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Executives

Stephan Eger - SVP and Head of IR

Tim Höttges - Chief Executive Officer

Thomas Dannenfeldt - Chief Financial Officer

Analysts

Fred Boulan - Nomura

Ulrich Rathe - Jefferies

Paul Marsch - Berenberg

Polo Tang - UBS

Justin Funnell - Credit Suisse

Ottavio Adorisio - SocGen

Hannes Wittig - JP Morgan

Deutsche Telekom AG (OTCQX:DTEGY) Q1 2014 Results Earnings Conference Call May 8, 2014 11:00 AM ET

Operator

Good afternoon, and welcome to Deutsche Telekom's Conference Call. Please note that this call will be recorded and uploaded to the Internet. May I now hand you over to Mr. Stephan Eger.

Stephan Eger

Well, thank you and good afternoon, and good morning to our listeners in the U.S., to our first quarter investor conference call of Deutsche Telekom. As always with our CEO Tim Höttges; our CFO Thomas Dannenfeldt. As always also the remark you will find a disclaimer in our presentation the important because the alternative would be (inaudible) which would take about another 10 minutes. And that without any further ado let’s go right into the investor presentation to start with Tim Höttges. Tim?

Tim Höttges

Yes welcome, everybody. You see that Stephan is pushing on the time. So I will do my best to guide you for the quarter result 2014. Let’s start today’s call with a brief summary of what we have achieved strategically, operationally, and financially in this quarter. I think we made good progress in the implementation of our strategy during this quarter. To give you just few examples. First in our all-IP migration program, we finished, as forecasted, the migration in our first European country, Macedonia, and migrated almost 500,000 customers to all-IP in Germany, by the way, a run rate of almost 50,000 customers a week.

Both our LTE and fiber rollout, particular in Germany are full-steam underway. In the Czech Republic, we bought out the minority shareholders, thereby paving the way for the integration of the GTS fixed assets after the closing of the deal, which during the quarter was approved, by the way, without any remedies. Entity systems 2015 restructuring program started in the quarter, with the sale of IDS and a significant reduction of our hardware wholesale activities, as well as first cancellation of unprofitable contracts. There was even an agreement reached with the unions on how we structure the restructuring. Operationally, as well as financially we can be satisfied with the first quarter and are on a good path to execute on our full year targets.

I think we delivered an organic revenue growth of 4.2% for the group, something pretty unique in the European telco sector and above consensus expectation. And by the way reading the results from a lot of European competitors already today this is quite unique what we are showing. Q1 adjusted EBITDA was roughly in line with consensus expectations, and driven primarily by the record customer growth in the U.S.

On the free cash flow level, we delivered 1 billion in the quarter, well ahead of consensus expectations and on good track for our full year 14 target of around 4.2 billion. And please consider you might have seen that we have significantly higher CapEx already spent during the first quarter. As a result of that, we fully confirmed our full year 2014 group guidance.

Let me quickly summarize our first quarter headline financials. Revenues for the group grew by 8% year-over-year on a reported and 4.5% year-on-year on an organic basis, with the main growth drivers being the U.S. business. The adjusted EBITDA decline of 3.9% was mainly driven by the exceptionally strong U.S. subscriber growth and the somewhat weaker T-Systems contribution in the quarter. The adjusted net income in the quarter was mainly a result of the EBITDA development, whereas the reported net income was supported by the financial gain from the sale of the Scout stake.

The free cash flow as said was nearly stable year-over-year at 1 billion driven by a roughly stable year-on-year cash CapEx and a slightly lower operational free cash flow, compensated by a slightly higher dividend from our UK business [EE]. And as flagged our net debt clearly was reduced to around EUR38 billion, driven by the free cash flow and the proceeds of sale of the 70% stake in Scout, which were somewhat compensated by the minority buy out in the Czech Republic and some other effects.

The net debt however, will clearly be higher in the second quarter as a result of the annual dividend payment as well as the cash-out for the A-Block acquired from Verizon, which is expected in the second quarter.

With this I hand over to Thomas for the operational details of the quarter.

Thomas Dannenfeldt

Thanks Tim. Let’s move now to the operational and financial details of the quarter, and let’s, like always, start with Germany. We’re pleased with our performance in Germany in the quarter. German revenues declined by 1.5% year-on-year a slight improvement versus the fourth quarter. Main driver this quarter were the mobile service revenues which again showed a continuous improvement and returned to a slight 0.2 percentage points positive growth with almost no MTR impact in the quarter.

Core fixed line revenues declined by 3%, in line with the trend of previous quarters. And I’ll come back to this for a deep dive perspective in a second. Our wholesale revenues continued to show a positive trend improvement declining by one percentage point year-on-year driven by our [continent] model.

The adjusted EBITDA declined by 1.1% year-on-year resulting in a strong and year-on-year improved EBITDA margin of 40.7%. The adjusted OpEx in Germany decreased by 1% year-on-year driven by a lower revenue related costs like interconnection and a slightly lower market in the West, which was somewhat counterbalanced by costs related to our IP transformation and our integrated network rollout.

In the German fixed we saw all-in-all another satisfying quarter in line with previous quarters. I would like to highlight the following. A 21% year-on-year reduction in line losses to 214K, despite 70,000 DT LTE wireless broadband customers added into the beginning of quarter. An accelerated growth of new fiber customers was 222,000 net new additions, of which 129,000 came from our own retail business, the strongest quarter since we started marketing of the product. In total we already have 1.74 million fiber customers on our German network now. Broadband net adds continued to improve to minus 7,000 in the quarter though we are not yet where we want to be.

