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Edited Transcript of DTE.DE earnings conference call or presentation 2-Mar-17 1:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Deutsche Telekom AG Earnings Call

Bonn Mar 2, 2017 (Thomson StreetEvents) -- Edited Transcript of Deutsche Telekom AG earnings conference call or presentation Thursday, March 2, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Tim Hoettges

Deutsche Telekom AG - CEO

* Thomas Dannenfeldt

Deutsche Telekom AG - CFO

* Hannes Wittig

Deutsche Telekom AG - Head of IR

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Conference Call Participants

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* Sam McHugh

Exane BNP Paribas - Analyst

* Stephane Beyazian

Raymond James - Analyst

* Akhil Dattani

JPMorgan - Analyst

* Emmet Kelly

Morgan Stanley - Analyst

* Ottavio Adorisio

Societe Generale - Analyst

* Simon Weedon

Citigroup - Analyst

* Dominik Klarmann

HSBC - Analyst

* Guy Peddy

Macquarie Research Equities - Analyst

* Nick Delfas

Redburn Partners - Analyst

* Ulrich Rathe

Jefferies International - Analyst

* Frederic Boulan

BofA Merrill Lynch - Analyst

* Mathieu Robilliard

Barclays Capital - Analyst

* Andrew Lee

Goldman Sachs - Analyst

* Justin Funnell

Credit Suisse - Analyst

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Presentation

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Operator [1]

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Good afternoon everyone, welcome to our Q4 and full-year 2016 conference call. With me are our CEO, Tim Hoettges and our CFO, Thomas Dannenfeldt. As usual, Tim will first provide his highlights for the year, before Thomas will dig deeper into our Q4 performance. Finally, Tim will provide his closing comments, and then we will have Q&A. You will find our usual disclaimer in the presentation. With this, let me give over to Tim for his highlights.

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Tim Hoettges, Deutsche Telekom AG - CEO [2]

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Hello everybody. Warm welcome here also from my side, and just quickly going through the matter here.

2016 was a good year for Deutsche Telekom for our customers and for our shareholders. Benefiting from our ongoing high investments in Europe and in the US, we achieved strong growth with customers, with earnings, and with our dividend. We delivered our guidance from 2016, and today we also present our guidance for 2017 where we target another year of strong investments, combined with double-digit free cash flow growth.

We are delivering against the group target we presented at our capital markets day two years ago, and we confirm these targets today. As always, I will start with a short overview before Thomas will provide you with some more detail on our most recent quarter results. The first slide is our usual quick reminder of our main strategic building blocks.

The good news is that our strategy stays a strategy stays a strategy, and that this remains as valid as on the first day, and we're focusing on execution. We like to be consistent, and we like to be predictable.

Slide 5 shows key financials over time. It shows that we promised at the beginning of 2015 and what we have since delivered. Some businesses are outperforming, some exceptionally strong. Other business delivered as expected, while others will have to work to do. I think you know who I'm talking about.

The simple message is that when you add it all up we're delivering on our growth promises. Our revenue has grown over EUR10 billion in the last two years. Our EBITDA, excluding the US leasing effect, grew by almost EUR3 billion, which is over 15% during this period, well ahead of our guidance. Despite our high investments, our free cash flow grew by almost 10%, and with the EUR0.60, we are proposing today are dividends will grow by EUR0.10 between 2014 and 2016.

Going forward, we expect our strong growth to continue, and you can see the main elements of our guidance on this slide. We expect our revenues to keep growing, and our EBITDA to grow by 4% to EUR22 billion in 2017. As you know, we guide using last year's average exchange rate.

If you were to take the exchange rate of our most recent consensus instead, our EBITDA guidance would be around EUR0.4 billion higher. And despite a further increase in investments to EUR12 billion, we expect our free cash flow to grow by more than 10% to EUR5.5 billion, [schnapps sign] 22.2 and 5.5. On the next slide you can see some of the 2016 highlights.

We continue to strengthen our position in Europe and in the US. We invested more than EUR11 billion in 2016, and on top of that, we spent EUR3 billion on spectrum, mainly in the US. Unlike some of our peers, we are not taking a break from investing, the contrary.

And we are seeing the results, our strong growth continues. Our revenues grew by almost 6% last year, our EBITDA by over 7%. Despite our high investments, our free cash flow grew by 9% to EUR4.9 billion last year, and we are therefore happy to propose a dividend of EUR0.60 per share for 2016, up from EUR0.55 the year before.

Our customer growth remains strong. Again the demand for our German fibre products stands out. We now connect almost seven million German homes and businesses with fiber. We added a new record of 2.4 million fiber customers in the last 12 months alone.

Clearly, our German customers are very happy with this product, and we remain focused on rolling out our super dense fiber network as quickly as possible. In the US, we gained more than eight million subscribers last year, well ahead of our initial guidance, and the guidance provided by our US team shows that we will not stop.

The next page shows some examples for the strong momentum we are seeing with our customers. We continue to see good momentum with our MagentaEINS convergence products. We now have 4.4 million converged subscriptions in Europe, up from 3.9 million at the end of the third quarter.

Germany delivered three million MagentaEINS customer promised at our 2015 capital markets day, two years ahead of time. I already mentioned our success with fiber in Germany, where we added a record of 2.4 million homes in the last 12 months. 33% of our retail broadband homes are now on fiber, up from 23% one year ago.

Our US performance continues to speak for itself. We now have almost 72 million subscribers. Just to put it in perspective, Sprint has 59 million. In the cloud we grew 12% last year and we now have EUR1.6 billion of sales in this strategic growth market.

When it comes to innovation, I don't want to bore you with the repetition of what I told you in recent quarterly presentations, so let me stick to a few highlights. 2016 was a year of many exciting product launches, such as our open telecom cloud, new security solutions, or our new Entertain TV platform. Our networks in Europe and in the US won many surveys.

In Germany, our continued network leadership was recently confirmed by all the major network tests. In the Netherlands, we just announced a highly innovative network partnership with Huawei, which will give us an edge for years to come. Our highly innovative hybrid product now has almost 300,000 customers.

Our German for more tariff were well-received and our German customers almost doubled their data usage last year. We added mobile video to our MagentaEINS portfolio, and this was very well received, with over 100,000 new subscriptions in Q4 alone. At last week's Mobile World Congress, we focused on 5G, where we see ourselves well-positioned and clear as an innovations leader.

Let me highlight just two innovations in particular: Together with a SK Telecom, our partner, we demonstrated the world's first cross-country network slicing. Network slicing is a key feature for 5G. It allows us differentiate the network experience for different users.

We demonstrated that this can be done across country borders, which is a key, for instance, for global cars or for global vertical solutions. We followed up the world's first one millisecond latency over a mobile network which we delivered at last year's Congress. With a pioneering network innovation, which guarantees latency for individual 5G applications. This guaranteed latency addresses the requirement that we are frequently presented as a request from our customers.

We made great progress with our smart home platform as well, where we added 100,000 German customers last year, and which we successfully sublicensed to other European operators. We have 40 partners for this platform alone, so this is also a great example for successful partnering.

We're also seeing the first tangible benefits of our network transformation. In Germany for instance, where we have rolled out our all-IP aggregation platform, customers find it easier to connect and our incoming call center traffic is slower by around a quarter.

Innovation also means service innovation. In Germany, we now have more than 600,000 customers to our IT support service, and we saw almost 0.5 million transactions on our Magenta service app. In Austria, through our digital assistant, Tinka, we are successfully using artificial intelligence in our customer service since 2014, and we are very close to launch commercially an artificial bot.

Slide 9 compares or 2016 performance with the guidance at the beginning of the year, and summarize the outlook for 2017. As mentioned, our main group financial metrics are well on track for what we committed at last year's capital markets day, and we reiterate these targets today. With this at hand over to Thomas, who will discuss our fourth quarter in greater detail.

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Thomas Dannenfeldt, Deutsche Telekom AG - CFO [3]

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Thanks Tim, and a very warm welcome from my side as well. As always, my first slide shows the financial highlights for the group as a whole. Our financial momentum remains strong in the fourth quarter, despite some legacy issues in our two systems unit, and increased customer investments in the European operations.

