.5 times adjusted EBITDA. As a result of our ongoing strong EBITDA growth, we quickly moved back from slightly outside this range one year ago.

Remember it was 2.6 in Q2 last year, so that was in our comfort zone. All three major rating agencies confirmed their Deutsche Telekom rating with a stable outlook during this quarter.

My final slide summarizes the strategy we presented to you at last year's Capital Markets Day and we continue to strongly execute against these targets. And as Tim said, we remain confident that we will keep delivering them going forward.

And now, we are ready for your questions.

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

[Operator Instructions] Please would you kindly restrict yourself to no more than two questions at a time. And I think we have some first questions already, so the first one is from Frederic Boulan at Bank of America Merrill Lynch.

Fred, can we have your question please?

Hi good afternoon everyone. Thanks also for taking the question.

If I could start on two points on Germany, quickly if you could come back on your high-speed broadband strategy and the license work, the promotion you launched don’t you think there is enough natural demand for high-speed broadband and aren’t you worried that you could a reaction on the back you also are taking the whole market pricing downwards? And then secondly in terms of domestic CapEx if you could share some thoughts around the impact of those increased subsidy on CapEx and your early thoughts on the 5G implications for your CapEx envelope in Germany?

Thank you very much.

Look, the first thing is we are investing heavily into the infrastructure in fixed line as you know it is 19% of our revenues which we are investing and mainly into the fixed line area at this time we are highly happy with the uptake of the high-speed products on our customer base already, but it is our intension as well to increase the net add numbers going forward. We mentioned that in the last conferences already.

We had as I say in the vicinity of retail net add market share of 20% and we have clearly higher ambition to monetize the infrastructure that we are building. We do not want to build a network for United Internet or other wholesale partners.

With that in mind, our intention is you know to show customers the full speed at no risk. So test the speed, test the best is the communication around it and we want to make it easier for our customers to experience this high-speed product.

The German broadband market has recently accelerated and it would be totally wrong if we are not participating in this environment. So now what is the offering?

19.95 for the first 12 months and afterwards you decide which kind of speed you like and if you stay in the highest speed is 44.95. If you stay with 50 megabit it is 39.95 and if you want to go below that in the 25 area it is 34.95.

That's the offer. By having this retail customers then within our base we have the capabilities of up selling our new TV product.

The TV product has a very good look and feel and by the way all the tests which we have seen now are very positive, by the way the best ones which you will find in Germany at that point in time. So we’re up selling TV as well on that one.

So we have a promotion behind that, that we say, if you take the TV product it cost you additional 995 on top of that, and there is a Sky promotion which we have agreed with Sky, which is three months for free for their services as well. So that makes it very attractive to go into the full value proposition of Deutsche Telekom and that's our intention.

We really want to up sell the Magenta services into a new kind of customer base and we want to convince customers. We haven't had the opportunity to use these services by not having the bandwidth so far.

So this is the intention behind that. The key intention is by bring more revenue to the table.

You see that we have successful with this already. For the first time since 20 years we’re on the right track with our revenue profile, overcompensating as well the revenue shortfalls on single play on line loss this year.

So this is very encouraging and we see that there is an accelerating demand of customers for these kinds of products.

And Fred, on your question on the domestic CapEx, first of all on 5G short one and a little bit longer one on the subsidies on 5G in or mid-term planning in our profile we already anticipated and assume that there will be more CapEx needed on the mobile side from 2017 onwards versus 2015 and 2016. So that is anticipated and within the CapEx envelope there will be an increase in the mobile side on the mobile CapEx obviously to support ramp up towards the 5G infrastructure.

On the subsidies maybe a little bit more here. First of all as you can imagine, we welcome that decision.

It is good for the customers, and I think it's good for infrastructure roll out that now government decided to move from that €2.7 billion into this into the vicinity of €4 billion. At the moment we are analyzing the possible scenarios for that usage.

What I can tell you is, meanwhile there have been tenders already in the country with federal subsidy program, they have been launched as always, you know we won some, we lost some, but for this year there is already an impact of a lower triple digit number on the CapEx side included in our envelope for this year included in our reiteration of our free cash flow guidance. So something in the vicinity of like €100 million to €200 million of that we will see already this year.

That's our assumption, then it will peak in 2017 and there will be now I think with the increased to €4 billion also a good chunk of that will be seen also in 2018 then. As we have planned always in a little bit room to maneuver we reiterated our free cash flow of 10% CAGR for the 2014 to 2018 perspective as well.

We believe that even with that increase we can stick to that commitment.

Thank you, Thomas. And the next question please from Mandeep at Redburn.

Mandeep can we have your question please?

Yes, thank you for taking the question. The first question actually is partly related to Fred's first question.