On the TV side, our measures to increase the momentum at entertain showed again results in Q1 with 78,000 new customers being added. Importantly, more than 60,000 of these new entertain customers booked the entertain package with a fiber access.

As promised, let me do a little bit of a deep dive into our revenues on the fixed line side. The overall fixed network revenues, core fixed line wholesale in Q1 declined by 2.5% with the fixed revenues, fixed line as per backup definition, declined by 3%. Within these fixed revenues, we saw a further slight improvement in voice revenues as in previous quarters, with revenues being down by 7.4% in the first quarter.

However we are not satisfied with the development of our connected home revenues, which declined by 1.2% in the quarter. This is not in line with what we said is target of 2% growth. Within the connected home revenues we saw a continued decline of our broadband revenues with minus 3% and a further slowing momentum of our TV revenues with growth of 7.7%. This means that we will have to work hard with our integrated network rollout and our up selling efforts in order to turn this around.

In the other fixed network revenues we saw the following major trends. The decline of 11.1% year-on-year in our variable revenues was inline with the trend of the previous quarters and is mainly driven by price as well as volume decreases attributable to flat rate components. Fixed line add-on options decreased by minus 7% year-on-year, showing a downward trend since quarters due to the increase of bundled revenues.

And our increase in other revenues fixed by plus 4.7% year-on-year is mainly driven by sale of terminal equipment in the leasing model. In our wired-line wholesale revenues, we see a continuous improvement since quarters driven by the strong uptake of the contingent model.

Let's now turn to mobile. The German mobile market service revenues decreased by two percentage points year-on-year in Q1, according to our estimates a clear improvement versus previous quarters. As anticipated, we saw a sequential improvement in our overall mobile service revenues in the first quarter and returned to a slight positive growth of 0.2 percentage points year-on-year, thereby again outperforming the market. Main drivers here were the continued negative but sequentially improved versus Q3 and Q4 voice revenue trend, the further slightly accelerated revenue decline in SMS revenues of minus 35%, and again, a very strong mobile data growth of 28.8%. Operationally, we continued our strong performance in the quarter.

We had 551,000 mobile contract net adds, of which 204,000 were own branded net adds. We showed a continued strong at smartphone momentum, with 953,000 sales, including strong sales of Android and iOS devices. At the end of the first quarter we already had 3.5 million LTE customers on our network in Germany and we continue to have the best class contract churn at 1.1%.

Let me also give you an update on our progress in terms of strategy execution regarding our integrated network rollout and our IP transformation in Germany on the following slide. By the end of the first quarter, we are at 35% -- 38% fiber and 74% LTE POP coverage. We have already migrated 2.6 million customers to all-IP in Germany, which translates into over 21% of our broadbands and almost 13% of all our fixed lines being migrated to all-IP already. Currently, we are migrating at a speed of roughly 45,000 to 50,000 customers per week in Germany.

Let me simply summarize the highlights of the quarter as all relevant numbers were already reported and discussed by our TMUS colleagues for the U.S. business last week. In Q1, the U.S. business showed their best customer growth ever with 2.4 million new net-adds, new customers in total of which 1.32 million were branded postpaid net adds, leading to an upward revision of the full year branded postpaid net adds target to 2.8 million to 3.3 million.

At the same time, we saw a strong year-on-year reduction of 40 basis points in our branded postpaid churn down to 1.5% and continued improvement in our customer quality. 53% of our equipment installment plan receivables are regarded as prime, up from 44% in Q1 2013.

Service bad debt expenses decreased 3% year-on-year and 13% quarter-on-quarter in Q1 2014. Most importantly, TMUS returned to a 4.5% service revenue growth in the quarter on a pro forma combined basis; postpaid service revenues grew even at 5.6%.

As a result of the stellar subscriber growth in the quarter, the pro forma combined adjusted EBITDA decreased by 25.9% year-on-year; and also as a result of the higher than expected subscriber growth for the year, T-Mobile U.S. revised their full year EBITDA guidance slightly down to $5.6 billion to $5.8 billion under U.S. GAAP for the full year.

Now let’s turn to Europe. Revenues in our European segment declined 6.5% year-on-year on a reported basis and 2.6% organically in the quarter, driven by the following effects: Broadly stable operational trends in our traditional telco revenues quarter-on-quarter but weaker ICT, energy, and handset wholesale trends compared to the fourth quarter. It is worth mentioning that from 83 million organic revenue decline in this quarter, 61 million are coming from the mobile regulation.

On a reported basis, the adjusted EBITDA in the segment declined by 6.4% and organically by 2.3%, resulting in a slightly year-on-year improved EBITDA margin of 32.9% for the segment. Main drivers were here lower direct costs driven by among others lower market invest as the share was split; contract transaction in some of the countries was higher; and also a good indirect cost savings in some markets, particularly in Greece, resulting from last year’s headcount reduction program, offsetting higher share of lower margin revenue businesses.

We continued to show good momentum in some of our growth areas in Europe. We showed satisfying growth in TV, with 55,000 net adds now reaching almost 3.6 million TV customers in Europe. Importantly, we also increased the number of our triple play customers in the region to 1.7 million up from 1.4 million a year ago. We delivered 58,000 broadband net adds in the quarter. And on mobile contracts however we were not satisfying at 12,000 new adds. Here we clearly lost momentum in the countries like Poland, the Netherlands and Romania. Mobile data organic revenue growth remained strong at 17% thereby continuing to compensate the decline in the SMS revenues.