Our revenue growth reaccelerated to 9% this quarter, largely driven by double-digit service revenue growth in the US. For the year as a whole, our revenues grew by over 5%. Adjusted EBITDA grew 2.4% in the quarter.

For the year as a whole, our reported adjusted EBITDA grew 8%, equivalent to 4.1% on a comparable basis. This growth was achieved despite a temporary slowdown in the run rate of our indirect cost savings, due to a further step up in network migration costs, and additional commercial investments in Europe.

Our adjusted earnings were broadly stable year over year. Our reported fourth-quarter net profit was hit by the BT write-down. Looking at it from a full-year perspective, this write-down largely reversed our earlier booking we had in the first quarter of the year.

After a very strong third quarter, our fourth-quarter underlying free cash flow was slightly down year on year, but this basically reflected phasing, and as you can see, we comfortably delivered our promised EUR4.9 billion for the year as a whole. Our net debt was impacted by US dollar strength and spectrum purchase, but we nevertheless managed to reduce our headline leverage ratio to 2.3 times EBITDA.

Moving on to slide 12, in Germany, our sales were down by 0.5% this quarter. If we adjust for the drag from roaming and termination rate cuts, our German revenues were slightly up year on year. Our EBITDA grew in the fourth quarter, taking us to the promised EUR8.8 billion full-year EBITDA we had initially guided for.

Going into 2017, our German business no longer includes the tower operations, which are now recorded under group development, and we have therefore provided a pro forma restatement with today's earnings release. For 2017, we expect the positive EBITDA momentum over the last quarter to continue, benefiting from almost stable revenues, the more advanced IP migration, and the efficiency measures we took in 2016.

On slide 13, we present our German service revenue trends. In the appendix, we provide additional detail on the component parts. And as you can see, our reported service revenues are again almost stable this quarter. When you adjust for roaming and termination rate cuts, our German service revenue would have grown slightly in the quarter, it would have been flat year on year. Our reported mobile service revenues were again almost stable this quarter, and again, as you can see in the appendix, adjusted for the close to 2% regulatory drag, and a further close to 1% convergence accounting drag, our underlying mobile service revenue momentum remains firmly in positive territory.

As before, small quarterly trend variations should not be overrated. We do not see major underlying trend changes, and we remain on track for our capital markets guidance of 1% service revenue CAGR before roaming. Our fixed line service revenue momentum improved strongly this quarter, but remember that Q2 and Q3 trends have been impacted by runoffs in our wholesale division, so the underlying picture remains one of slow but steady trend improvements. You can find more detail on the various drivers again in the appendix.

On the next two slides, we dive a bit deeper into our German mobile performance. Our commercial momentum and performance remained very steady. We gained 514,000 contract customers in the fourth quarter, but this was again impacted by seasonal volatility and lower value service provider costs. More importantly, our own branded customer base grew by 180,000, broadly in line with the trends in the previous quarters. We now have over 11 million LTE customers, up more than three million in the last 12 months.

The next slide shows the progress we are making from our convergence propositions and data monetization. Over two years after launch, MagentaEINS already accounts for 1/3% of the relevant mobile customer base, and we achieved this milestone by keeping our underlying consumer mobile service revenues stable, which shows our successful upselling. Benefiting from our more for more tariffs, and other innovative propositions, our consumer mobile data usage growth further accelerated this quarter, and almost doubled year on year.

Moving on to fixed line on slide 16, the clear highlight is the 674,000 new fiber customers we achieved last quarter, which is a new record. While our resellers keep doing well, most of the new customers were on our retail platform. We think this clearly demonstrate the benefits of our strategy to bring our super dense fiber network to as many homes as possible, as quickly as possible.

Our broadband growth accelerated to 87,000 broadband customers, benefiting from our outstanding fiber momentum, our test the best promotions and our new TV platform. You remember, we said 80,000 to 90,000 will be the number, and I guess we were spot on here.

TV net additions improved to 61,000 which is good to see, but we think there is still a way to go on the TV side. Benefiting from our broadband momentum, line losses further improved. For 2017, we target at least the same broadband net adds as we delivered last year.

Driven by growth in broadband and the better performance in our other revenue, our retail revenue momentum improved by 1 percentage point to minus 1.1 this quarter. Our broadband revenues grew 1.6% this quarter, as in previous quarter, in close sight of the 2% CAGR we promised at the Capital Market days. And again also here, you can find more detail on our fixed line revenue performance in the appendix.

On slide 18, you can see that we added the further two million German households to our fiber footprint in the fourth quarter, bringing the full-year total to four million, and now cover 64% as promised two years ago at the capital market days. 53% of access lines are already on our IP platform, so we are more than halfway there, and we continue to work towards migrating our mass market access business to all IP by the end of 2018.

Now moving to the US, to the usual two slides we have on T-Mobile US, who already presented their very strong numbers two weeks ago. The momentum remains very strong. We won 1.2 million branded postpaid customers in the fourth quarter, and we also added more than 0.5 million prepaid customers.

Strong subscriber growth and slight ARPU growth combined to 10.6% mobile service revenue growth, and we saw another quarter of very strong EBITDA growth. With this result, T-Mobile US provided guidance for the US GAAP EBITDA of $10.4 billion to $10.8 billion in 2017, and also guided for 45% to 48% free cash flow CAGR from 2016 to 2019.

When reconciling our T-Mobile US with our EBITDA guidance for 2017, please take into account around EUR0.4 billion of US GAAP IFRS versus IFRS adjustments, and compare to consensus also around EUR0.4 billion of currency effect, as already mentioned by Tim. T-Mobile also provided a strong customer growth outlook of 2.4 million to 3.4 million branded post paid net additions.

On the next slide, we show some selected performance metrics for our US subsidiary. Our branded postpaid phone churn improved year on year again, as did our bad debt expense ratio, as did our cost of service. To sum it up, another fantastic quarter for T-Mobile US.

So back in Europe on the next slide, it was a very strong quarter for customer growth in our European segment. Continuing the Q3 performance, 381,000 contract net adds marked a substantial improvement compared to the prior year. In the Netherlands, we have now grown contract net adds for six quarters in a row, 71,000 this quarter. Our convergence momentum continues to accelerate with 180,000 new additions, and meanwhile, our TV and broadband momentum remains strong and steady.

Adjusted for roaming, our organic revenue momentum was stable this quarter; however organic EBITDA was down almost 10% this quarter. This reflects revenue mix effects, the impact of European roaming, some comp issues, but mainly it reflects increased market invest, as you can see in the improved customer momentum.

Going forward, we will continue to focus more on customer momentum. Our performance will also be impacted by some roaming, investments in convergence, our pilot project in the European aviation network, but we nevertheless anticipate only a slight further EBITDA decline in 2017.

As slide 23 shows, in Europe, we now migrated over 60% of our homes to IP, and our LTE coverage now stands at 84%, and our fiber coverage at 26%. The performance the systems this quarter was negatively impacted by write-downs related to two large legacy contracts, which we had already flagged to you in our call in Q3. The unit's EBITDA performance was being impacted by our all-IP transformation costs, as the business customer migration is stepping up this year.

Revenues were down 7.4% year on year, and our Q4 EBITDA was only EUR60 million. Many of you will ask if this reflects increased pressure in the public sector, in global accounts, or more generally in the overall B2B business. While we are clearly not satisfied by our financial performance at this system this year, the picture is more differentiated. We are doing well the public sector and more generally in our European B2B businesses.

You can see this for instance in the positive 2016 B2B revenue momentum, shown by our German unit. Our overall order book was stronger than in the previous years. In our case, the challenges are well-known and in principle unchanged. We still have some exposure to standard IT business, and like most others, we are subscale in the global connectivity game.

As you know, we began to tackle these issues a few years ago through a refocusing of activities towards a more network-centric services, such as our public cloud and security products, and through a major efficiency program. Lastly, we also presented ngena, an innovative platform for global peer-to-peer connectivity, to overcome our scale limitations.