Obviously you've reached revenue growth in fixed line, it seems a little bit of that's driven by the significant year-over-year, but also sequential acceleration also revenues which are now growing at 3.4% and if you adjust for some of the one offs that you called out in the footnotes it's actually even faster than that. And that appears to be as a success of wholesale broadband take up by others.

So it's sort of inconsistent with the answer to the first question, which is you're not building a network for others. You're actually - seems to be that the wholesale revenues what's driving the growth.

So other people are being more successful selling your network than you also. So I'd like a little bit more color on that point please?

The second question I had was really on the balance sheet. Now that you're comfortably within your leverage targets at 2.3 times, you know obviously your EBITDA is still growing, Germany is now stabilized.

How do you feel about the balance sheet and potentially moving to full cash dividend rather than a script dividend just maybe give us some color on the balance sheet and how you feel about that?

So, by the way the revenue effect on the fixed line side is driven by both angles, it is driven by the wholesale impact, it is driven by the retail impact, it is driven by the base and it is driven by new customers. So it is coming from all these angles and you're right, the impact of the wholesale numbers were higher than the numbers on the retail side.

We have seen a growth of something like vicinity of 4% on the wholesale side. We built the network and we are investing heavily into the infrastructure and our intention is that we want to see both numbers growing, but we want to see the mix coming into another share here.

So what we want to see that our retail shares growing up and we could easily take the price some of the wholesale side here. The intention which we are seeing by the way and that is in our contingent model and in wholesale pricing model is we were surprised about some very aggressive offers from our competitors coming in with 9.99 for the first six or 12 months and then going to the higher prices and we saw as well Vodafone being in this race with the subsidy for the first 12 months as well.

And knowing that the original product Deutsche Telekom is better than what our wholesale partners are offering at least that is my belief with all the maintenance people behind and with all the service behind, with all the customer service behind, we do not want to leave that share as it is today and therefore we make it now easier for customers with this kind of lower economic price here to choose and to test our own capabilities. That is the intention behind the modification we made for that one.

And on top of that, we were not able in the second quarter to fully excavate the entertained service offering, that is due to the introduction of this new platform, both is up and running, the August prices are in the market at the E5 [ph] our biggest fair in Germany is coming soon with the promotion. So the second half year we will be focusing very much on fixed line retail products.

The first half year was very much focusing on the front loading of our mobile services. So that is the intention.

We expect that we at least make the same net add numbers on our fixed line retail services as we made last year. That is the intention, so that is what you could expect for the remainder of the year.

Yes Mandeep and your question on the balance sheet first of all leveraged 2.3 it is where it should be. Please keep in mind there is U.S.

auction running that will have obviously some impact on the leverage as planned, but what I'm saying is prior to the end of that auction, the leverage should be significantly below 2.5 and that is where we are. So that is one part of the answer.

The second one is, in my planning, in my mid-term planning in our guidance we have given, we assumed no script dividends, so it is the whole discussion about script dividend is on a yearly basis and opportunistic view on, it doesn’t make sense it is appropriate or not, but mid-term planning never assumes that it takes place. And so, that is I think answering your question.

Thank you, Thomas. The next question we have is from Akhil Dattani of JPMorgan.

Yes, hi good afternoon. Thanks for taking the question.

Firstly, just on German mobile and I guess it is somewhat related to the first question we had on German fixed. Just interested in terms of how you think about some of the conflicting moves we seem to be seeing in terms of pricing across the market.

Obviously you have discussed the more for more changes that you've put through the high end, but equally Vodafone seems to be arguing that there has been a step up in indirect channel spend associated with that, and then at the low end we've obviously seen a bit more aggression from some of the smaller players. So just generally, a bit of color around the competitive environment?

And you mentioned on more for more specifically some numbers around the usage trends you are seeing at the back of that. So if you wouldn’t mind sharing a bit more color in terms of both the uptake of those offers and sort of data usage trends we're seeing, that would be quite interesting?

And then just a very quick one on Holland, you mentioned the improving contract net adds we see in the last few quarters, just interested to understand from you whether you feel there are meaningful changes you still need to make to that business or do you think things are on track and if you are able to comment on the remedies that have been offered in Holland or whether or not you'd have any interest in those I'd be interested too? Thanks.

Yes, Akhil, I'm going to start on the German mobile and I think then Tim will pick up the question about the Netherlands. I think first of all it is important to mention that as you know the German market is quite well segmented.

So you have that upper end of the market where you have with more for more Voda following the trend and you have – I would say the big network operators following a strategy of value more for more. You offer more and people pay more.

And yes, there's always noise around competition, that's what competition is about. Someone is complaining about what happens in indirect channels and so on.

But I guess that the general trend here is more for more upward strategy. By the way on indirect channels to be very specific on that one we clearly said that for the introductory quarter, which was Q2, we will have higher subsidies behind that new offer.

