Expectations for the operating segments

GERMANY

We are currently implementing a comprehensive transformation program for our Germany operating segment and our aim is to largely conclude this program by the end of 2018. Our goal is to secure our position as the leading integrated telecommunications provider in the German market by providing innovative and competitive products and services.

The organizational structure of the Germany operating segment changed as of January 1, 2017, with control of DFMG (Deutsche Funkturm) passing from that operating segment to the newly established Group Development operating segment.

In the fixed network, we want to offer the best customer experience with fiber-optic products. We are paving the way for this with our integrated network strategy. We are building an IP-based network with high transmission bandwidths so that, in the future, we can offer our customers competitive high-speed lines, e.g., by migrating our VDSL network to vectoring technology. In addition, we are investing heavily to offer greater coverage and even higher speeds in rural areas as well. We are also using innovative products for this purpose – like our hybrid router, which combines the transmission bandwidths of fixed-network and mobile communications, thus enabling much higher transmission speeds. 9

In 2014, we were the first provider in Germany to market an integrated fixed-network/mobile (FMC) product: MagentaEins. We have gradually added new products to this range, such as an FMC offering specifically for our business customers. When designing our products, we pay particular attention to high quality and a simple rate plan structure. In addition, our multiple-brand strategy in mobile communications allows us to address the entire customer spectrum – from smart shoppers through to premium customers.

We want to secure an ever larger share of the growing TV market. To this end, we are investing in our IPTV platform and winning new customers with attractive content and services. As part of our IPTV strategy, we offer appropriate TV services to our wholesale partners and the housing sector.

In both mobile communications and the fixed network, we want to remain the market leader in Germany in terms of revenue. As our customers’ demand for bandwidth is constantly growing, we intend to continue investing extensively in broadband networks, innovative products, and customer service. Our success in this area has proven us right: Our broadband revenues are constantly growing and customer satisfaction levels, too, are on a positive trajectory. We now want to cement these two positive trends. “Progress through digitization” will be one of the drivers of this development.

Overall, revenue in our Germany operating segment should stabilize in 2017 – despite the strong impact of regulation on our core business. We also expect to see a substantial increase in both broadband and TV revenues, and IP offerings as well as growth in business customer operations. The positive trend in IT and cloud business is expected to continue, making up for the ongoing negative trend in fixed-network telephony and text messaging. We want to continue expanding our fiber-optic services, both by means of business models with wholesale products (such as the contingent model) and through further partnerships, e.g., in the housing sector. Further, we want to provide new services for our customers in collaboration with partners.

We expect to see a slight year-on-year increase in revenue in 2018. We want to continue consolidating our position as market leader in the mobile and broadband area. Thanks to the outstanding quality of our network and the progress being made in fiber-optic roll-out, we anticipate greater demand for mobile and broadband products as well as substantial growth in the number of broadband, TV, IP, high-speed, and hybrid lines. We would like to continue offering best customer experience with integrated services (e.g., MagentaEins), and with digital products and service experiences. Our IT and technical service revenues should help feed this trend. In addition, we want to make advances with the smart home business and offer further M2M and security services. We expect growth in cloud services to continue. Wholesale business revenue should stabilize thanks to strong demand for our contingent model.

We expect adjusted EBITDA in our Germany operating segment to increase slightly in 2017 and again in 2018, accompanied by a steady improvement in margins. Growing revenues as well as savings in indirect costs – especially from a reduction in shared functions and from increased productivity – will be the main factors in this trend. On the basis of the new Group structure as of January 1, 2017, we are forecasting an adjusted EBITDA margin of around 39 percent in each of the next two years.

Our course is set for innovation and growth: While we will continue to promote investments in new technologies with even greater intensity in the future, we are reducing investments in legacy systems. The focus of our capital expenditures in the coming years will thus fall on our network infrastructure and our mobile network (e.g., FTTC, super vectoring, FTTH, 4 x 4 MIMO, 5G). At the same time, we want to roll out our fiber-optic network, also in areas near local exchanges, e.g., on the back of the “More broadband for Germany” initiative. We intend to participate in funding programs – such as the German government’s program for broadband expansion – and continue the efficient migration to IP and BNG. Hence we expect cash capex to increase in 2017 and then to decline slightly in 2018. The progress made in our investment program should lead to lower capital expenditure in subsequent years.

