Highlights in the 2016 financial year

BOARD OF MANAGEMENT

As of January 1, 2017, the Deutsche Telekom AG Group Board of Management was extended to include the additional Board department Technology and Innovation, headed by Claudia Nemat. Srinivasan (Srini) Gopalan joined the Board of Management as of January 1, 2017 as the member responsible for Europe. The Supervisory Board of Deutsche Telekom AG approved this decision in its meeting on June 30, 2016. The number of Board of Management members has thus been increased from seven to eight.

EMPLOYEES

On April 13, 2016, we and the ver.di union agreed the terms for a collective agreement for the following companies: Deutsche Telekom AG, Telekom Deutschland GmbH, Deutsche Telekom Kundenservice GmbH, Deutsche Telekom Technischer Service GmbH, Deutsche Telekom Technik GmbH, and Deutsche Telekom Regional Services and Solutions GmbH. The new collective agreement provides for salaries to increase with retrospective effect by 2.2 percent as of April 1, 2016 and by a further 2.1 percent as of April 1, 2017. Lower salary bands increased at the higher rate of 2.6 percent as of April 1, 2016. The agreement took effect on February 1, 2016 and runs for two years.

In the collective negotiations for T-Systems in Germany, we reached an agreement with ver.di on June 15, 2016. One of the points agreed was to increase salaries under the collective agreement by 1.0 percent, and in the lower salary bands by 1.5 percent, as of July 1, 2016, and by a further 1.5 percent as of April 1, 2017. The agreement took effect retrospectively on April 1, 2016 and runs for two years.

Both collective agreements exclude compulsory redundancies until December 31, 2018.

DIVIDEND

In 2016, we once again offered our shareholders the option of converting the dividend for the 2015 financial year into shares instead of receiving it as a cash payment. The acceptance rate stood at almost 41 percent of dividend-bearing shares, which means this option was taken up for some 1.9 billion shares. With a subscription ratio of 26.7: 1, this resulted in the issue of around 70 million new shares. Shareholders who did not choose this option received a cash dividend, which amounted to around EUR 1.5 billion in total. We are considering offering our shareholders this choice again for the 2016 financial year.

CORPORATE TRANSACTIONS

After the British Competition and Markets Authority (CMA) had approved the sale of the EE joint venture to the UK company BT unconditionally and without remedies in January 2016, we and the French telecommunications provider Orange consummated the transaction on January 29, 2016 at a purchase price of GBP 13.2 billion. In return for our stake in the EE joint venture, we received a financial stake of 12.0 percent in BT and a cash payment of GBP 15.7 million.

In December 2016, we agreed to sell our hosting service provider Strato to United Internet AG for a purchase price of around EUR 0.6 billion. We expect the transaction to close in the first half of 2017. Payment of most of the purchase price is to be made immediately after closing. Until this date, our stake in Strato will be reported in the consolidated financial statements under non-current assets and liabilities held for sale. The sale of Strato is in line with our strategy of developing other options for increasing the value of business areas that can no longer be adequately developed within the Group, through partnerships or disposals.

In April 2016, we placed approximately 2.6 million shares in Scout24 AG at a price of EUR 30.00 per share. In another book-building process in December 2016, we brought 1.8 million shares to market at a price of EUR 32.00 per share, with gross proceeds of EUR 0.1 billion in total. Following the transactions, we continue to hold directly and indirectly approximately 10.2 percent of the total number of shares of Scout24 AG. Due to the continued significant influence on Scout24 AG’s finance and operations, we continue to include the remaining stake in this company in the consolidated financial statements using the equity method, reporting it under the Group Headquarters & Group Services segment in the reporting year.

BOND ISSUANCES

Under our debt issuance program, we placed euro bonds totaling EUR 4.5 billion in March 2016, followed in April 2016 by a fixed-interest euro bond with a volume EUR 0.5 billion, and in October 2016 by a fixed-interest GBP bond of GBP 300 million. In September 2016, we also placed separate U. S. dollar bonds with a total volume of USD 2.75 billion. All bonds were issued by Deutsche Telekom International Finance B. V. with the guarantee of Deutsche Telekom AG. The issuances form part of our general corporate financing and did not increase the level of our net debt. For further information on the issuances, please refer to the section “Development of business in the Group”.