And we said we're going to reduce that again in Q3 what we did, so I guess that that's a trend we can observe and you mentioned that in what we call smart shopper where Trillish [ph] and United and also Otelo and Congstar and Blau and so on are working. There is a lot of competition going on as the market segmentation works, I guess very well, that's kind of normal situation from my point of view.

Our bigger impact we had in Q2 on our mobile service revenue was not coming from the B2C side, it was B2B. So, on that side in Q1 we had a very big impact that was already the negative impact was declining in Q2 and that's why we're confident looking at the second half of the year because of the B2B drag diminishing over time.

We guess we will see that that guidance of 1% ex-roaming kicking in.

With regard to your question to the Netherlands, look, you know that this isn’t an easy market for us and it wasn’t in the past and so we have to do our homework here. And the first step was to fix the basic and that was let’s say that we have to improve our network, which is now one of the best network which we have.

It has an excellent spectrum position, it has an excellent build out, is an excellent to testing now. And so the prerequisite for good set of carrier services is given.

The second thing what we have to do is that we have to ensure that our brand is good positioned with a clear mandate here and with a clear view on what's going on there. We are working on that one with the new management.

We have changed the management entirely over the last month, and we're working in a very tight governance with this team and together to reassure that we find the right proposition around the mobile area. The prime focus for us in the net Dutch market is the mobile area.

Because we have some competitors sitting there with fully converged environments, while we are very much focusing on mobile services that's the prime market for us in any market by the way there will be place for mobile services. And we have to find out what is the best positioning this regard and I don’t want to let’s say release our latest thoughts on that one here.

You will see that within the next weeks by the way coming to the market what our intention is around that. Looking to the situation around the merger of Ziggo and Vodafone, yes there are remedies, there is a disposal of the fixed line intended here.

This fixe line is quite small business 123,000 customers. The net adds per quarter is 17,000, so it's pretty small.

That business and the question is whether we are tackling to fix all that converged as an answer, it is for us too early to say whether this is interesting, but we would be not well advised if we would not look into that one. So that doesn't mean that we're going to buy it.

It means we will have a look on to that one. And after a good due diligence on the strategic fit here we will come back to you on that one.

So I hope that is answering your question. The first steps are done, network the net add numbers we expect positive net add number for the total year 2016 and the other propositions we will come into the market soon and then we could discuss about the impact.

Thank you, Tim. Just to may be add a bit more color on the mobile data trend, so as Thomas had already said in his speech we have seen acceleration of German mobile data usage in the residential customer segment from around 35% year-on-year growth in the previous quarter to 61% this quarter and its approaching the 1 gigabyte per month level, not huge by international standards, but for Germany clearly a good development and we are pleased to see that it's something you would have hoped to see given we have increased the data allowances for our customers as part of the more for more move in April.

So, the other positive aspect here apart from the data usage increases that has been really quite a little spin down and not as much cannibalization of top box et cetera as when you, one might have thought so is genuinely people seem to enjoy having more data and they are using it and I think that’s encouraging as a trend for the market.

So, the next question we would – from Sam [indiscernible] at Exane. Sam, can we have your questions please?

You talk about your share of net adds on retail broadband, what do you think your fair share of net adds is, I mean if you have been doing kind of 20% recently? And then secondly, just on the cost base in Germany, one of the size is down about $140 million year-over-year, which is roughly the same amount of handsets sales are down.

Can you just give us a little color about how the cost base in Germany is moving and what your expectations are for next year and the year after that? Thank you.

First question with regard to the net debt numbers that we want to see, we have a good base and we have a low churn on that base and we see a lot of upgrades in that base bandwidth is the 580,000 number, so our base is very stable. Now with regards to the net debt numbers, we are expecting, we have said that in the vicinity of last year, so in vicinity of 300,000 is the number which we are aiming for throughout the total year.

That’s the ambition and this is then translating into the market share overall which you then see by the end of the year.

And on the cost base the share of the indirect costs so not as the season – season revenue related is minus $45 million which is kind of a fair chunk of the whole thing. Last year we, I’ve said $1.8 billion is the number on the four years perspective.

I think we’ve been in line with that on a 2015 perspective. I think we will do on 2016 as well.

As you know, there will be a little bit of a back loading due to the IP migration we have shown '17, '18 it will be little bit more than '15, '16 what we said and I guess we're in line with that.

Thank you, Thomas and with that we move on to Robert Grindle at Deutsche Bank. Robert?

Yes, thank you. I think it’s really interesting part is the appointment of the head of the merged, IT and technology network division and it appears that some of the benefits of your investment in IT infrastructure might be becoming more visible and I noted some announcements on – this morning which may be moving to some sort of delivery size.