USA

In 2017, T-Mobile US will continue to execute on its Un-carrier promise to deliver the best value experience in the U. S. wireless industry. Key elements of the Un-carrier promise include delivering distinctive value for consumers in all customer segments by eliminating customer pain points and providing excellent 4G/LTE services through a strong mid-band spectrum position supplemented by low-band spectrum in key metropolitan areas and a nationwide fourth-generation LTE network. Additionally, the Un-carrier initiatives focus on attracting and retaining a loyal customer base by offering devices when and how customers want them, and plans that are simple, affordable and without unnecessary restrictions to deliver the best value in wireless.

T-Mobile US expects continued strong increases in branded postpaid customers in 2017 and a further increase in 2018. In branded prepay customers we expect a continued increase in 2017 and 2018. However, competitive pressures and unforeseen changes in the wireless communications industry in the United States may significantly affect the expected ability to attract and retain branded postpaid and prepay customers.

T-Mobile US expects a strong increase in total revenues in U. S. dollars in 2017 and a further increase in 2018. Revenue is expected to be positively impacted by continued customer growth momentum.

For 2017 and 2018, T-Mobile US expects an increase – in U. S. dollars – in adjusted EBITDA. As a result of the significant growth in customers over the past year, revenue growth is expected to outpace increases in expense. Additionally, T-Mobile US expects continued focus on cost saving initiatives.

However, continued investment in the network and increased spending for marketing of the T-Mobile US brand will likely impact adjusted EBITDA. Competitive pressures may also significantly affect expected revenues and adjusted EBITDA in U. S. dollars. Exchange rate fluctuations may significantly affect revenues and adjusted EBITDA in euros in 2017 and 2018.

Excluding expenditures relating to spectrum, T-Mobile US expects higher cash capex in U. S. dollars in 2017 and beyond as it continues to expand its 4G/LTE network.

EUROPE

The organizational structure of the Europe operating segment changed as of January 1, 2017. Operational management of the Netherlands subsidiary was transferred to the Group Development operating segment, while the new Board department Technology and Innovation, which will be reported on in the Group Headquarters & Group Services segment, assumed responsibility for the GNF (Global Network Factory) and Group Technology units, and the Pan-Net companies.

In some footprint countries of our Europe operating segment, the situation on the market remains difficult. We nevertheless want to defend our strong market position and expand it where possible. In the case of our integrated companies, our approach depends on the position of the respective company in its market: We are thus working to consolidate our market leadership in the fixed network and in mobile communications, or using our strong position in the fixed network to strengthen our mobile business with convergent products. We want to systematically transform our mobile-centric companies into integrated enterprises.

On our way to becoming Europe’s leading telecommunications provider, we will continue to rely on our technology leadership over the next two years. With its pan-European all-IP network (Pan-Net), Deutsche Telekom has created a simplified, standardized network for the centralized and efficient production of innovative services for all the countries in the region. This network requires all our subsidiaries to migrate to IP and, at the end of 2016, Hungary became the fifth national company in our Europe operating segment to all but complete this process. 9

We want our customers to benefit, too, from shorter times to market for new and innovative services. Pan-Net went live at the end of the reporting period. It will put us in a position to create a digital product portfolio, including applications for simple, seamless connectivity – whether users are at home or on the move. We are also enhancing our communications services with new and innovative elements, e.g., state-of-the-art messaging, voice, and video services.

Revenue from our TV and entertainment services continued to grow steadily in the 2016 financial year. A successful content and product campaign is in place to secure our strong market position in Greece despite the economically challenging situation there. Over the next two years as well, we expect our subsidiaries to post further revenue growth in the TV segment. An important measure implemented in 2016 to enhance future efficiency and growth was the establishment of a stronger, centralized content and product team. Our international team will negotiate, for example, key international media rights in the future. In addition, we intend to combine our product development activities so as to be able to implement new and additional functions in our TV markets faster and more cost-effectively. There will also be a stronger focus on factoring existing customer wishes into product development. That includes, for instance, the enhanced presentation of our content via a new, more intuitive user interface as well as easy access to all relevant TV content regardless of location, time of day, or device.

One aim of our integrated network strategy is to make further advances in the fiber-optic roll-out in our fixed network. Our strategy in Greece has been to focus on rolling out optical fiber up to the street cabinets, complemented by vectoring technology as from 2017. In the other integrated companies, we have been investing in the FTTH roll-out for a number of years now, and plan to continue doing so in combination with FTTC and vectoring. Our target is for the integrated national companies to provide 50 percent of households with FTTx at speeds of up to 100 Mbit/s.