Let me give you a quick update on the progress being made on the revenue as well as on the technology and cost transformation in segment Europe in the quarter. The share of total revenues from our growth areas increased by 3 percentage points year-on-year from 25%. The share of the fixed revenues from connected home grew by 2 percentage points year-on-year to 23%, driven by TV revenue growth, especially in Croatia, Greece and due to our acquisition of DIGI in Slovakia.

The share of mobile data revenues of overall mobile revenues grew by 3 percentage points, to 19%. We’re especially pleased here with the growth rates in the Netherlands, the Czech Republic, and also in Croatia. And the share of B2B ICT revenues as of total revenues increased by 0.9 percentage points to 3.8%, driven mainly by our Slovakian and Romanian operations.

We also continued to make good progress with our partnering efforts. For example, our partnership with Evernote now is launched in all 12 countries along with Deezer on the music downloads in 6 and Spotify in another 2. The [IP] share of all fixed networks access lines grew by 10 percentage points, to 29%, mainly driven by Slovakia, Croatia, Hungary and Romania.

LTE sites in service almost increased by 6 times year-on-year to 6,700. We have LTE networks in commercial use now in 10 out of 12 countries already. Homes connected with fiber-to-the-home grew by 43% year-on-year to around 200K and households passed with VDSL/FTTH technology increased to over 5 million.

Let’s now turn over to T-Systems. The first quarter clearly already was impacted by the restructuring at the market unit. The reported revenues decrease of 7.8% was driven by Tel IT but also by mark-to-market unit. Tel IT revenues declined by 12.7% year-on-year reflecting a lower demand/cost base. The market unit reported a revenue decline of 6.7% year-on-year. Adjusting for (inaudible) and FX, the organic revenue declined by 4.1%. This was clearly impacted by the first steps towards the 2015+ restructuring plan; and for example, a significant first reduction in hardware reselling and first cancellation of an unprofitable customer contract. The decline is in line with projected revenue decline for the full year 2014 as a result of the restructuring and the announced repositioning of T-Systems.

T-Systems adjusted EBITDA and EBIT declined significantly in the quarter as a result of revenue decline and seasonal cost deviation, which is expected to reverse in the upcoming quarters.

Let’s move now to our group financials for the quarter, turning to free cash flow first. Group free cash flow is down 5.3% in Q1, at almost EUR 1 billion significantly ahead of market expectations and on track for our full year guidance of around EUR 4.2 billion. Main drivers were the roughly stable year-on-year operational cash flow, the roughly stable year-on-year cash CapEx. Group net debt was reduced as anticipated by over 1 billion to 38 billion at the end of first quarter with the biggest moving parts being the 1.6 billion cash contribution from the sale of the 70% Scout stake; the 0.8 billion payout of the buyer of the minorities in Czech Republic and clearly the 1 billion free cash flow. The adjusted net income decreased by 23.5% year-on-year in the quarter driven: a, the decline in adjusted EBITDA; b, the increase in D&A, driven by the U.S., and here predominantly due to the MetroPCS consolidation; and c, a decrease in P&L taxes in the quarter in line with the decline of the adjusted EBITDA.

The group ROCE benefited strongly from the book gain on the sale of Scout stake and stood at 9.3 at the end of Q1. Please bear in mind that mathematically throughout the year the impact of that Scout book gain will be [dilutive. So that the 9% first quarter ROCE is definitely not an indication for the full year of 2014.

Turning to our balance sheet ratios, net debt to adjusted EBITDA remained stable versus year end [2014] at 2.2 times as a result of the sequential reduction of the net debt. The equity ratio increased slightly to 27.9% due to the slightly higher asset base and the increased shareholder equity. With regard to our comfort zone ratios, we are (inaudible) with regard to all ratios. And our ratings remained stable at BBB+ level with the major agencies and stable outlooks. As a result, we continued to get excellent funding conditions in the debt capital markets.

Let me now hand over to Tim again for a quick summary and our priorities for the full year 2014.

Tim Höttges

Yes. Thanks Thomas. So on the strategic side, I think we have to execute upon our strategy and what we have updated you upon. And it is along the line of the four principles: First, integrated IP networks; second, best customer experience; thirdly, win with partners; and fourthly, lead in business.

We have a lot of things on the plate and we are very active on pushing things forward. And I want to give you a little bit insight on the priorities we are working on. I think in Germany, we have to execute on our all-IP migration with the target of migrating around 3 million customers this year. And keep in mind we have to attempt every single customer in a dialogue and even physically on his infrastructure at home. Secondly, we have to drive our integrated network rollout at full speed. Thirdly, we are driving integrated products, so the fixed mobile converged products are coming during the course of this year. Fourthly, improving our performance in the broadband market from a net adds perspective. And last but not least, we have to execute on our new small and medium enterprise initiative which we have laid out in our last meeting.

In the U.S., we want to execute upon our LTE rollout target of 250 million POP coverage now. This gives us new market opportunities [as well as] for our MetroPCS but as well even for the T-Mobile brand.

We have to deliver upon our new higher branded postpaid net add target which we have laid out in the quarter result of 2.8 million to 3.3 million new customers. And we want to deliver upon the EBITDA target of $5.6 billion under U.S. GAAP.

In our European priorities, the priorities are as follows. First, we have to drive our IP migration with full speed within Slovakia being completed by year end. We have to continue to grow in our defined growth areas; mobile broadband, TV and B2B ICT business and we are going to start the integration of our GTS business we have recently acquired. And last but not least we have to design our pan European network concept, which is a very innovative and new instrument in our industry.