So the question is are we starting to get to the point where you might see some of the pan net investment benefits in Europe or are we still way off on that? And separately, what might be other benefits of the new merged IT and technology division under Claudia?

Thank you.

May be I kind of start and Tim, you can add some thoughts here. First of all what Tim mentioned and said already is last year we laid out our strategy about the superior production model and we said what the impact of those activities will be.

Remember they are four parts, we are digitizing the customer facing process as we create the pan European network we do the INS [ph] roll out and we do the key migration and we have given you the profile which was a drag between 2014 and 2018 basically and turning to positives from 2019 onwards, we've said from the early 20s onwards you will have – you will see a $1.2 billion OpEx run rate related to that and all the steps we do in here is to support and secure that development and activities in our commitments. A little bit more color on that to give you an idea, I think we're talking about 360 platforms across our European countries.

We will consolidate them into 50 to 60 platforms. The first ones will establish itself and be available by the end of this year, so it is not anymore a concept, it is work being done already and getting commercialized this year.

But as always – there is role in that platforms and the first ones end of this year, it is 50 to 60 to establish, so it will take some years and then as we said $1.2 billion will be the run rate in the early 20s and OpEx you should expect.

Let me add one sentence to the governance issue. The first thing it was never a question on whether, it was only question when.

We are going to this governance structure, because as you know, we are strongly believing into that IT and networks are becoming the same more and more and to have a kind of seamless hand over within one governance, within one clear organizational structure makes a lot of sense to simplify process within the organization. The second thing is that we have still inefficiencies in the system.

When it comes to our IT roadmap to be honest, one evidence is sometimes we are ready with our network capabilities, but the next moment we find out that on the CRM side, on the BSS side, we are not ready for launching this product and to synchronize in this big organization those activities in a better way. Thirdly, we have announced that we have now built and started three data centers across Europe, that is what you are referring to it, so and we are investing money into that one.

You see the benefits already on that services, for instance it is cloud VPN piece is up and running and get markets already in the market every day. So there are already benefits on that one and there is a clear cost target and efficiency target behind Claudia's work.

The second intention behind this organization structure is, I call it always the [indiscernible] which means how many construction areas could one manager handle. And the reason that having technology in all the European markets at the same time was from my reading high complexity and reducing the complexity and handle it over to two guys makes a lot of sense.

On one side, you bundle IT and technology, on the other side you have a guy who is more marketing focused and sales oriented with very international experience. So that gives us in the board room and you might say German Telecom is a little bit of technocratic and bureaucratic, it was my intention to have even more sales and marketing skills in the board room and with Srini we have the right attempt focusing very much on the consumers propositions in this regard.

And the last message is, we scale up this organization to a more international organization, because now we have two members in the board who is not able to speak a word in German, which I highly appreciate because we have already everything in English here in the organization, but we have to bring the discussions and teams and the rotation within the organization to more international. So this is the intention behind it as well, so a lot of intentions behind this strategic move apart from the benefits we are expecting from the integration of IT and NT [ph].

Thank you, Tim and with that we move onto Justin at Credit Suisse. Justin, can you please ask your questions.

Thank you.

Thank you. Pointed questions, just going back to mobile, I guess in Q3 there is another impact from roaming, is there going to be bigger impact in Q2?

And then at the end of the year there is essential change in MTRs which some of your peers have started guiding and maybe we move to boric, maybe quite a big cost. So I guess we should be starting to think about negatives MSR [ph] trends for next year.

So, but I guess you also went up from lower MTRs, and I know you don’t want to spell it out too much, but presumably a cut to MTR would be actually net positive feel EBITDA outlook next year where for Germany in total. I just wonder if you could just give us a bit of a stare on these different factors as we start sort of modeling it in?

And the second quarter question is quite big picture, obviously [indiscernible] is working for you and you are building out faster broadband much faster than countries that are doing FTTH and if you look at France for example. There is obviously danger longer term as more of you does FTTH, Germany gets left behind.

I am just wondering if you are starting to think longer term about how you might do more FTTH and what the conditions would have to be for that to make sense for you? Thank you.

Justin, let me take the first question on the share. So the roaming impact, it started on the 1st of May and therefore we had two months in this quarter and in Germany and also in the remainder of Europe where we of course also had roaming impact.

It was of a similar magnitude in each territory and you would expect that in the third and fourth quarter therefore is greater aspect subject to seasonality to receive et cetera and so that's probably more an issue for Europe than for Germany where it is probably a bit flatter in terms of the impact for the year and of course it is also a drag going into 2017 we think it is about the same magnitude as we are expecting for this year which is around about 70 million for Germany and similar magnitude for Europe on 2016 impact basis. So that's not the annualized number, that's the expected impact for this year.