We also want to fulfill our customers’ desire for more mobile bandwidth, which is why we plan to take part in further spectrum auctions in the years ahead. Our investments in mobile communications are focused on two areas: expanding LTE reach and implementing LTE Advanced technology in order to increase network capacity. This will make transmission rates of over 300 Mbit/s possible. In 2016, we succeeded in covering 84 percent of the population in the countries of our Europe operating segment with LTE and are thus well on track to achieve our goal. By 2018, we also want to achieve network coverage of between 75 and 95 percent in further countries. 5G, the next mobile standard, is within reach. Initial tests with 5G-precursor LTE Advanced pro (4.5G) have been successfully completed in Austria, Croatia, Greece, and Poland.

We have continued expanding our portfolio for business customers, adding high-performance ICT and cloud services. Our MagentaOne Business brand, in particular, was positioned in the European subsidiaries and marketed with considerable success. In the future, too, we will remain focused on this portfolio of convergent products, which unite the fixed network, mobile communications, and cloud applications. This offers additional customer benefit in the area of security and intelligent collaboration, especially when assisting small and medium-sized enterprises with the digital transformation. We also intend to intensify our efforts to position ICT and M2M/IoT networking, which got off to successful start in the reporting period. This will increasingly target and support Smart Cities initiatives in municipalities in Central and (South-)Eastern Europe. 11

In the next two years, we expect to acquire more customers in our Europe operating segment, with the successful launch of the MagentaOne convergence brand contributing toward this growth. As a consequence, we expect the number of TV and broadband lines to rise in 2017 and 2018. The number of mobile customers is likely to decline slightly year-on-year in 2017. This is primarily attributable to the prepay registration regulations the regulatory authority in Romania plans to introduce in 2017 – without these new regulations, the number of mobile customers would likely remain stable year-on-year in 2017. The number of mobile customers should rise again in 2018. Voice telephony in the fixed network is likely to be replaced more and more by mobile communications, a trend that should again have a negative impact on fixed-network business in the next two years. We consequently expect the number of fixed lines to remain stable in 2017 and to decline in 2018.

Changes in legislation, for example regarding taxes and duties, and national austerity programs may have a negative impact on our revenue and earnings in the next two years. As was the case in the prior year, developments in the fiscal situation in Greece could have an adverse effect on our revenue, earnings, and our ability to invest in this national company. Changes in exchange rates could also affect our earnings on a euro basis.

On the basis of these assumptions and parameters, we expect revenue in our Europe operating segment to decline slightly in 2017 – on a like-for-like basis, i. e., based on the pro-forma figures for 2016. This presupposes constant exchange rates, certain assumptions as regards regulation, market players and spectrum auctions, and an unchanged organizational structure. We expect revenues to stabilize in 2018. As mentioned, we plan to maintain our high level of investment in our integrated networks through 2017 and 2018 – which will keep the development of cash capex stable.

Vigorous competition in the markets of our operating segment could potentially put pressure on our margins. To be ready for such an eventuality, we want to enhance our productivity and cut our indirect costs. We expect to post adjusted EBITDA of around EUR 3.7 billion in 2017, i. e., slightly below the prior-year level, and to see a slight increase in 2018.

SYSTEMS SOLUTIONS

In line with our Group strategy, we want to “lead in business.” As part of our transformation program of recent years, we divided our operational organization into three divisions: the IT Division and the TC Division, which are responsible for traditional IT and telecommunications services, and the Digital Division, which is clearly focused on new growth areas like the digital transformation and the Internet of Things. We also finished setting up the Telekom Security unit in 2016. Our aspiration with this unit, which began operating on January 1, 2017, is to become the market leader for cyber-security. Even though we have largely completed the restructuring initiated by our transformation program, we are still in the transformation phase.

We are among the top providers in the European IT market. Our very high levels of customer satisfaction are a key element in maintaining this position in the long term and in taking us a step closer to our goal of becoming the No. 1 in cloud computing by 2018.

Although cost pressure remains high, our aim is to achieve profitable growth with traditional IT services, systems integration, and outsourcing. On top of that, we are successfully differentiating ourselves from our competitors in more and more business areas. We are building on our lead in the digital economy and also relying increasingly on platform business and scalability. Partnerships are the core element of our growth strategy. By building out our networks, we can offer international, integrated connectivity and shape the digital transformation of key industries with new business models – as new cloud services and our comprehensive cloud portfolio underscore. Together with our partners we have created a cloud ecosystem, which brings together state-of the-art technical products from global market leaders and specialist providers on our platforms. We have also expanded our portfolio of dynamic services: Customers can book infrastructure, SAP applications and much more as needed and pay only for what they use. We already have 50 partner companies that market their products together with us. The corresponding services are made available from our high-security data centers, such as the one in Magdeburg/Biere. Magdeburg/Biere is one of the few data centers in the world from which competing cloud providers offer their services – and that gives us is a clear competitive edge.