At T-Systems I think the path is clearly defined. We have to implement the restructuring program, which we call T-Systems 2015. We have to increase our EBITDA and EBIT run rate throughout the year by the way improving in the second half of the year and continue to deliver upon our spend reduction target of 1 billion until 2015 at telecom IT, where we have made great progress over the last three quarters.

With this Thomas and I are happy to answer your questions.

Question-and-Answer Session

Stephan Eger

Well thank you very much Tim. We start now with the Q&A part and I think we can finish upon time at 3 pm CET. As always if you like to ask a question please press Star-1 on your touchdown telephone. The operator will announce your name when it’s your turn to ask a question. Should you require to cancel question please press the Pound sign.

Just a very quick remark, the U.S. guidance obviously as given by the U.S. colleagues is $5.6 billion to $5.8 billion under U.S. GAAP. And now we start with the first one, I think the first one is Fred Boulan from Nomura.

Fred Boulan - Nomura

Hey, good afternoon, gentlemen. Thanks for taking the question. Firstly a question on your assets in Europe, Tim, I think you mentioned this morning satisfactory progress in a couple of assets, Poland and Holland. Can you discuss your options here and also about [EE] how do you think about this asset considering the absence of fixed there and the entry of BT in the consumer market later in the year?

And secondly on the U.S. consolidation, John (inaudible) was on the tape last week saying consolidation was a matter of when and not if. So if you seek meaningful synergies in the combination with another asset, would you be ready to share the [trust risk] by not requiring significant break of fee? And also if you can walk us through your thoughts on monetization of your stake going into look-up expiry idea end of this year versus other options and in particular how you think about the AWS three option in that context? Thank you very much.

Tim Höttges

Thank you, Fred. So let me start with the assets in Europe. look I think Thomas and my ambitious all is to be very clear and not always making a dog and pony show on quarter results but even vocal about challenges which we are facing. That was the reason that we were addressing this issue on the Netherlands and as well in Poland. By the way, I think the net add numbers on the mobile side weren’t as high as we expected. We want to see loss share on the marketplace, especially in (inaudible) the Orange we were facing [quickly] offers in that market.

We even had a little bit less momentum on pets and on other things because we took some promotions out of the business to improve the profitability. And in the Netherlands I think we have changed a little bit the logic of this contract support here. So, with this, I think the market ambition should be a little bit higher for our teams in this region. That has nothing to do that we are now questioning the portfolio position of these two assets. It’s an operational topic which we’re going to address throughout the year.

With regards to the U.S. consolidation; when, not; if, and ready to share the risks and how could we monetize our stake here with the expiry of the lock up, and what are our thoughts on the upcoming spectrum auction that is how I understood your question, Fred. I think the first thing is we’re very happy how our U.S. business is developing. We said last time, first what you have to do to turn around the business’s infrastructure. We built this infrastructure of 200 million POPs, which we now increased to 250 million.

With the LTE proposition, we said we have something to sell in the marketplace. Now, we gained, over the last four quarters big time customers. Now the big time customers as a first step is creating revenues and for the first time this quarter we are able to show you the increase on an organic level that we have increased 4.5 times. Now the logical consequence is that now free cash flow and EBITDA is a consequence of this customer roll, which will help us to self fund further growth in the U.S. business. So this is becoming a self funding platform, which is creating more momentum in the marketplace.

So far we are very proud of what we are doing. Especially if you look to the design of some of the (inaudible) shops or if you look to the branding of Sprint, they are copy pasting what we’re doing and trying to do that, so I think the momentum of our proposition is unbroken and therefore whatever we do we do it for creating additional value in the U.S. market. There is no pressure, there is no hurry for selling a business at that point in time. We have a self funding platform which is nicely developing.

That said, correct, we will have an expiry of the lock up by the end of the year so that we are open to sell some of the stock here. And right there is even a lot of speculation with regard to spend. I do not want to put oil into the fire on that one in this conference call, but I reiterate what I’ve said always. We are open to create the super maverick. I think to really create value in the market at the higher speed with a better network with even more spectrum a combination for instance with one of the players would make a lot of sense to create a super maverick against AT&T, against this bifurcated market in the U.S.

So therefore if there would be an opportunity, it would be (inaudible). But you even know that the [SCC and the DOJ] make their statements. They want to keep this environment open for 4 players. I could always say look, you could say if you want that, what are then the prerequisites from a spectrum policy, from reserved spectrum and from advantages to compete with these 2 big players. This is something which we’re going to see next week because the FCC is set to propose pro-competitive spectrum auction rules for the next year’s 600 megahertz incentive auctions and I even have heard that there might be a spectrum reservation for smaller carriers. Let’s see what we will hear at the 15th of May on that subject.

So therefore, it is too early to say something on how it is developing, but we have a very good momentum at that point in time. And with regard to the spectrum auction, we are waiting for the design which is coming. And we plan to participate in the auction next year.

Fred Boulan - Nomura

Okay. Thank you very much.

Thomas Dannenfeldt

The third question I think was on EE and the perspective on BT entering the market here on the mobile side. I think first of all what Tim mentioned on the U.S. is true for the EE as well. It’s about value creation and last year we came to the conclusion, it’s better to stick -- with the asset and stay with the asset like it is. And we think we can create more value by doing that. Why is that the case? A, we are happy with the operational development and the performance of the EE team; they’re doing extremely well I think compared to the other players in the market, especially in terms of differentiating with the network, which is part of our strategy as well. So that’s what they're doing very well. On service, I think they started activities and initiatives to improve here as well differentiate even further in marketplace.