In terms of the MTRs we have heard from the German regulator that they want to change their methodology. It is for us not a significant EBITDA impact, it is module and directly may be slightly positive, but depends on a few factors, but it is not a significant factor on the EBITDA side.

In terms of the revenue impact, of course it will depress headline service revenues. There is no question about that.

As you can see we will always make sure that the effects are understood and I hope that people understand that this is of course not a, let's say relevant EBITDA, relevant category of revenues that we might be losing here. So hope that answers your questions and I'll pass on to Tim for the fiber question.

Look the answer is one, the question is one of the most relevant one which we are discussing publicly, but even internally here. And if you ask the man on the street whether he wants to have FTTC, FTTP, FTTH or GPON or whether he likes more vectoring, I could tell you the answer is who gives a shit.

The answer is you know I want high bandwidth and I want high speed at my home and I want to have all the sales and services in good quality, that is let's say what the customers are giving us as feedback. So to say this is good technology, this is bad technology does not make sense.

The second thing is if you, you could tip a market with fiber to the home and building out very slowly the cities and density on the urban areas is much lower than it is for instance in the Netherlands or as you would find it in France we are highly spread around the countries and even in the cities the density of population is lower. You would define a very small market and our intention is to define a big market in Germany.

And therefore we have two vectors to spread our bandwidth. And what we're doing is, the first vector is that we bring a good sufficient bandwidth into everybody's house.

And then later on we consider whether are you know question for even higher bandwidth. So the first thing what we are doing is now with the vectoring and with the NABA [ph] high discussion which is going on that we bring up 80% of the households are with vectoring technologies 100 megabit.

On top of that we have four billion of subsidies in the market where we will apply for and where we so that Deutsche Telekom is able to today beyond that households. And then we will go with software updates on vectoring close with up to 250 megabits and then there might be areas, some new areas where we are already building today fiber to the home.

And that is what we are doing anyhow so that we are not investing and old technology here we are rolling in these areas with fiber to the home. But this is much more efficient.

It is enlargening the market which we then could deploy. It would satisfy customers demand for the next year and this will help us from a commercial, but as well from a customer satisfaction much more than focusing only on specific fiber to the next technologies.

And there are lot of technologies being developed [indiscernible] and others, let's see how they could compensate. 5G is coming with a peer to peer communication on top of that very soon, which is enabling new technologies.

So being very specific and only focused on FTTH I think this would be entrepreneurial wise and commercialized wise the wrong answer then and not participating in this dialogue in the public. We will create a mix of it and we will create the best mix of what we have.

Let me mention one thing at the end. If there would be, let's say the idea of going to fiber to the home, the question is under which regulation.

If the regulation is a ULL regulation as we have to say what is an incentive for us, an incentive for us to build this infrastructure, and there is none. So the prerequisite even to think about fiber to the home in the German environment would be a change of the ULL or the Bitstream access regime in the German environment for Deutsche Telekom, because otherwise immediately our competitors could easily jump on this technology without additional costs while we are having all the investments to carry.

So that doesn’t make sense at all, so therefore I think the vector one going to full coverage of customers all I'd say 80% coverage that is what we are seeing here at Deutsche Telekom in the first tens with speeds beyond 200 megabits is the right thing to do customer wise and as well commercially.

Okay thank you, Tim. The next question we have is from Emmet Kelly at Morgan Stanley.

Emmet can we have your questions please?

Absolutely, thank you very much Hoettges. So, your two questions please, the first question is on your German tower portfolio.

I think I recall a couple of years ago you separated us out into a different kind of holdco, correct me if I am wrong, I think it is called Deutsche Mobilfunkturm. Can you just give me your latest thoughts on how you see the strategic options for this business, whether it is sale or listing or just maintaining the status quo?

And then the second question please is on text mobile convergence, pretty big picture question on the United States, now you know here in Europe Telephonic Fusion and Orange Open and of course MagentaEINS have all been huge commercial hits for the European telcos whereby there seems to be basically no sign whatsoever that fixed mobile convergence is happening in the U.S. and in fact as you know Verizon has offloaded much of its fixed line network.

Do you think fixed mobile conversions will happen in the U.S. eventually and maybe just mention what real team of all U.S.

can pay there? Thank you.

Tim is going to start with the tower question. Perfectly pronounced budget, funkturm [indiscernible] and the intention of I think I mentioned to go that we have a deeper look into it and there was some headlines saying we're going to sell it and our intention is not to use that primarily as an element or component for deleveraging or things like that.

The key question is, is there additional value we can get out of that business by managing it differently and handling it differently because we have the German tower co we have by the way some assets as well in the European countries additionally. We are using it more like a workbench for tech than as a dedicated optimized tall portfolio and so we think there is value we can get out of a different way of handling the business whether it is then a listing or a fail or a status quo is as long as we are not concluding is open.