We are now in good discussions with BT regarding further cooperation. Yesterday we've announced, was that yesterday or the day before? We announced the cooperation regarding the international network collaboration.

We're seeing mostly good progress with our strategic initiatives. Unfortunately, progress is sometimes slower than we would like, and occasionally there are some legacy issues, but we think the direction of travel is right. For 2017, we projected at least stable EBITDA for the division.

On the financials Q4 free cash flow was down year on year, but as mentioned earlier, this was mainly due to phasing. Just to remind everyone, we have been after Q3, we delivered much more than 80% of the total year's guidance, so that was clear. Our net debt was impacted by the strength of the US dollar, and by spectrum payments new to this quarter, and by number of other miscellaneous items including a revaluation of the T-Mobile mandatory convertible.

The next slide shows our financial metrics. At 2.3 times, our net debt remains well within our comfort zone of 2 to 2.5 times adjusted EBITDA. At the end of last year, we extended our existing funding agreement with T-Mobile by agreements related to a further $3.2 billion. We continue to see this is a win-win for both parties, because of the meaningful cash cost savings.

Year to date, we've already raised EUR6.8 billion of debt under favorable conditions, or in general by the way, covering our maturities in 2017 and to finance in advance our latest funding agreements with T-Mobile. My final slide, as always, summarizes the strategy we presented to you at capital market days 2015, in terms of the strategy is a strategy is a strategy, so we continue to execute well against those targets, and we remain confident that we will keep delivering them going forward.

With this, I hand over back to Tim with some of his closing remarks. No?

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Tim Hoettges, Deutsche Telekom AG - CEO [4]

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We go into the questionnaire right away.

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Questions and Answers

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Hannes Wittig, Deutsche Telekom AG - Head of IR [1]

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Okay, thank you Tim and Thomas. It's now time for the Q&A.

(Operator Instructions)

Sam McHugh, Exane.

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Sam McHugh, Exane BNP Paribas - Analyst [2]

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Two questions please. First on the all-IP migration. Can you just remind me how much you are spending on that OpEx and CapEx annually, and when we should expect those costs to subside? Secondly, just on the potential for the tower business, how much scope is that to increase tenancy rates? You talked about creating value in that. Can you just outline the other ways you could create value? Thank you very much.

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Tim Hoettges, Deutsche Telekom AG - CEO [3]

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We're going to start with the all-IP part and then I go to the tower business, potentially Hannes will answer that one. We're spending roughly EUR1 billion this year total spend across Germany and T-Systems, and the European segment CapEx and OpEx altogether. And there's no change on the midterm outlook we have given, in terms of the related upside to that. Just to remind everyone, we said that will be a EUR1.2 billion net OpEx reductions by all the topics we're driving here on the superior production model materializing themselves completely in the early 2020s.

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Hannes Wittig, Deutsche Telekom AG - Head of IR [4]

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Yes, and on the towers, I think the you've seen that we have moved it out of the German segment and into our new segment, group development. And the main points here is that we think it gives us greater opportunities to develop the business, so this is not primarily a financially motivated financial transaction, could be part of the development path going forward, but it's not a necessity. You've seen we are well within our rating corridors, and debt reduction therefore is again not a primary driver.

So what is the main focus? It's to develop the business operationally and strategically, as we move towards 5G, and I think you can see that to some extent in the appointment of Bruno Jacobfeuerborn, as CEO of our tower business, he is a highly recognized leader in 5G across the world, and is also our group CTO, and I think that speaks for some of the opportunities we see towards 5G, Internet of Things and et cetera. So yes, that could also lead to more third-party business over time, but I think it's too soon to be too specific here.

Stephane Beyazian, Raymond James.

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Stephane Beyazian, Raymond James - Analyst [5]

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I just would like to come back on the T-Systems and perhaps BT, the new agreements BT Global Services is about network and expanding your footprint, but I'm wondering, looking at both issues, BT and yourself in the global market, if you don't have here a case for a more conservative strategy on geographies to take some market pressure off, or simply retire outside your home markets. And following up on the BT question, you expressed concerns last year on the critical issues at BT such as Brexit, pensions, and network. Is there any change in your investment approach, now that BT shares are cheaper than last year? Thank you.

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Tim Hoettges, Deutsche Telekom AG - CEO [6]

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So, the first thing is with regards to the Brexit, and the question about BT. It does not change the way how we think about our financial investments in BT. Although we are quite concerned about this regulatory debate in the UK, which is not coming to an end.

So this is definitely I think for me the biggest obstacle in my observation as a 12% shareholder here. In principle, BT is a great company. It executes well, and it will definitely benefit from the EE integration going forward. It has strong market positions in consumer market, in the B2B market, in their home country and it is well positioned, as well, on the content side as a fixed mobile converged player, and this is a business we understand and which we heavily promote.

Our intention is to promote BT wherever we can, and it is up to BT how much they take advantage of it, and how fast they're doing it. In any case we will do everything to make this business as successful as possible, and we are not considering any change in our shareholding or perspective as of today. We are anyhow subjected to a standstill, and a lockup agreement until the end of the year. That is the current positioning.

Independent from that one, we made some progress in the way, while we are cooperating with BT, and we're hosting their customers on our SAP on our server architecture, and we are doing a direct interconnect with their infrastructure on the fixed line customers. So we're helping both companies to better utilize the infrastructure. So has it changed? No, the intention is there. And is it an easy phase for BT? No definitely not. But we are inside of the team and trying to support wherever we can.

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Hannes Wittig, Deutsche Telekom AG - Head of IR [7]

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Okay, thank you Tim.

Akhil Dattani, JPMorgan.

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Akhil Dattani, JPMorgan - Analyst [8]

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Two questions please, if I may. First on the German mobile market, last year we saw Deutsche Telekom announce more for more price increases back in February. Since then, we've seen pretty much the entire market follow suit. So just keen to understand how you feel the benefits of those changes have impacted Deutsche Tel and whether we should read anything or not into the decision as yet not to have replicated that again, as we've gone into this year.

And linked to that, we've seen a number of markets across Europe starting to push through much larger data allowances, in an attempt to really present the gap between the MVNOs, as you find it very hard to replicate those offers. So just keen to understand, you think there's merit to similarly putting through much larger data increases going forward, as you try and increase the gap between the no frills plans?

And then secondly a very open-ended question around the US. We have seen the new head of the FCC make a number of comments around consolidation, and his thoughts around that. Softbank has been quite public in some of their commentary, so just wanted to similarly, you might be willing to share any thoughts around US consolidation going forward, and your stance on that? Thanks a lot.

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Hannes Wittig, Deutsche Telekom AG - Head of IR [9]

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Akhil, that was three questions, but we will try our best.

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Tim Hoettges, Deutsche Telekom AG - CEO [10]

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So Akhil, let me, let's say, give a statement, with regard to our German market. I think 2016, and especially the fourth quarter, was a very encouraging quarter for the German business. We have very strong broadband net adds.

The best numbers we have seen, and we're very close heading to the 40%, so significant improvements, and as well, in the way how we are competing with the cable operators in this one. We have seen an increase on TV adds. That's definitely the case, but we want to see more progress to be made with our new TV platform, so that's something to come.

Record improvement on fiber net adds. 394,000 net adds in that quarter on the fiber side. This is more than 120,000 more than the average of the last quarters, so you see wherever we are now opening up, and of course what I mentioned last time, where we opened up new ventures and new infrastructure, the customers are very happy to take our brand.

We have increased the MagentaOne footprint from 3 million beyond, and every MagentaEINS customer is coming with EUR8.70 additional ARPU, which is helping us on the revenue side. And overall, we have seen that on the mobile side, our brand and our network perception is even stronger. We are very much supported from the B2B side here in this regard. A lot of customers, independent from the situation, that we do not have to reduce prices in the competition, it is the quality issue which is driving customers into our arms is paying off. So we are quite encouraged, and that gives us the foundation for the encouraging forecast, with regard to growth in the German entity for 2017.

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Thomas Dannenfeldt, Deutsche Telekom AG - CFO [11]

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Maybe to add on this one, and then we come to the question on the US. First of all, more for more, just if you look at the numbers we've seen in 2016, we've seen headwinds, regulatory headwinds by roaming and by MTR cuts of EIR88 million in the total year, EUR77 million roaming, EUR11 was MTR.