We want to expand our international telecommunications business with business customers. On our way to becoming Europe’s leading telecommunications provider, we are concentrating on customers in Germany, Switzerland, Austria, Spain, Scandinavia, the United Kingdom, the Netherlands, and Belgium. Our TC Division is expanding its sales in these countries and extending our range to include innovative services such as Managed LAN, Unified Communications, and IP VPN. We also want to win over customers internationally with consistent offerings, new products, and competitive prices – and all-IP migration and cloud services offer the best opportunities to achieve this.

As of January 1, 2017, we changed the structure of our Group. The main reason for the change was the transfer of Telekom IT from our Systems Solutions operating segment to the Group Headquarters & Group Services segment. On a like-for-like basis, i. e., based on pro-forma figures for 2016, we expect revenue and adjusted EBITDA (around EUR 0.5 billion) for our Systems Solutions operating segment to remain stable in 2017 and order entry to grow, due to the ongoing transformation. In 2018, we expect order entry and revenue to increase at segment level, and we expect adjusted EBITDA to rise as a result of increased profitability, in both cases compared with the prior year.

GROUP DEVELOPMENT

The Group Development operating segment was established on January 1, 2017. We expect to see a stable revenue trend in this operating segment in 2017 and 2018. Adjusted EBITDA is anticipated to remain stable in 2017, coming in at around EUR 0.9 billion. We expect the stable development in adjusted EBITDA to continue in 2018. The competitive situation in the Netherlands remains challenging. Here we are pursuing a new strategy to stabilize the downward EBITDA trend, which continued in 2016. The key elements of this strategy are a repositioning of the core brand T-Mobile and more efficient management of costs. Further, we completed the acquisition of Vodafone’s fixed-network business in the Netherlands in December 2016. While this will enable us to enter the market for fixed-network and convergence products, it will also entail a considerable amount of integration work.

An increase in capital expenditure for networks is likely to support implementation of the strategy for T-Mobile Netherlands in 2017. In the coming years, we also expect capital expenditure to increase at DFMG, primarily due to the ongoing build-out of Telekom Deutschland’s mobile network. After the high levels of capital expenditure in the Netherlands in 2017, the corresponding figure in 2018 should be lower.

GROUP HEADQUARTERS & GROUP SERVICES

In 2017 and 2018, we plan to continue our cost-cutting measures and further optimize our processes and structures in the Group Headquarters & Group Services segment. The resulting savings will enable us not only to offer services to the other segments in a more cost-effective manner, but also to make a contribution toward improving earnings. Following establishment of the Board department Technology and Innovation on January 1, 2017, which unites our cross-segment network, innovation and IT activities of the units Global Network Factory, Group Technology, and Pan-Net (from our Europe operating segment) and Telekom IT (from our Systems Solutions operating segment) are being transferred to the Group Headquarters & Group Services segment. In 2017 and 2018, the Board department Technology and Innovation is likely to post ongoing IT development expenses in Germany as well as additional expenses and further capital expenditure for the development of innovative business ideas. In addition, there will be costs for the ongoing establishment of centralized production platforms as part of our Europe-wide Pan-Net project. Part of these expenses will be offset by synergies from the creation of the new Board departments and by positive effects of the restructuring on earnings.

1 The forecasts contain forward-looking statements that reflect management’s current views with respect to future events. Words such as “assume,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “could,” “plan,” “project,” “should,” “want,” and similar expressions identify forward-looking statements. These forward-looking statements include statements on the expected development of revenue, EBIT, EBITDA, adjusted EBITDA, ROCE, cash capex, and free cash flow. Such statements are subject to risks and uncertainties, such as an economic downturn in Europe or North America, changes in exchange and interest rates, the outcome of disputes in which Deutsche Telekom is involved, and competitive and regulatory developments. Some uncertainties or other imponderabilities that might influence Deutsche Telekom’s ability to achieve its objectives are described in the section “Risk and opportunity management” and the “Disclaimer”, at the end of the Annual Report. Should these or other uncertainties and imponderabilities materialize or the assumptions underlying any of these statements prove incorrect, the actual results may be materially different from those expressed or implied by such statements. We do not guarantee that our forward-looking statements will prove correct. The forward-looking statements presented here are based on the future structure of the Group, without regard to significant acquisitions, disposals, business combinations, or joint ventures that may arise at a later date. These statements are made with respect to conditions as of the date of this document’s publication. Without prejudice to existing obligations under capital market law, we do not intend or assume any obligation to update forward-looking statements.