So operationally, I think they're doing good, strong team; number one. Number two, we think the UK market will see the FMC trend as well as the all the other European markets, but our assessment is that it will be a little bit delayed later than we will see it -- always we see it in the European markets. So there's still enough time to grow on mobile only businesses. That's number two. Number three is we also you might know or not, offer with EE broadband product and they are doing well. So they are improving here in terms of number of customers, we are gaining and margin as well. And number four, as BT is a new wholesale in the market based on our wholesale contract, we had a deep assessment and thought whether it is wise and good to keep them or to take them on our networks. We think it is. It is value creating for BT and will be value creating for EE as well. So our assessment is with the good operational performance, with the right steps from EE into the broadband market and with its wholesale deal on BT, we are doing the right way to creating more value.

Stephan Eger

Thanks Tim and Thomas. Let’s continue with Ulrich Rathe from Jefferies. Ulrich?

Ulrich Rathe - Jefferies

Thanks so much. My first question is on Vivento. I noticed that it's the record high, historical record high transfer of employees into Vivento this quarter. And it seems to be coming from within [GHS] if I'm not mistaken. So I'm just wondering what is going on there. Is this a sign of significant further cost cutting or how do we interpret this move at this point? And then my second question is on the German broadband and fiber situation in particular on the retail side. Could you just shed a bit of light on where these customer -- net customer losses actually happened, is this in the VDSL built out regions, or is it in the sort of non-VDSL but cable regions, or is it outside of those regions? And could you then also maybe comment a bit more on the strategies that you intend to deploy to actually stop and turn around that customer loss as you’ve indicated as some of your focus point for the German business in 2014? Thank you.

Thomas Dannenfeldt

Yes. I’m going to start with the second question on the German broadband side. First of all, the way we’re doing the rollout is by competitive pressure and situation, so to say. So we analyzed where the competitive pressure is high, where churn probabilities are high, and that’s where we roll out first in the areas where we don’t have a fiber infrastructure so far. So that is exactly the way we tackle the rollout. It is important to understand that the churn in the areas where we don’t have VDSL infrastructure is a little bit higher, but not significantly higher than in the other areas but it’s exactly the way we’re tackling the rollout starting with the higher churn probabilities and going there.

Tim Höttges

I’d like to add something Thomas here on that subject. First, what we see in the areas where we’ve built fiber, we have a huge uptake from our customer base. We have record sales on fiber, more than 220,000, only in this quarter on our fiber proposition. So that is a great outcome. Second, what we even see is that the trend on the broadband on the retail side is improving. We had in the fourth quarter minus 47, we had in the Q4 minus 22, and we have minus 7 in the first quarter. So, we see that our activities are improving. And to be very detailed here, we have even new tariffs in place on the marketplace so that new propositions are made like the Call & Surf by LTE is supporting us in areas where we cannot sufficiently promote fiber. And we have even promotional activities going on, on the broadband side here in Germany too, to be more competitive even on the price side.

I think it is very important that we accelerate or even execute along the lines of our CapEx rollout because the fiber is the answer on what we are doing. And we are quite confident that we’re going to see a positive development throughout the year.

On top of that, the revenue stabilization which is helping us as well on EBITDA and free cash flow is coming from fixing the wholesale business. Remember just a few quarters ago we had a minus 7%, minus 8% of this number. We are now almost stable on the wholesale side. And the contingent model is creating added value for us. And we are not losing these service revenues to the cable operators. So we’re keeping some of the momentum. And the contingent model for the wholesalers is a good proposition, is working nicely and helping us to utilize the infrastructure.

So I think, overall, I think you’re absolutely right. Stressing the negative number, we are not happy with that one but we have a lot of activities, both on broadband but as well LTE substitution and as well by build out up and running.

Stephan Eger

And Ulrich, just on what happened at GHS with the personnel here, we have in total a reduction of 1,118 people in [THS] year-over-year. There are a couple of inorganic effects, so for example, we moved the procurement out of Germany and out of T-Systems into [THS] to bundle that in one central function, that’s about 291. Then we had consolidation of smaller companies like Explosion Interactive, 47 FTEs, ClickandBuy service in India, 19 FTEs. And obviously, we have a deconsolidation of Scout of 1,211 FTEs. Underlying the reduction is 254 staff year-over-year, which is the reduction of 1.2%. And obviously that’s the headcount reduction in some of the steering function and shared services. Shared services started with a shared headquarter a little bit later than the rest of the headquarter, and that is basically as I said 250 FTEs and I guess some of them actually showed, then, up at Vivento. And with respect to the details in Vivento, Andreas will come back to you right after the call.

And then we continue with Paul Marsch from Berenberg.

Paul Marsch - Berenberg

Yes, thank you. So I have two questions. I just noticed on the line loss that the consumer line loss trend continued to be relatively weak, I think slightly worse in the quarter, whereas the business line loss or the business line trend actually went positive in the quarter, with about 15,000 net additions. I’m guessing that that business trend is seasonal in the first quarter. But I just wonder, in consumer, if you have a view on how much of that might be being driven by mobile cannibalization and when that line loss on consumer might eventually stabilize or show some kind of inflection.

And then on VDSL, just a question on the margin, I’m not sure if it’s right to look at it in this way, but are you able to give us any insight on the EBITDA difference for a Deutsche Telekom ADSL customer who migrates to a retail VDSL offer with Deutsche Telekom, how that compares with a customer who migrates to a wholesale VDSL offer? So is that customer who migrates to a wholesale VDSL offer materially EBITDA dilutive?