My guess is status quo is unlikely because we believe we can do better and more, sale is unlikely as well, because we believe there is a lot of optimization, we should go for the first instance, but as I said it’s an ongoing process and we don't feel in a hurry there and rush. We're looking into that and then after we've concluded what we believe is the best way forward we will talk about it, that's on the tower portfolio.

Okay, let's go into this broader question on the on the U.S. The answer is do we expect that cable and wireless to converge in the U.S.?

Potentially, yes. A convergence makes sense given the increasing data consumption and conglomerates [ph] seller and WiFi networks, so there might be player who has the idea to bring this together at one point in time.

That said, it's different to the very local markets in the German footprint, but you always have a full fledged infrastructure for mobile and fixed-line as looking to the Netherlands and to Germany and to other markets and then you could advertise it in that way and you could communicate across all areas makes it a lot of easier to sell the stuff. In the U.S.

the overlapping of this mobile and fixed-line network is quite fragmented. AT&T for instance has 50% overlap across the country, Comcast has 45% coverage for their networks in the U.S., Verizon has 18% in the countryside.

So it’s very difficult to assume that this is going to happen across the whole country in the U.S. And so far we haven't seen big experiments on local markets as well.

Independent from that one, the mobile business in the U.S. is a very mobile centric oriented business for the upcoming next year we have a challenger.

We are pure mobile assets and position ourselves in this regard. We see enough room for growth as being a mobile player in this environment and therefore I do not see business impact from convergence in the U.S.

landscape soon. But potentially convergence might take place there as well with the difficulties I mentioned.

Thank you, Tim. The next question is from the webcast and it is from [indiscernible] at Horizon Capital.

He asked how is you IP migration proceeding in general and for large caps in particular and how are you performing that?

Yes I guess, I'm going to take that one. First of all as we’ve shown in Germany we were roughly half through in terms of the volume in European countries, four countries have done.

We will finish Hungary this year, the migration current status is 86% of the lines being migrated end of the year will be 100%. So then after end of this year Romania and Greece will be the relevant countries being less not completed the current state of there is 22 in Romania, 12 in Greece.

So we are really phase here. So overall, especially looking at the mass market in consumer and B2B mass market I think we're doing well in the migration and the speed of migration we always said and as we mentioned in Germany for instance, we've already migrated also on million B2B lines.

So there is the volume so to say in B2B we’re doing well. We always said that large caps being addressed here are more difficult.

We’ve seen some successes now into systems in Q1 and Q2 contracts with large caps migrating as well. We see some revenue pressure with that especially in two systems as well.

That something we've seen in the beginning on the consumer migration as well and then we found ways to mitigate that to up sell. And I think we need to find the right way forward here on the large caps as well.

And I think as mentioned the more difficult part of the large caps is coming up right now. So on last migration I think we are very confident that we will deliver on time on the large caps.

That's lot of hard work to be done.

Thank you, Thomas. And with that we move onto Andrew at Goldman.

Andrew can we please have your questions?

Yes, thanks, good afternoon everyone. I had a question on your fixed network upgrades.

So is a follow-up question and a broader question. On the fixed network upgrades could you just give us some more color and what you’ve learnt from your discussions with the regulator based on your ability to be able to upgrade your network using the plus across the country?

And how will you monetize it, will you have wholesale pricing flexibility there do you think? And then broader question, given fixed now delivering growth and mobile isn’t yet, which part of your German business do you think you have to most indeed any pricing power your fixed mobile or in your bundles and if you give kind of a reason why that would be great?

Thank you.

So, first question on super-vectoring no regulatory problems at all. What they got to experience on the novelized [Ph] discussion and vectoring discussions all takes quite some time a lot of people being involved.

It was by far longer than we expected. So the original idea was 2018 has been postponed and anyhow from just from an approval procedure here from our angle.

The second thing is that the exclusivity was slightly reduced over time, but in principle the concept and the approval for our vectoring and the novelized [ph] as it was as we had asked for. So it took too long, but in principle we got what we asked for.

And on the second part of the question pricing power fixed mobile bundle, first of all maybe an update on the value up in the MagentaEINS transactions, current status is that per transaction, we see revenue up at all sort of €8.20 now. That number is continuously and consistently increasing since I think the quarter launched, which is good news.

So on bundles for sure we see that up sell and we see also higher stickiness and lots of effects which is obviously taking place here. On mobile, I mentioned that I think if you think the separation through, we see the most, the biggest drag we had last two quarters was on B2B.

And then the smaller one last two quarters was a very small one was on B2C. And again on B2C you need to split up the high end with the telecom brand and the lower end with the Congsta.