But our decline was EUR43 million. Or in other words, the underlying growth was around EUR40 million, so we could turn the underlying non-regulatory elements of the business into the positive territory again, and I think that gives you an indication that more for more was the right move, and it worked. Especially as it was addressing a customer pain point, having two less of data volume available for their usage and their demands. By the way, this was also the reason why we added or doubled the volumes in the base, not only for the new customers.

And this is one of the reasons why we introduced for instance the mobile TV element on the mobile side for converged customers, as a free component to encourage the customers to use even more the mobile network we have here in Germany. Driving consumption is the way forward for us, incentivizing the customer to use more and enjoy the fantastic experience is the way forward.

Is there any thinking about having the next EUR5 up on that one? No. Is there obviously for the driving the consumption, the underlying thinking is to drive the mix of the tariff plans and the price plans up? Yes.

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Tim Hoettges, Deutsche Telekom AG - CEO [12]

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Your question with regard to the US, the first thing is you know that nobody is able to answer this question, because any transaction has to be diligently being analyzed, worked through, and then be decided from the authorities in the US. The total climate, I think, from the Republicans in the US is more open and less regulative as in the former regime, that is what we all expect, so that's, let's say, an over observation.

The second thing is, we are in the so-called allocation phase of the 600 megahertz spectrum, and I hope that we would see the encouraging results coming out very soon. We know the total amount which has been spent, and that it's $0.90 per megahertz pop spectrum overall, which has been paid. So we're waiting now for this final allocation, and until then I will not even speculate, not even think about let's say any consolidation in this environment, not to risk the outcome of this undertaking.

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Hannes Wittig, Deutsche Telekom AG - Head of IR [13]

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Thank you, Tim. Emmet Kelly, Morgan Stanley.

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Emmet Kelly, Morgan Stanley - Analyst [14]

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I have just two questions, please. The first question is one I've asked before, which is on your German TV business. So I think in 2016, you launched the new Entertain platform and the set-top box. The upside is your ARPUs in German TV are still very high at EUR37.

The downside is net adds have been stable, and haven't really accelerated throughout the year. Can you maybe talk a little bit about the TV strategy in 2017, and what steps you think you can take over the next couple of years to make your business more mass-market, and maybe get TV penetration up to where Orange or Telefonica is?

The second question is something I may have missed, so forgive me if I did. On T-Systems, I know EBITDA's very lumpy in this business, but I estimate EBITDA was maybe EUR175 million per quarter since the beginning of 2015. It stepped down to EUR60 million in Q4. Can you maybe say how much the step down was from the write down you mentioned, and how much is organic or performance related, please? Thank you.

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Thomas Dannenfeldt, Deutsche Telekom AG - CFO [15]

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Emmet, this is Thomas. To your second question, which was quite easy, I think you're right with the levels you've given, like EUR160 million, EUR175 million, that level is correct, down to EUR60 million, and the difference is exactly what is related to those specific deals. And the first question was on?

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Tim Hoettges, Deutsche Telekom AG - CEO [16]

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Emmet, look. Promise and deliver. We are increasing our targets for TV customers in Germany, we have done that internally, there's a higher commitment on that one, and you're seeing from our broadband net adds and to market share that this is something which we always have in mind, by changing the speed in certain areas. Do we want to have more TV customers? Definitely this is the case.

How can we make that more mass-market product without violating the total amount of ARPU? We do not want to give it for free as a service into the community, we want to create money out of it. We have now continuously developed new features such as restart, or replay, as well as this interactivity. We have improved in our content portfolio.

We have acquired smaller long-tail content like the ice hockey league, or like the ladies football, or like the third league. And this stuff we have new channels, HBO, Fox, and TV Now from RTL, online. We have created new special offers, as in September, which is EUR120 credit voucher for the content. We have the continuous rise of high-speed VDSL availability which enlarged the market for us, where we could sell the product. This was a limitation in some of the areas so far.

And we hopefully benefit from the ongoing DVB-T migration, which is taking place in Germany. We have incentivized our sales forces in the shops to openly address this DVB-T migration. We're approaching customers directly in this regard.

On top of that, we are considering more and more a TV only product, over the top and by our app, so that we could bring let's say these TV services into the viewer mix. TV Mobile for instance, costs EUR6.95 per month, and it is coming with no zero rating, so including the data consumption, which has been offered. So even here we have things to do.

Are we are now going into exclusive content, big things, which you might have in mind with your questions to create a exclusivity on the content? No, our answer is clearly the aggregator strategy. We want to aggregate as much of content in an easy usability in our TV Entertain services, mobile and fixed.

And there will be more to come from functionalities, to stop that discussion here. I think the service is very well perceived, the platform is absolutely stable and in a good performance. So I think we have the ingredients. We need more focus and we have to scale it up, knowing that the German TV market is slightly different than in other markets.

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Thomas Dannenfeldt, Deutsche Telekom AG - CFO [17]

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Emmet, back again, Thomas here. Because I've given you the answer on your question, but I missed to give you the outlook, and I think is important to add that as well. For 2017, we guided the EBITDA for the market unit on the level of EUR0.5 billion, which would amount to a stable performance, or maybe it's a slight up, let's see. So we don't anticipate or expect further write downs related to the mentioned issues. Just to be clear about the past, and what you should expect looking forward.

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Hannes Wittig, Deutsche Telekom AG - Head of IR [18]

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Thank you, Thomas. Simon Weedon, Citigroup.

Simon can we have your question? Okay, with that I first go to Ottavio from Soc Gen, and then we'll come back to Simon.

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Ottavio Adorisio, Societe Generale - Analyst [19]

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A couple questions. The first is another follow-up on the T-Systems. Going through the accounts, you basically attribute the negative performance on the top line on the market units to first downward price trend in the ICT business, and also to exchange rate effect. It's possible that the break down is into two.

And also, you mentioned about the outlook. In the outlook I can see that you're looking for flattening performance next year, and actual improvement in 2018. So would it be possible to know what is going to drive that particular performance on the top line, and on EBITDA? And the second one is on the European business. The trends were not good on EBITDA, but you attribute that to be significant investment in customers, and one can see that Austria and Netherlands had a pretty good performance on net adds.

However, Poland was relatively weak this year and net adds were also very weak. So I was wondering what's going on the Polish business? I consider the fourth quarter was better than the rest, but if you can give an outlook going forward, and if you believe that the business as it is, or as it stands, is basically a deal, or you probably need to do more in terms of M&A to stabilize the business?

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Thomas Dannenfeldt, Deutsche Telekom AG - CFO [20]

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I'm going to start with T-Systems. First of all, as I answered Emmit's question, the impact on the EBITDA we've seen on T-Systems Q3 and Q4 was not price trends. There is precedent obviously by all-IP migration and by some price pressure we have in those markets, they always exist. But the main element of the negative impact we've seen in Q3 and more in Q4 have been those two big contracts, and they are not related to the FX and ITC, that's a general situation we have in the market, as a continuous headwind.

But we have also tailwinds. Remember, we have change the strategy some years ago, and we're moving more and more from an IT outsourcing big deal type of business into a platform-based scalable IT business for instance, like cloud business, like security businesses. So those business, by the way, which inherit the same risk you have in big IT outsourcing deals, but those business weigh on one side of the platform, and then you scale them and use them, so you derisk also by moving from IT outsourcing big deals into platform business.

And that's why we are still confident and clear in terms of the two years perspective of that business. The only thing I guess we have underestimated is how long it will take to get completely the garage clean, so to say, get the legacy big deal contracts and controls. So I think that's the difference, but the rest is top line growth and EBITDA improvement by scalable cloud and security businesses.

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Tim Hoettges, Deutsche Telekom AG - CEO [21]

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Ottavio, with regard to the European situation, the first thing if you would have taken the Netherlands, which was obviously a challenging environment, take it out of the European P&L, you would see that the business was an operating business flat, and for the EBITDA development in 2016. So as a total, our European footprint, we have a lot of good things in it. If you take the great performance and just as an example, if you see Croatia, Hungary and as well Slovakia.