Stephan Eger

Well, let me start and I think Tim will also join upon that. Now, first of all, in the line losses, I don’t think that we see too much of an uptick in mobile cannibalization issue. Look at our own mobile cannibalization by our LTE product that is actually down sequentially. We are now at 17,000 customers being on there and that has been much stronger in the quarters before. So I don’t see that. On the contrary we also would not see the business trend necessarily as being a seasonal impact in the first quarter I think it has also something to do with the rollout of VDSL and FTTC over four quarters.

Paul Marsch - Berenberg

Right, okay.

Tim Höttges

But, Paul, let me add one element, it’s a kind of regular activity we’re having here is once a year, in the beginning of the year, we do a kind of adaptation between the business and the consumer segments, looking what kind of customers we have in the consumer segment especially being very small business customers and then what we are going to do is take them and put them into the business segment. So it’s just every first quarter a year we have that kind of activity to look into the consumer segment take the small business customers in there and shift them into the business segment so that’s been in Q1 there’s always that kind of effect you will see also this before and…..

Paul Marsch - Berenberg

Yes, okay.

Thomas Dannenfeldt

And one last answer, maybe on the business customer side, absolutely right. We are growing our business. So just off of my mind is something in the vicinity of 4% growth in this area from revenue perspective. And the reason is that simply the proposition which we have in the market, being it the cloud services, being it the security features, being it the integrated telco services which we are delivering, integrated in our service proposition, we have laid 19 new products out at CeBIT fair, this is helping us big time here on the customer side. So, therefore, on the B2B side, we are very strong from a propositional side, and we do not see, let's say, a view to take from our competitors in this area.

Stephan Eger

And, Paul, just for clarification, the second question was is there any EBITDA difference i.e. dilution if a DSL retail customer in Germany migrates to a VDSL offer from ourselves, right?

Paul Marsch - Berenberg

Yes, sure. Because I mean obviously you leave there some costs in supporting that customer, but you are still making a decent ARPU from the wholesale revenue, right?

Stephan Eger

Okay. Yes, the answer is yes. But then it was about retail moving to wholesale, the question.

Paul Marsch - Berenberg

Yes. So if we are going to see a big take up from the contingent model continuing through the year for customers who might be leaving Deutsche Telekom retail and taking up a service from whether it's O2, Vodafone, United Internet, are those customers EBITDA dilutive to you? And so are you making less EBITDA from those customers than you would if they migrated to your VDSL service?

Thomas Dannenfeldt

There is a…

Paul Marsch - Berenberg

Maybe it's just too complicated to answer in this forum, so.

Thomas Dannenfeldt

No, I think now we get the question.

Tim Höttges

First of all, we got the question, thank you. I think there are two answers to this. First of all strategically our aim is to strength wholesale and retail versus (inaudible) not to fight retail versus wholesale and let the cable guys go. So, the way we think that is we need to be stronger than cable and stronger than the wholesale guys in the marketplace but also make sure that wholesale can get a decent share out of the market and not only seeing cable growing. So that’s first of all the understanding, the thinking looking at the whole game. So that’s number one.

Number two, there is a slight difference in terms of the margin from retail to wholesale, but due to the contingent model, it’s not as big anymore. As you know from the ULL pricing to the contingent model pricing, there is uplift in there. So there is difference, it’s not so big anymore and I think again, the perspective is fight cable, not wholesale.

Paul Marsch - Berenberg

Sure. Thank you very much.

Stephan Eger

Thanks Thomas. And I think we move on to Polo Tang from UBS. Polo, your question please?

Polo Tang - UBS

Yes, hi. I just have a few different questions. Just on German mobile, you’ve had very strong postpaid net adds in Germany for the past seven, eight quarters. So my question is when is this going to feed through into improving mobile service revenue growth? And related to German mobile, can you just talk though LTE in Germany; so what are you seeing in terms of the uplift to data usage and the uplift to ARPU? And just finally, if something does happen with T-Mobile U.S., could you just talk us through future uses of cash? Could we expect this to be returned back to shareholders or would it be a case of reinvesting proceeds to strengthen your European footprint? Thanks.

Thomas Dannenfeldt

So, first of all, I think on the German mobile side, we are very positive about the development because we see absolute revenue growth on service revenues, not having seen that too often during the course of the last years to be honest. And I think the main reason for seeing that positive trend versus market, as I mentioned we still expect the market to decline around 2% maybe 3% vicinity. It is about the differentiation in the network. So our view is what we see in the net adds, what we’ve seen by the way also in the way we differentiate in the marketplace in terms of network quality is already reflected in our performance on the service revenues. And we expect that to go on further.

Tim Höttges

Look another famous idiom from me here. You have to kill the bear first before you tailor the skin. So therefore Polo, your question with regard to the use of cash of a potential sale of the U.S. business, this is something which is totally theoretically and nothing which we really could seriously discuss. But maybe let me share a little bit of my thinking. At the AT&T times, we were very balanced in the approach towards debt holders, equity holders, and towards our balance sheet here. And this should always lead us on this kind of considerations. I’m a big shareholder of Deutsche Telekom and therefore I’m even interested to see the appreciation from this kind of potential deal.

Polo Tang - UBS

And just to follow up on the question about LTE, what kind of uplift are you seeing in terms of DT switch in ARPU?

Tim Höttges

The uplift in LTE is linked or let’s say the other way around. Most supporting element of LTE is to drive MRCs upwards. So the MRCs being sold to make sure that those MRCs are driven upwards, knowing that there’s a lot of noise in the marketplace, pushing prices downwards. To give you even clearer answer on that one, the tariff plan we sold most is the one where LTE is incorporated, even if it is 50 bucks or 45 bucks tariff plan a month, compared to EUR 20 to EUR 30; entry points in the marketplace, the most sold one is the one with LTE. So it’s not LTE per se is, it’s driving up the MRC with the LTE element and the LTE service improvement we do have.