So pricing power in Congsta, I guess is a little bit of pricing power available. Yes, but it's relatively small, because those customer and consumers they are looking for a smart deal and not so much for big value in there whereas on the telecom brand you see the more for more logic working.

So I think it is very important of what kind of segment you're looking at, smart shopper not so much, high end consumer yes, and in some segment especially large caps in B2B limited.

Right. Thank you, Thomas.

I mean should add that I think our network is still a very strong selling point as in principle and we’ve again one will do surveys for older products, and I think that helps us with pricing power, and it's per basis, because we have good ratings in mobile and in fixed and also now in TV the latest test. So ideally of course we bring it all together and leverage the brand and you can see that we have some pricing power when you compare the prices in the market and our trends are healthy.

So, our next question, I would like to take from Paul at Berenberg. Paul can we have your question please?

Yes, thanks for taking the question. So I just want to come back to German mobile competition again.

Apologies sort of, I know you've given answers already, but it does seem like the Trillish [ph] Remedy with Telefónica Deutschland is perhaps more generous and rewards volume growth more so than maybe we all appreciate it or the analysts appreciated a year ago and that seems to largely be to blame for the price tension in the value site in Germany that we're seeing in the last quarter or so. And I mean, clearly that has provoked a response from the dinette brands as well the valley brands.

So I'm wondering how much insight do you have on the detail of that remedy to enable you to behave tactically in the market and you see some observers now thinking that truly she’s aiming for five million subscribers in the medium term others are thinking that they aiming for seven million to 10 million subscribers another remedy facilitates that kind of scale for them. So is it a relevant risk for your own mobile target, for your 1% CAGR over the medium term or is it something that's accommodated within that 1% CAGR?

Thank you.

So Paul, maybe I'll give you the go and then Tim and Thomas help me if they have further thoughts. I think it is very hard for us to comment on something that in this case we don't know, because it's a private agreement between two companies that is also looked at by the - supervised by the European Commission.

I mean when you remember – if you remember a year ago, when we gave our guidance at the capital markets, we made out an expectation for the German mobile service revenues. We came from a strong starting point, we said 1% mobile service rate CAGR for four years before you are roaming.

So if you would do the math on that we see you roaming roughly two percentage points you can see that we weren't – we didn’t take account of a certain number of potential risks, and in that guidance, and of course, nobody can tell from today's point of view where exactly we land whether it’s going to be a few basis points higher or lower. But we're pretty much on track with that.

So I think our basic set of assumptions and not specifically referring to that the one that you are asking about seem just been robust, and we are tracking towards our target and we maybe at the time some people hope for more and some people now fearful. But I think in the end of that day that we are pretty much where we saw we were going to be.

Thomas?

Maybe to add there there if you look at the chart showing the reported mobile service revenues and then the roaming impact and the Magenta impact and you do the math for this quarter the underlying is 1.3% growth, a year ago it was 1.5%. So and obviously either need the Magenta won nor the roaming have something to do with the Dillish [Ph] situation.

So if you do that kind of math you see our underlying trends have not changed significantly, and yet there are those two impacts, one voluntarily by us driven on the MagentaEINS side and the other one roaming it’s kind of what happens in the completing history.

I think, we now have John Dan [Ph] from World Bank of Canada [Ph]. John, can we have your question.

Hi there, it's a question on MagentaEINS. Why quarterly take up running behind the take up of the fast so those 50 megabit and 100 megabit products.

And then secondly, could you just, if I’m – I mean in terms of the 1990, 12 months offer. Is there some genius, so for example what proportion of your current customers roll from the current 12 months discount on to this second year?

So would we expect a sort of stable broadband ARPU next year despite the sort of new customers coming in at a lower price point?

Yes, thank you for the question. First of all on the new pricing is only for new customers, because the intention is obviously to remove the barrier to experience in your network, and so it's for new customers there is no relation to the existing base so to say.

The MagentaEINS the first part of the question there is no hot coupling so to say of new infrastructure products with selling in MagentaEINS. You can sbecome a MagentaEINS customer it would be so to say old views [Ph] on infrastructure and mobile as well as the new infrastructure.

So it's not couple that all just want to remind everyone on the call that we are by far ahead and better than our targets we have announced last year for 2018 on MagentaEINS, we said we will see the EUR3 million the past, I think the EUR2.5 million already and EUR3 million by the end of 2018 we passed the EUR2.5 already so we are far ahead on that, but there is no heart decoupling MagentaEINS on the new infrastructure products.

Okay, I hope that answers your question John with that I move on to Ottavio from Soc Gen. Ottavio, can we have your questions please?

Hi good afternoon and thank you for taking the question. I have two follow ups very quick, and then a question.