So let's focus on the bad things in this portfolio. And you pointed out, we had a challenging environment in the Netherlands. In the Netherlands, I can tell you, we have taken really decisive action, new management, unlimited tariff, worldwide deal on the network, investments into the LTE infrastructure, leading the market test. Cost-cutting and reducing we headcount, buying Voidance's fixed line business.

So just to highlight six things. And they're all in just less than three months. You see that we have serious momentum taking over, and when we are changing the speed on businesses.

Now in Poland -- sorry Europe, my last highlight lowlight situation here, in the first quarter, we had a customer growth of 380,000 new contract customers. This alone shows let's say that there's a great momentum being created. The quarter before was less than half. So, and the second thing is, if you look to the LTE coverage we have now 84% LTE coverage, and we have a fiber cover at least 100 megabit per second, of more than 26% of the population.

And our all-IP migration is beyond 60%. So I think this is showing you how serious we are working on the European portfolio, and that we see some encouraging developments there, as well.

With regard to Poland, the Polish market wasn't that easy, and we have to improve the situation as well, you're totally right. And it always starts his new customers, with new contract customers.

And if you take the numbers, they were negative in the fourth and second quarter. They were positive in the third quarter, and they were tripling already in the fourth quarter3. So we're on good track with the contract adds.

Second, we won the P4 network test in January, so it was proven that our network is doing better, and the same is true for the profitability where we are now have reduced costs in a decent way. The next is, we are opening new doors in Poland. We identified the strategic negative from our business, that we were not present in retail sufficiently.

This is ongoing and it's in our planning and we made good progress here as well. So, are we fast enough? You could always question that, but at least you know we took even here decisive actions.

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Hannes Wittig, Deutsche Telekom AG - Head of IR [22]

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Thank you, Tim. Simon, can you ask your question please?

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Simon Weedon, Citigroup - Analyst [23]

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I just had two operational questions really. One was if you just comment a bit more about the state of competition at the lower end of the mobile market in Germany, and if you're able to go further from here in diversifying away from the use of service providers? And the second thing is on the Dutch fixed business, you have acquired from Vodafone, I know you touched on it just now, and some of the other changes you made in the Netherlands, but I wonder if you could elaborate on how that -- how you can use that to help reposition yourselves in the Netherlands specifically. Thanks.

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Hannes Wittig, Deutsche Telekom AG - Head of IR [24]

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Let me start with the competition. I think we can all see what's happening in terms of the pricing, that's quite public, and I think we have seen fairly constructive moves. But it is always a bit risky to extrapolate short-term movements. I think there may be some structural drivers, for a bit more constructive pricing from the German MVNOs, but let's wait and see if the current environment can be sustained. At this point, it looks cautiously encouraging, but we've had our ups and downs in the past, so let's see how this will develop.

And I think at the same time we can say we have very steady momentum, and we are doing well in terms of positive service revenue growth, adjusted for headwinds that Thomas mentioned earlier. I think we have a clear plan in terms of boosting data usage through the items that Thomas has already mentioned. So those are truly also the right things to do.

Whatever happens in the low-end of the market, our quality differentiation surely holds up very well. And if anything, I think that has become more relevant as the data usage has gone up, and also you can see that some of the German low end competition has access only to fairly low data speeds, so that helps us to maintain a premium. In terms of the Dutch fixed line network, I pass on to Tim.

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Tim Hoettges, Deutsche Telekom AG - CEO [25]

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Thank you, Hannes. Hannes wants to answer all the questions. He knows everything about the business so therefore Thomas and myself will not show up anymore. We make holidays, good idea. Good job, Hannes.

So let's talk about the Netherlands. I think it is important to know what we are doing there. I was there in the last two months, twice there in the Netherlands with the team and with the people there. The first thing is the fixed line part is for me not the most important issue. It is a defense situation to counter the fixed mobile converged offerings from Vodafone and KPN. But independent from that one, we are in discussions how we could improve the wholesale prices, especially on fiber with KPN. So we use that, but we will even trying to find new ways of killing commercially with KPN, I had a discussion with a local block on that one at the mobile fair, but I didn't want to go into more detail on that one.

The second thing is, our business there is very much focused on the mobile. We believe there's in every market, a place for a good mobile player. That is why we launched the unlimited plan. The unlimited plan has been perceived from the market very strongly, so I think the first step was made.

And in this mobile world, it's not the consumer side alone. We have gained some really big customers on the business side, and I think we are regaining momentum here as well, so Mike is very much focusing on this new contract net adds in the business side, as well.

We have recruited a very strong new management team with Soren, an external CEO from Telia who has joined us, and a good mix of people, very diverse people there. And what Vodafone gives just additional firepower in the office, which we have in time. So let's see how this is developing, but think the total mix and the experiment as well, taking that out of the European net goes into this corporate development portfolio, is hopefully creating even more agility, as we have seen already.

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Hannes Wittig, Deutsche Telekom AG - Head of IR [26]

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Thank you Tim. Dominik Klarmann, HSBC.

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Dominik Klarmann, HSBC - Analyst [27]

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One big picture, and I understand you can't be specific on US M&A, but maybe you can share your current thinking on the pros and cons of allocating capital in Europe versus the US? And then secondly, on 2018 and your free cash flow target of roughly EUR6 billion, if I deduct the low-end of the T-Mobile free cash flow guidance, and use your, I would say, conservative FX assumptions, would imply that the European free cash flow declines by about EUR400 million in 2018 versus the 2016 base.

At the same time, if I look at your 2018 annual report outlook, you're seeing European EBITDA grow, CapEx fall. So why would European free cash flow fall that much? Is that target by now just very conservative on the rising cash outflows below operating cash flow, that we should be aware of? Thank you.

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Thomas Dannenfeldt, Deutsche Telekom AG - CFO [28]

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I'm going to start with the question on the big picture and allocating capital in EU versus Europe. I think, basically we've given the conception answer three years ago, when Tim was very much around talking about Europe is falling behind in infrastructure because we are fragmenting, we meaning Europe, is fragmenting itself. It's splitting up into little pieces instead of scaling up.

So the US market per se has scale advantages. That is something which is not new, and that's an important driver in terms of capital efficiency you have, so that's one element of the answer. The second element is I guess that we maneuvered ourselves into a situation last three, four years, that we are capable to go for stand-alone perspective on a longer period of time, a successful one.

And Europe in terms of positive regulation, and in terms of scaling is still a mixed bag. I think we are situated in Germany in our home market in a situation which is okay, this is why we're investing there. But if you look at the European level of regulation, that's a mixed bag still. So there very many good reasons to keep going in the US.

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Hannes Wittig, Deutsche Telekom AG - Head of IR [29]

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On your second question, you are surely referring to the two sets of free cash flow guidance that are out there. So we have the cash flow guidance for full year's CAGR of 10%, and that will get us to a number in 2018 that we have not yet disclosed. Today we have just guided for the 2017 number, and we have guided towards growth of 12% to EUR5.5 billion.

And separately the T-Mobile US, of course the earnings call has guided for a three-year CAGR of 45% to 48% over a three-year period, which takes them into 2019, but they have not been specific in terms of the trajectory how to get there. So I think we cannot really make calculations for 2018 out of just two sets of outlooks, but I think it's fair to say when we talk about 2017, we see a significant ramp-up in investments, which is more relevant for our German business and particular.

I think we are all completely aware of what drives it. And so in those terms, yes, there is a different cash flow trajectory in 2017 in Europe and in the US, but I think we cannot read anything in it for 2018, and it's nice to see that medium-term outlook for Deutsche Telekom is well supported by what T-Mobile US has guided for.

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Tim Hoettges, Deutsche Telekom AG - CEO [30]

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I like your question, it's very controlling like but let me make a clear statement here. We have many capital markets days, and we were very clear about 1% to 2% on growth on revenue, 2.4% on EBITDA, and a CAGR of 10%. Since that, in the third year in a row, we are over delivering on that one by double amounts. So I do not want to be semantic, but we have promised and we have over delivered on all these numbers.