Polo Tang - UBS

Thank you.

Tim Höttges

There’s no direct measurable ARPU in euros I can recall here on that one.

Stephan Eger

Thanks Thomas. Let’s go to Justin Funnell from Credit Suisse.

Justin Funnell - Credit Suisse

Thank you. Obviously the all-IP migration is gaining momentum and by the looks of your line loss, going very well indeed. I was just wondering when you’d be able to start really showing cost cutting benefits from that; is that a 2015 story, for example? Secondly, is this move towards a integrated European platform, again as you go all-IP in Eastern Europe, what are the potential savings there, and again, are they coming through next year or does it take a bit longer? Secondly, I was just wondering how you feel about the potential remedies on the German consolidation deals. Do you see those remedies as something that might actually disrupt the market and make the market worse, or is this still too early to know? And then, finally, do you feel you need to react to Vodafone’s recent move to push fixed mobile bundles more aggressively? Do you need to start going quad-play in Germany? Thank you.

Thomas Dannenfeldt

I’m going to start with your first part of the question, all-IP. I think it’s kind of typical for Deutsche Telekom that we are able to create big machines running big volumes in a very appropriate and proper way. So what you see right now is in the all-IP migration, as mentioned, 45,000, 50,000 customers being transferred to all-IP, changing their CPEs within their home, doing the switching, all that kind of stuff, and without any relevant and significant impact on service quality and customer reaction and customer feedback. So I think that’s where we are today. And I think the good message is that machine is up and running, we will accelerate that number further on.

The other part of the story is there are some millions of customers to be transferred to make a clean all-IP network happen. So that will take some years to make it happen. Talking about 2.5 million, 3 million of IP migrations this year, it doesn’t mean there are still some millions left. So you asked, when will we see effects of cost cutting in 2015. No 2015 not, because 2015 will be somehow the peak of the transformational -- the transactional volume, we will see but 2016 onwards you can expect to see the first savings kicking in.

Justin Funnell - Credit Suisse

Thanks.

Stephan Eger

But on Germany and now in Eastern Europe, Justin, very quickly where are we, we’re about -- in terms of IP migration, we’re at about 70% in Slovakia end of the first quarter, roundabout 50% in Croatia, 34% in Montenegro, 36% in Hungary. So on average in Europe including Germany, we’re at about 23% with the laggard so far being Greece and Romania, but it has always been planned that they are kicking in later.

Now, with respect to those costs savings there, we always said Macedonia is the first showcase, with EUR 10 per access line per year to be saved. And we always also promised you that we were coming up with a clear savings number with our Capital Markets Day later in the year, because obviously it depends on country by country where the savings coming from. For example, in Croatia, the biggest chunk of the savings will be from energy, whereas it was completely different in Macedonia.

Tim Höttges

With regards to -- maybe I’d like to add one sentence on this Pan-European network question here and the integrated European platform. Look, this was laid out as a strategy and I have to be very honest. We have -- we are working intensively on that subject to understand what the opportunities are, where the big cost levers are coming from, what it would mean from governance perspective and other things. And we need some more time to really go through that. So, it's a strategy, it was laid out but you cannot expect immediate answers and the benefits coming soon. So, we have to work that through diligently.

Now, my -- the next question was with regard to the remedies on the German market competition. You know that shareholders on both sides approved the deal and EU regulatory approval process is still ongoing. I think O2 made a remedy proposal to the EU Commission and all market participants received this proposal and had the opportunity to comment upon. The EU Commission will decide on that paper at the 23rd of June, at least that is our knowledge here at Deutsche Telekom. And it is very difficult to discuss now the remedy proposal here because we are all lying under an NDA in this regard.

All I can say from our painful experience and one of my biggest management mistakes, I personally did was, the Tele.ring acquisition in Austria 8 years ago. Intra-market competition in general has to be possible in Europe. We need that in order to set the economic framework for the necessary infrastructure investments into the mobile infrastructure. And scale matters in our industry. I think that is clear to everybody. But the remedies imposed on any deal should not kill the economic logic and the synergies of such a deal. Otherwise, it would be better to walk away from such a deal. And we should have done that in Austria in the past, but we were so much committed as managers to get things executed. And I hope that the Telefónica management is seriously considering the price and the benefits of this kind of remedies. And therefore, let’s wait what is coming out of their proposal at the 23rd of June.

Going to Germany, react to push bundles more aggressively quad-play, yes. And this comes from my heart. We were the first company here in Germany bringing the fixed and mobile business together a few years ago. This company is doing a good job on the sales perspective, doing a great job on the network differentiation side, doing a great job on investing into quality. This is the basis of bringing these two networks together, and you could be assure that, independent from the tariffs which we have recently launched on integrated things, we are even working on the customer experience side here. So I promise you here in that call, during the course of this year, you will see quad-play and other things around that during the course of 2014.

Thomas Dannenfeldt

I would like to add a few words on that one as well, because I think it’s important to understand how we look at quad-play. Quad-play, in some countries in Europe is a discounting game, in some countries, it’s an upselling game. And we believe and we have seen the last years already in cross-selling activity that on quad-play there is upselling opportunities and there is opportunities to even see a better ARPU with the customer and not discounting it because of having churn issues. We don’t have churn issues here in the marketplace. Fixed line churn is in the proper shape, it’s around 6.5% to 7% in broadband. Mobile is in the proper shape. So it is not a defensive game. There is no reason to react on Vodafone or somebody else’s activities bringing fixed line into their shops; it’s about creating value on the quad-play game.