The first one is on fiber result talk about net adds and two other kind of problems, could you just see if all the net adds you have on fiber they are all up selling or they are new customers, are they retail or wholesale? On the mobile you stressed a few times that the German market is very segmented and your exposure to the other segments to be lower, therefore it is possible to give us a bit of an insight which sort of revenues you make through Congsta or at least some insight about the customers who are having Congsta?

And the third, this question is to as a follow-up on an answer that Thomas gave on the tower. You say that the status quo is not attainable, you want to extract value from your teller portfolio, but as far as in the stand on the, you already give access to the barcode Telefónica Deutschland.

Your spectrum portfolio is already replicated by the other two MNO. If you start also extracting value from the other portfolio [ph] and therefore give access to new tenants, how are you going to differentiate your, because the moment you lead significantly on networking that's really giving the pressing power.

How do you reckon that that will continue going forward if you're going to extract value from the tower? Thanks.

Yes maybe I'm going to start with the towers. I guess there is a misunderstanding, the misunderstanding is that the towers we have in our decent [ph] company are solely and exclusively being used for our infrastructure that is not the case.

We use it already some of the years also for to market those places to Vodafone and to Telefónica. So it's and by the way also to other media companies it's not only a mobile infrastructure for lot of it is just exclusively used by us.

The bigger chunk of the advantage we have in an infrastructure by the way is the fiber back hauling. It's much bigger than the antennas, so that's on the towers and Congsta.

It's very steady. It's a mid to high single digit percentage of all mobile service revenues that normally we do not strip out those numbers completely.

And on fiber I’m not sure…

So the net adds ad what we have seen in the up selling is retail based on Deutsche Telekom.

Yes, just to add to that, you can see that our fiber intake rate 300,000 roughly or 350,000 per quarter in the last, so on average for the last two quarters clearly exceeds our broadband net adds of 60,000 or 64,000 respectively in the last two quarters. So therefore, it clearly the majority of customers is fiber customers from up selling.

Okay, so I think we have a final question for today from, I hope I get the first name right, Matthijs Van Leijenhorst from Kepler.

Yes, it’s Matthijs Leijenhorst. Thanks for taking the question.

I've got a long question left. If I look at the restructuring cost there was quite a swing in Germany in the second quarter.

I was wondering how do I have to look at these restructuring costs, because I assume a big party is related to the [indiscernible] peak translation. But given that the translation should come to an end by the end of 2018, is it fair to assume that these costs should fade out after 2018?

And so what I'm actually asking is, what is the amount of restructuring costs that your line in for 2016, 2017 and also after 2018 can you give some color on that?

We've given last year in the that capital market is no change on that one we gave guidance on post special effects you should expect that they will decline from €1.8 billion to €1.3 billion from €14 billion to €18 billion. The swing in Q2 is actually not linked to the IP migration.

It's simply the situation that there is a kind of special situation for our civil servants. There is the [indiscernible] on what is that innings, the early retirement schemes for civil servants and that needs to be supported by the government and there was a decision that this will be the last time, so to say, we've got support from government side so we decided to max out the volumes we can and that was the special situation here and that is not related to IP migration.

Okay, I think we are through today's list of questions. Of course if there are further questions as always we would ask you to contact the Investor Relations Department and we also have a briefing for the sales side in London tomorrow and I think Tim wants to wrap it up with say a few final thoughts and thanks all for participating.

Tim?

Thanks for all your questions on the numbers. Beginning of the year there was quite some uncertainty because of Brexit, the vectoring decision with regards to the network test and with regard to the market leadership.

I think we have now much clearer view on the situations going forward. Most of the uncertainties are clear now and we are in a quite good mood and winning mood here on the market issues.

That doesn't mean that we haven't enough to do here at Deutsche Telekom. What you could expect from us for the second half of the year is a very much intense focus on broadband retail and on the TV proposition, the IP transformation, the service issue on the German situation is a big method for us going forward.

The Netherlands and Poland are the two markets where we are working on improving the market, the product propositions and as well our positioning in this regard and on top of that the cost cautiousness and the cost reduction within our organizations moving on. On top of that, the regulatory issue is something which is an ongoing issue here within the company.

We have now one let's say one battle but not finally the war on this overregulation in Europe. So we're going to work on further issues on that one.

There is this MTR and FDR [ph] discussion coming. There is this Bitstream layer 2 discussion which is going on.

So there are a lot of areas as well for the environment for FTTH going forward which we mentioned in our talk. So these are let's say the big game changers, the big value levers for Deutsche Telekom.

And on the U.S., I mentioned that this is a blockbuster performance which we see across all metrics and we are very confident that our team in the U.S. with the auction in the back half fulfilling on the expectations which we have.

So with this looking forward to the next quarter with you guys, talking about the business, thank you very much.

Thanks to all and hand back to the operator.