And if we're giving you a guidance, with another 12% growth in our free cash flow for this year, we don't to that just hazardously, we do that by intention. We're very clear on that one, so we are very committed that we are even in the next year, we are able to deliver on this guidance, independent from all this mathematics, which is maybe playing to in this group.

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Hannes Wittig, Deutsche Telekom AG - Head of IR [31]

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Okay so our next question we have is from Guy Peddy at Macquarie.

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Guy Peddy, Macquarie Research Equities - Analyst [32]

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Probably another question for Hannes, I suppose. If you just talk little bit about domestic CapEx, and what pressures or are if there are any pressures you're getting to deepen your fiber build, especially to residential homes. This is obviously clearly a big issue that is impacting in the UK, and obviously very relevant for BT. And then on secondary, more for probably Tim, you've mentioned that BT remains a good investment, but during the course of the past year, you must have been shocked by the fact that there's been accounting scandals, management have slightly misread off com, management has slightly misread a restructuring of their assets, and therefore, they have suffered a big slowdown in some of the corporate enterprise and public sector customers. I'm just wondering why you think only BT at these levels is still a good investment, giving the past year's performance. Thank you.

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Tim Hoettges, Deutsche Telekom AG - CEO [33]

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Guy, it's Tim. The first thing, with regards to the domestic cap rates, and pressures. I think there's always the discussion going on that is our infrastructure well fit for the future needs? Are we sufficiently covering the population of Germany?

What is the right technology? And as you could imagine, there's some pressure as well, from [BRACO] and some association as well from my dear competitors, the Red ones especially, who are just always trying to tell me that our infrastructure is not good enough, compared to theirs, which honestly, I might understand from an advertising perspective.

The reality is different, the reality is that we have constantly increased our net add numbers in the German environment. Wherever we are opening up, the good vectoring or super vectoring services -- the moment the customers really like it, and they bind to that one, and you have seen the great numbers in the fourth quarter, which is heading -- we're doing pretty well in the competition against the cable operators at that point.

The second, there's no political pressure. The political pressure is on -- was that in the coalition agreement, 50 megabit for the entire society was a great quest. In Germany, let's say with vectoring and with the exclusivity of vectoring in the initial areas, we are able to support this political aim, with the technology we are deploying, and that is appreciated, because in the areas where we're building this, we're the only one who is really, let's say, servicing good quality.

Then there is this area where subsidies are paid for building out the very rural areas, so from 80% to 100% coverage. And in this area, the technology is mainly based on vectoring technologies, and in this areas, the percentage of Deutsche Telekom is significantly above 50%. So even in this area, people like to see us competing, and see the light of pitching for this money, otherwise they would not -- let's say, contribute it into our direction. So the intention to cover with our bandwidth service, as much of the German market, and that our telecom signal is available for all of the customers in Germany, is working out.

On top of that, in the last quarter we have hired a guy from the competition, Pruchnow, you might have known him from his Versatel or his Telefonica times. He has one task. He is the guy for the corporations, so whenever there's a corporation modem in a rural area, where we could jointly build out, or where we could jointly use an existing fiber infrastructure, we are willing to consider that.

There are already two deals which I'd like to mention to the community here. The first one is Innogy, who has made a cooperation with us, where we are using their fiber infrastructure, and the second deal is NetCologne, where we are cooperating. So there is more to come with regard to the build out of fiber in Germany, as well through this cooperation model, which is more efficiently. I think the discussion of the tone in which we have is something which might sometimes be irritating for you, but there's no pressure on us to further invest. We are the top investor with EUR5 billion in the German infrastructure, and we get a lot of appreciation as well, for the efforts we are taking here.

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Hannes Wittig, Deutsche Telekom AG - Head of IR [34]

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Just to clarify, the EUR5 billion referred to the geography in Germany, and that relates to the year 2016, so there's no confusion, especially now we have changed the segmentation. You have pretty clear CapEx outlook for the various units in our annual report. Let me also maybe add one word before we get onto BT. We have not guided for CapEx beyond 2018, as you know.

We have said we have guided now for 2017, otherwise we provide free cash flow guidance under going through 2018, in the way that we talked about earlier. But what is clear is that at some point, our FTTC deployment comes to an end, and there is some funds available, and I think it's directionally clear that our networks will get denser and denser, and we will keep investing fiber as we do now. We spend a lot of money on fiber every year, more than EUR1 billion, as you know. And this is a pot of money that can be used in different ways going forward, but we have not really guided beyond 2018, so it's too early to talk about that. And on BT, Tim?

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Tim Hoettges, Deutsche Telekom AG - CEO [35]

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Look, of course, we were surprised and disappointed by the BT's management recent profit warning, and the underlying developments. But we continue to believe that BT has a lot of good fundamental substance. I mentioned the positions in the British market earlier, and we continue to think that there's a lot of potential for collaborations between our two companies. So there is anyhow, a period of where we are, where we have a standstill here. I hope that especially the DCR situation is going to be solved soon, and then we will see the value enhancing, that is let's say, our prognosis here, and we believe BT is a good asset from our perspective.

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Hannes Wittig, Deutsche Telekom AG - Head of IR [36]

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Thank you Tim. Next would like to have your question, Nick, from Redburn.

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Nick Delfas, Redburn Partners - Analyst [37]

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Just two please, on the scrip dividends, could you talk little bit about why you continued with that? Shareholders who take the full divi being diluted by about 8% since 2012, and there's also a discrimination against the non-German domiciled shareholders. So why continue with that policy, rather than just pay the full dividend in cash?

The second question is about restructuring charges. I know Thomas, in the past, we have talked about when the restructuring charges might reduce, they're obviously still quite high in 2016. It looks like you need to transition the product set in T-Systems and there are 44,000 employees there. So really it's a question about duration of restructuring charges, and also how the cost per employee might evolve? Thanks very much.

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Thomas Dannenfeldt, Deutsche Telekom AG - CFO [38]

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Nick, on your first question on scrip divi, it's quite simple. First of all, let's just remind ourselves that both have developed well, the stock price and dividend development, number one. Number two is, we still see 50% roughly acceptance rate last year again, on the scrip divi, so there is obviously a part of share of the people who like it. And thirdly, its voluntary, it's not like were forcing someone into the stuff. So that's on scrip divi, and so it's a year-by-year opportunistic perspective we're taking here. It's not part of my planning, but as long as we feel there is a good development of stock price and divi and a high acceptance rate, we might go with it again.

On the restructuring charges, you are spot on. I have spoken about in the capital market days two years ago, with the expectation that it will go down and decline. 2016 was not exactly what I would call still high, it was record high, and there was a very specific reason. The government decided to end the voluntary early retirement schemes, and stop that scheme, and not to prolong it anymore.

So it was a last exit situation for those people who can't apply for. We decided then to use that specific situation and max out the volumes here, so that is why you see the peak in 2016. It was not related to T-Systems or any specific other business, was simply driven by that decision by the government.

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Hannes Wittig, Deutsche Telekom AG - Head of IR [39]

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Thank you, Thomas. The next question I would like to take from the webcast and it's from [Steve Markham at Verite]. The question is, would you be prepared to take your net debt over EBITDA to around 3 times, if the right deal emerged in the US? A question for Thomas.

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Thomas Dannenfeldt, Deutsche Telekom AG - CFO [40]

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First of all, the guidance we give on our rating and our leverage is based not on speculations on M&A, but on our plan and the structure we have right now. Whenever we assess opportunities, we take that into account. So that's an element of the equation, of assess it and nothing else.

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Hannes Wittig, Deutsche Telekom AG - Head of IR [41]

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Our language has always been that we remain committed to our ratings corridors, but we could temporarily depart from them, if there's a strong strategic logic, and that's how we still think about it. Next question from Ulrich at Jefferies.

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Ulrich Rathe, Jefferies International - Analyst [42]

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I have two questions, please. The first one is coming back on that free cash flow outlook. At the given FX assumption, you are essentially guiding for cash flow up $600 million year-on-year.