FINANCING RELATIONSHIPS

In order to optimize the financing terms and conditions for our subsidiary T-Mobile US and thus also those for the Group, we provided T-Mobile US with a 3-year partially secured credit line of USD 2.5 billion and a secured loan of USD 660 million in December 2016. Together with the temporary loan commitments for up to USD 4.0 billion, which were made in March and April 2016 and run until the end of May 2017, Deutsche Telekom AG provided its subsidiary T-Mobile US with a total funding framework of more than USD 7 billion as of the reporting date. This does not increase the Group’s net debt. For further information on our financing relationship with T-Mobile US, please refer to the section “Significant events after the reporting period”.

INVESTMENTS IN NETWORKS AND NEW SPECTRUM

  • In 2016, T-Mobile US acquired spectrum licenses from a number of competitors for a total of around EUR 1.7 billion. Swap arrangements were also consummated with competitors in the reporting year; giving rise to a total non-cash gain of EUR 0.5 billion. In September 2016, T-Mobile US agreed the swap of spectrum licenses with a competitor. The spectrum licenses to be exchanged in the value of EUR 0.1 billion were reclassified to non-current assets and disposal groups held for sale. The transaction is expected to be closed in the first half of 2017.
  • At the spectrum auction in Poland which ended in October 2015, T-Mobile Polska was the highest bidder, acquiring spectrum of some EUR 0.5 billion, which was paid at the beginning of February 2016. In June 2016, T-Mobile Polska acquired additional mobile spectrum for around EUR 0.5 billion. This was offered to our subsidiary by the Polish regulatory authority UKE after the highest bidder had declined to accept the spectrum. T-Mobile Polska was offered the spectrum for purchase as the second highest bidder in accordance with the rules of the auction. Payment was made in July 2016.
  • Work to expand Europe’s largest data center in Biere near Magdeburg began on schedule in June 2016. It is expected to be put into operation after only two years of construction – in time to serve the increasing demand for secure and reliable cloud services and further cement our market leadership in Europe. We expect the investment for the expansion in Biere to be in the three-digit million range. 13
  • For the new age of telecommunications, as part of our “Leading European Telco” Group strategy, we are working towards a pan-European production model with an IP-based infrastructure. We laid the foundation for this in August 2016 with the commissioning of our first production sites in the Hungarian capital of Budapest; two more will be set up in Poland and Greece in 2017. These production sites will provide services like voicemail, text messaging, and e-mail for all our European subsidiaries in the form of product modules. Each subsidiary can assemble these modules tailored to the needs of their respective market. In this way, the set-up of our pan-European network ensures long-term competitiveness on our markets while at the same time creating synergies throughout the Group.

INNOVATION

  • We proved our technology leadership once again in the reporting year. In particular, we reached milestones in the development of the new 5G standard and in narrowband communications. At the Mobile World Congress in Barcelona, for example, we unveiled the world’s first end-to-end 5G system: with a latency of less than a millisecond – a technical record and a major step towards achieving genuine real-time applications such as self-driving cars or remote medical surgery.
  • In October 2016, we introduced the world’s first end-to-end system for narrowband communications (Narrowband Internet of Things – NB-IoT) in our networks in Germany and the Netherlands. One of the first applications is an innovative parking system we developed together with our partner Huawei. The sensors installed in parking spaces communicate with drivers via an app, directing them to empty spaces. The narrowband technology allows the use of low-energy, cost-efficient sensors and thus is ideal for flexible use in all sectors of the industry and economy. 9  For further information on our innovations, please refer to the section “Innovation and product development”.