Justin Funnell - Credit Suisse

Thank you.

Stephan Eger

Well, thanks, Thomas. And before moving on to Ottavio Adorisio from SocGen, let me quickly come back to one other question from Ulrich beforehand, that was what’s happened within Vivento. And now stay tuned guys. Within Germany, so actually there was nothing on the outside world changed, but we changed people within [THS] from group business security into Vivento. Actually these are the guys at the doors of all our operational businesses throughout Germany. So Ulrich, you definitely win the question on the most creative question from the backup. I don’t think that anybody will buy our shares over the back up there, but now I think the question is at least tackled.

And now let’s move over to Ottavio.

Ottavio Adorisio - SocGen

Hey, good afternoon, gentlemen. Couple of questions on my side. The first is just related to guidance. Thomas clearly explained that T-MUS had to soften the guidance around 100 million to invest in customer growth, but you kept the guidance at the group level.

So I was just wondering where the savings would come from to compensate for that. And the second is specifically going back to the U.S. And I do understand and I appreciate that’s difficult to comment on what’s going on. But without throwing any oil in the fire, as Thomas stated what really they are doing is on one side they’ve got the DoJ and the FCC that would like to maintain four infrastructure players. On your side, you basically said that you do need to basically gain scale, both you and Sprint. Therefore my question to you is what sort of remedies and concession would be prepared to make in the U.S. to facilitate a potential for entrance and therefore to [appeal] any sort of antitrust hurdle that looks to be at the moment on the horizon? Thanks.

Thomas Dannenfeldt

Yes, I’m going to start on the question on the compensation. It’s quite simple. It is additional cost-saving efforts and activities we agreed upon in the group outside the U.S. to compensate on that one to keep the guidance stable. And I think that’s the simple answer on the first question.

Ottavio Adorisio - SocGen

Could you just clarify a bit more where, in Germany; in Europe; in T-System, where those savings are coming from?

Thomas Dannenfeldt

Across the whole board so that everybody is participating and supporting that one.

Ottavio Adorisio - SocGen

Okay.

Thomas Dannenfeldt

It’s kind of you can assume a kind of fair share support of everyone in the group in that one.

Stephan Eger

Remember, (inaudible) the guidance revision, T-Mobile U.S. at the midpoint is $1.50. So, we’re speaking about EUR 100 million here.

Thomas Dannenfeldt

Fair share.

Stephan Eger

Yes. And a fair share distribution as Thomas said.

Tim Höttges

Ottavio, I think with regard to the U.S., first you need a deal. And then I think your question is smart but you could imagine whatever happens to discuss remedies and concessions in a call, that wouldn’t make sense at all, because this is bilateral negotiation process and with the authorities. And even if we would have a deal on the table, I would not disclose that in a quarter result. You wouldn’t do that either. So therefore, I’m sorry for being that straight.

Ottavio Adorisio - SocGen

I understood. Thanks.

Stephan Eger

Thanks Tim and thanks Ottavio. And now let’s move on to the last question of the call because there is other calls out here in the industry later on. And let’s move on to Hannes from JP Morgan.

Hannes Wittig - JP Morgan

Yes. Good afternoon and thanks for the question. I just wondered how you’re looking at incumbent consolidation as a subject, what priority for you. There was another comment today from the German Chancellor, in fact related to the fragmentation of the Pan-European industry. Is that a priority, are you still seeing yourself as an important player in this and do you think we will see some relevant action in the next 6 months to 12 months to drive sort of Pan-European consolidation?

Tim Höttges

Hey, Hannes. So the first thing is I appreciate that our Chancellor is pretty aware about what’s going on here in Europe. We have 28 markets. We do not have a single market package. The single market package gets reduced to the sour path than rather giving some sweet path to our industry. We have a ridiculous discussion on net neutrality these days. Looking to the U.S., we could learn in Europe how a market should be structured. And on top of that, we have a competitiveness which is very high. And you know all the incentives from regulators are forced on price regulations than rather on infrastructure investments.

So therefore the good thing is that something is changing. And if you read the German press on a daily basis at Frankfurt or on other newspapers, there is a continuous flow of a discussion about what Europe needs from digitization perspective. And therefore I appreciate that.

But look, before you go into consolidation in Europe, you need another framework. The first one you need is single market package from -- which is supporting interaction and consistent to that one, even the antitrust perspective has to change. If the antitrust perspective is only related to the local countries, then even the single market will never take place.

So therefore, I think these are the two prerequisites before really a consolidation should take place. You know I am a fan of European consolidation. At one point in time it has to take place, because scale matters in our industry and the synergies could be realized. But at that point it would be much early to speculate on this kind of euro wide and cross-country regulation because the framework isn’t given at that point in time. So, in the next month to drive something and to see something, I would say no.

Hannes Wittig - JP Morgan

Thank you.

Stephan Eger

Thanks Tim. Hannes, Thank you very much. We’re ending the call right now. I know that there is a couple of more people in the waiting chain; we obviously will call all of you from the IR team in the next 20 to 25 minutes. So, thanks for that. And for the rest -- especially on the buy side, I think we’ll see many of you in the next weeks. We are on the road on conferences, and in London and other areas, Boston and New York with Tim and Thomas, more than happy to see and discuss the trends with you personally. Thank you very much. And have a good day. Bye, bye.

Operator

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