But if I look at the combination of EBITDA and CapEx, that is essentially guided down year-on-year by $200 million, so clearly there's something in between. And I understand you expect good working capital to do much of the difference. I was just wondering, could you comment on what's going on the working capital, if this carryover from things you did in 2016? Are these new initiatives? What are the sources for this, it would be my first question.

The second question is on the broadband chan in Germany. Mr. Hoettges explained that in the fourth quarter, you saw roughly 30% of market growth, you believe that 87,000 was maybe 30% of market growth, which implies that with your 40% share of the base, that you still lost share even with that 87,000 in adds.

I was just wondering when you guide for 2017 to essentially produce similar intake as 2016, that effectively means, I think, that you're guiding for further sure loss. I was just wondering how you think about share loss? Does it simply not matter because you're doing so well on fiber upgrades, or how you think about broadband share in total? Thank you.

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Hannes Wittig, Deutsche Telekom AG - Head of IR [43]

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On the first one, I think when you look at our free cash flow equation going forward, I think you could also just look at the EBITDA, and see that the EBITDA is going up, and the free cash flow is going up by a similar amount. Of course, otherwise, there a lot of moving parts, so yes, we're investing more.

When you then look at working capital, it's important to appreciate that while we expect improvement in working capital next year, we still expect a working capital drag next year. We expected a continued working capital drag, although we think it will be lower than in 2016. 2016, it was particularly strong, due to the very strong growth in the United States, plus the shift in the commercial model towards leasing, which has also been somewhat the factor here.

But the big picture is we grow free cash flow because we grow EBITDA, and I think that's how, what's the fairest way is of looking at it. At the same time, we are very happy that we can grow free cash flow while we invest more, and that will help us in the future.

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Tim Hoettges, Deutsche Telekom AG - CEO [44]

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On the broadband share in Germany first of all, last year was two very different halves of years. The first half was mobile dominated and fixed line wasn't very strong, whereas we improved significantly dynamics in the second half of the year, and we will keep going. The guidance we've given in total numbers, meaning the similar amount like we've seen this year, is obviously dependent on what the total market size will be. So the clear message is, we will go for 40%. Whatever the market size is, so we can think about what the market size is, but the clear message is, we're going to go for our fair share, we're going to use the momentum we have right now. The customer loves our product and we go for it, and if that means there needs to be a higher number in 2017 because the market is a little bit larger, we go for a higher number.

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Hannes Wittig, Deutsche Telekom AG - Head of IR [45]

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Thank you, Thomas. Next I would like to have a question from Fred at Bank of America Merrill Lynch.

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Frederic Boulan, BofA Merrill Lynch - Analyst [46]

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I'm going to try to follow up on the US before moving on. So first, you've moved away from your self-funding strategy last year. Just trying to understand whether you would consider going beyond that, and you commented on the US.

And secondly, you talked a lot about 5G in Barcelona. If you could a little bit with us your thoughts on the impact on your network, what CapEx can we think about, and whether you think DT will be better positioned versus a mobile-only provider, incumbents in general versus mobile, whether you will have access to third parties, and therefore as you suggested before, which will limit your ability to differentiate. Thank you very much.

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Thomas Dannenfeldt, Deutsche Telekom AG - CFO [47]

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So first of all, I'm going to start on the US, Fred. This is Thomas. Yes, moving away from self-funding last year was a clear commitment, an increase of commitment to the US for good reasons. When we started the journey it was highly cash flow negative, and after we've seen that the business has developed well, and was in a good territory, we decided to move away from the self0-fund. As you know, that does not mean that we complete it by 100%, but by a larger extent, are willing to support the US.

We're doing it always at arms-length perspective to ensure that the minority rights are covered well. But yes for sure, it means an increased commitment to the US. What we've seen and shown last year. As I said, we like the development of the business, we see there's a standalone path, and that's fantastic.

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Tim Hoettges, Deutsche Telekom AG - CEO [48]

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It's good doing it this way for the group and for the US. Now that said, on 5G, Fred, it was quite impressive to see that there's a lot of practical things happening now in this new technology, and Deutsche Telekom has been always part of the leading telecoms in the world on developing technologies. For instance, Bruno Jacobfeuerborn was heading the 5G standardization committee for that one.

After we have announced the strategic partnership with SK Telecom, and the intention behind was that we are strengthening the skills on 5G deployment, because SK is definitely one of the first in the world going to be launching 5G, because 2018 for the Olympic Games, they want to have a showcase for the worldwide community. We have been quite proud of showing a lot of loud around slicing, and around guaranteed latencies and guaranteed quality classes in the network, and we have been able to launch worldwide narrow band IoT service at the both in Barcelona.

That said you see that Deutsche Telekom and its community is working on a lot of things. The big drive test in Germany at the Autobahns in Bavaria is empowered by Deutsche Telekom. So I can tell you if it comes to the perception, I would say we're definitely leading the game here in our markets, where we are operating, and I see that as a differentiator definitely.

We will not release any numbers at that point in time. It's too early to say how this rollout is playing into the CapEx envelope, which we foresee, so it is part of the current planning of what we have, so nothing to worry that we are coming up with suddenly an increase of whatever we have, our envelope, are we investing more than our competition is doing?

Thank you for supporting all of us for this strategy. I think it paid out in the US, where we've invested more than $20 billion into the LTE infrastructure over the years, now we have a high-level pilot work with Verizon, a dream in the second is true for Germany, where we have invested heavily, now we're gaining the customers on the fiber side, and we are leading in eight out of our markets on the P3 drive tests, in the Eastern European rim as well, so I think that's the right thing going on, and give us some trust and some confidence that we are doing business well in the 5G environment.

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Thomas Dannenfeldt, Deutsche Telekom AG - CFO [49]

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Maybe add a few words also on the backhauling side, if your question was related to backhauling. What we're doing already in 4G is we're offering backhauling services for our competitors. This is not about a monopoly situation, this is quite simple.

As long as we have good commercial conditions and pricing, and not regulation telling us how we have to price our product, it's quite easy. There's nothing wrong with partly sharing your infrastructure was competition and gaining advantages from it. The other way around, it creates additional margins, and you always need to be careful, that's what we're doing is to be one or two steps ahead of competition, but there's nothing wrong with also partly sharing the infrastructure, as we do it in 4G, for fiber-based backhauling with competition as well.

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Hannes Wittig, Deutsche Telekom AG - Head of IR [50]

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Thank you, Thomas. Next I would like Mathieu from Barclays to ask his question.

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Mathieu Robilliard, Barclays Capital - Analyst [51]

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Thank you. First in terms of German EBITDA, you're guiding for growth. Could you maybe give us a little bit of granularity into the pluses and minuses driving that growth? How much could it be for revenues, or is it almost nothing? What is related to employees or structural costs, et cetera, et cetera?

So that's the first one. And the second one quickly, lots of questions in the past year have given some granularity in terms of what the elements that drive the SCS so maybe you could share that with us for 2017 in terms of for example restructuring costs that you anticipate at this time and maybe some of the other items? Thanks. Thanks.

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Thomas Dannenfeldt, Deutsche Telekom AG - CFO [52]

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This is Thomas, Mathieu. First of all, on the German EBITDA, there is basically, it's various bits and pieces. One is on the revenue side, you have seen we guided our CAGR, we've given for years was slightly above zero, plus 0.3, we are at minus 0.3, so there will be a little bit contribution from the revenue side.

But don't forget, I mentioned that a minute ago, we had a peak in our personal restructuring costs in 2016. That is obviously also driving the OpEx downwards, and giving us room to maneuver on the OpEx side. So there's a contribution by less personnel costs, driven by restructuring we've done last year, and those components add up altogether to the growth we guided in the German EBITDA side.

And the second question was? On the free cash flow -- the restructuring costs. First of all, on the restructuring costs we will see -- because you were talking to about free cash flow, there is always a difference between restructuring EBITDA and cash on the cash side. We will see decline of EUR200 million to EUR300 in this year versus last year, on the cash related to restructuring costs. Then more granularity, maybe the tax, the interest, and I've forgotten?

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Hannes Wittig, Deutsche Telekom AG - Head of IR [53]

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If you go interest, tax, and the received, it's a wash. So the main driver here is the plus EUR800 million we have on the EBITDA, and Tim, do you want to tell me something? It's the EUR800 million on the EBITDA and the lower restructuring costs.

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Tim Hoettges, Deutsche Telekom AG - CEO [54]

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Hannes, it's great to help you out here in this numbers, and the first time in this time. EUR22.2 billion is the adjusted EBITDA, minus EUR12 billion is the CapEx, the minus interest taxes and received dividends are of minus EUR2.7 billion. Then we have working capital of minus EUR0.4 billion, and then we have special factors on cash, which is minus EUR1.6 billion, makes the number of EUR5.5 billion.

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Hannes Wittig, Deutsche Telekom AG - Head of IR [55]

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It's good to have two highly competent leaders for this business, and now we have two more questions, and the first one is from Andrew at Goldman.

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Andrew Lee, Goldman Sachs - Analyst [56]

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And sorry if this is flogging a dead horse on the US. I just wanted to ask a strategic question in terms of the challenges that you might face in this market. Let's say the M&A has been announced over past few months were to be approved.

It's a clear shift towards convergence, and with 5G seemingly coming quicker according to the Mobile World Congress feedback, how does that impact your view on your position as a kingmaker asset? The importance of being convergence you, and the timeline in which you have to make a decision on what you do there?

And just secondly on the B2B side again, it's been asked a lot, but I just wanted to ask a fundamental question on T-System or BT's B2B operations, or just fundamentally. These assets are very difficult for us to analyze.

And in the past, it looks like there have been low barriers to entry, low marginal cost to entry from your competitors, and therefore a lot of pricing pressure. As you move onto this new cloud on ICT platform based world which you mentioned, it looks a little bit like the software as a service and platform as a service revenues can be done by many other players.

So why isn't that a more difficult set up for growth, and hence, as much if not more pressure on the top line, that means you are just going to have to slash costs to stand still. Any help in how you think about it structurally would be really useful. Thank you.

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Hannes Wittig, Deutsche Telekom AG - Head of IR [57]

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Look, first it would be an understatement to say that we are delighted with the T-Mobile US stand alone performance and the execution which is taking place with all the money which we've invested there. We have created here just over the last years a unique position, and it's not so easy to just copy that, as you have seen out of the developments. Along the way, there were many decisions for us to take, and I think we were always so far right, what be did and what we didn't consider. There were offers in the market from some French guys, and the like, remember where we did the right thing of just ignoring it.

Now, there is something in your question which I cannot at least confirm, that there is a clear tendency towards convergence. I'm the biggest fan of convergence, and we are driving convergence very intensively, but I do not see that in the US market yet. So maybe I'm missing something, but so far it has been combination of cable operators to cable. It has cable to content or tech mobile to mobile, but I haven't seen fixed mobile converged tendencies here. That said, if this tendency is there, might be good for consolidation.

We've created a business, we have had a lot of organic and inorganic opportunity in this environment, we have created huge opportunities. And for us, there's no rush, there's no need to rush into anything, to do something. We will evaluate any opportunity now from a position of strength, and our primary goal is to create even more value of our shareholders. The value we have created since 2013, it's just $25 billion, only to give you the magnitude of this 400% increase, and I hope we have some trust to do and consider the right things here.

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Tim Hoettges, Deutsche Telekom AG - CEO [58]

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A few words on the B2B side question on our thinking. First of all, I think we need to be careful in terms of comparing T-Systems and BT Global Services in terms of the same box we're talking about. It's not.

Where we basically struggle with, in terms of profitability is the IT outsourcing business, to a huge extent, especially if you look at the full impact you've seen and the lack of scale on the telco side, and exactly not what BT Global Services lacks. You've seen that by the deal or the cooperation which was announced yesterday, that they are looking for our -- the value we can add in that partnership on SFP Cloud Services meaning IT, they don't have that in that extent, and we're using more there, better available worldwide telco infrastructure.

So it is not the same issues here. It's different, but in principle what I can tell you is moving away from IT outsourcing basically means you take over a complex legacy IT infrastructure of a big company, and you restructure it.

And obviously, whenever you do that, you have big risk, because it's big. Very specific legacy base deal you have. And that's different to a cloud service you build up in a very lean way.

The way we build it up is very much along global partners and partnerships we are doing. And what we are basically doing here is, we use the best partners we can get in there, and combine it with all the strength. So talking about a German cloud doesn't mean there is a specific level of trust we have for the business customers, not only here in Germany, but in the wider scale here.

Creating that perfect set up of the ingredients we can bring and partners can bring in, without creating huge risk profiles in that business, and without creating another type of legacy. That is what we are aiming for and what is working already well to mention that, for instance [Market Book B] is one example of that German cloud-based thing. We're expanding it because there is demand, so we're going to go there.

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Hannes Wittig, Deutsche Telekom AG - Head of IR [59]

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Excellent. So the last question for today is from Justin at Credit Suisse.

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Justin Funnell, Credit Suisse - Analyst [60]

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It's another -- trying to get a bit more color on your thinking on the US. Thinking about the 2.5 gigahertz band that Sprint has. Obviously, they've got a very wide band there. There's some technologies that have been announced that would in theory make that band more valuable, but it creates a band that's been that used very much in Europe, even though most operators have already got it.

Is there any thinking you can share about how you think about that spectrum band? How available is it? And then secondly you show the uptake, again, trying, on your customer base, you got pretty reasonable uptake on your mobile contract base, but only 15% on your broadband business.

It looks like you're selling it to your existing mobile base, rather than using it as a acquisition tool. Is that right? And could you actually get to the point where you start to use it as an acquisition tool at some point in the mobile market? Thank you.

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Tim Hoettges, Deutsche Telekom AG - CEO [61]

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Look, Sprint is clearly making its own strategic and technology choices, and is working to make its network more competitive, so some of these bets may work out, others maybe not. So it's definitely something else, and then with the industry does and what we are doing. And when it comes to us, we think we will materially benefit from investments in spectrum and network that we have consistently made over the last years.

Just think of our low band spectrum 5x4 MIMO, thank about volatility, single run. We are a global industry leader, and we have always been able to drive tangible network improvements, which we're developing across the globe, as well as in the US. So if you would ask me, this is helping maybe Sprint to become a denser network, fine for them.

But we have already built this dense network, and these guys are investing something like $2.5 billion where we are investing significantly more, and not only in one year, so it's was two times higher, and therefore our network is definitely only better, it is even more common. Let's see how that their comments, their strategy is not our strategy, and I should not comment on that. and that, to Matt.

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Thomas Dannenfeldt, Deutsche Telekom AG - CFO [62]

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Justin, your question on MagentaEINS, I think what we have seen there, and what we see there is basically what we have expected, meaning that mobile contract customer share in MagentaEINS bundles is higher than the fixed line side, for various reasons. Number one, what I like to do is remind ourselves that in 2010, when we merged the fixed line and mobile side in Germany, we started with cross-selling, which is a pre-phase of MagentaEINS products.

And we have seen exactly the same dynamics. Obviously, mobile is ramping up much faster and is growing faster in terms of the adoption rate for various reasons. Number one is, you have various sim cards in a household, but you have one access on the fixed line side, normally. Some people have two, but normally have one.

That's not true for the mobile side. And then switching on mobile is so to say the exit or entry barrier is lower, so there's a fast adoption rate in there. So what we have seen from 2010 to 2015, when we did cross-selling but no converged products, what exactly the dynamics, I think it's natural that fixed line is somehow lagging behind. But on the other hand, you're right, it's an opportunity looking forward.

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Hannes Wittig, Deutsche Telekom AG - Head of IR [63]

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Thank you Thomas. I think that was the last question for today and the conference call is now about to end. So we had long Q&A today, so we will not continue to elaborate, and should you still have further questions, then we would like you to contact us at the investor relations department. And with that, I give back to the operator.

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Operator [64]

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Thank you. We would like to thank you for participating in this conference. A recording of this conference will be available for the next seven days by dialing 1805-2047088 via reference number 500972#. We're looking forward to hearing from you again. Goodbye.