PARTNERSHIPS

“Win with partners” is one of the four areas of operation in our Group strategy, and it underscores just how important collaboration and partnerships are for the success of our Group. We have successfully partnered with key players for many years, including Apple, Samsung, and Microsoft. We again entered into and expanded a large number of partnerships in the reporting year. We would like to present some of them in detail:

  • At the end of February 2016, we entered into a strategic partnership with South Korea’s largest mobile telecommunications services provider, SK Telecom. The shared aim is to further expand our performance potential as industry leaders, so as to create additional customer benefits. Our collaboration covers in particular the areas of media and IoT platforms. The partnership is also driving forward the development of 5G technology. We managed to win SK Telecom as a committed partner for the Next Generation Enterprise Network Alliance (ngena) initiated by us.
  • At the Hannover Messe in June 2016, where we exhibited under the motto “Digitization. Simply. Make it happen.”, we expanded our alliance to drive the progress of the industrial Internet. We agreed to collaborate with Huawei to open up the IoT mass market for hardware and sensor technology. We are expanding our longstanding collaboration with the German Research Center for Artificial Intelligence (DFKI) to make it possible to promptly incorporate the latest scientific and research findings into our in-house product development processes. For industrial data analysis, we intend to work with GE Digital, a subsidiary of the U. S. industrial group General Electric (GE), and use their Predix cloud platform. We want to work with GE Digital to drive forward digital innovations in industrial segments like production, transport, energy, or healthcare.
  • Our business customer arm T-Systems and the energy management company Eaton have been pooling their IoT expertise since November 2016. Together we want to offer small and medium-sized mechanical and plant engineering companies secure IoT solutions for networking their systems in the cloud. Eaton provides an automation component that ensures easy connection to our multi-IoT platform. This will enable mechanical engineering companies to monitor and maintain entire facilities directly from the cloud and, thanks to intelligent data analysis, to improve their productivity. 8
  • When digitizing critical business processes, sustainable quality is crucial. Our Zero Outage quality program aims for stable ICT operation and the highest possible level of customer satisfaction. We have been further developing this vision since 2016 in our global partner ecosystem together with other big names from the ICT industry and have set up a Zero Outage Industry Standard association: We have defined an industry-wide, cross-company standard for IT quality, which we now plan to establish with all partners.
  • T-Systems, Daimler and DKV EURO SERVICE are working to establish a partnership for the development and provision of a European Electronic Toll System (EETS) throughout all of Europe. For marketing the EETS services and handling toll collection vis-à-vis end customers, the joint venture parties intend to integrate the services of sales and marketing partners. The intended technical basis for the planned services is an on-board unit that can be used internationally to enable billing of toll charges Europe-wide with a single device.

NEW DEALS WITH CORPORATE CUSTOMERS

We continued our streak of success in cloud services in the reporting year. But we also succeeded in concluding, extending, and expanding various contracts in other areas in Germany and abroad. Examples of new corporate customer contracts:

  • At the end of May 2016, T-Systems concluded an agreement with ITSCare, the IT service provider for the AOK health insurance fund for Baden-Württemberg, Hesse, and Rhineland-Palatinate/Saarland. This triple-digit-million, multi-year deal covers the centralized operation of the IT infrastructure with data center and network services, as well as decentralized services like service desk and workplace services.
  • The Austrian highway operator ASFINAG has commissioned T-Systems with the operation of the central toll collection system GoMaut 2.0 from 2018. This deal, awarded in August 2016 with a term of ten years, involves operating the toll billing IT systems, around 230 points of sale in Austria and abroad, as well as the 48 mobile control units. We will operate the hardware in our own highly secure data center, the T-Center in Vienna, as well as further develop and modernize existing applications. The company will deploy state-of-the-art virtualization and automation technologies, with the aim of increasing security and quality while reducing costs.
  • T-Systems once again convinced the automotive group Daimler of its IT expertise, concluding an agreement with a three-digit million order volume: It includes the operation and modernization of the mainframe computers as well as key IT applications. Furthermore, we will connect more than two million vehicles around the world via Daimler’s connected car platform.
  • At the end of November 2016, Deutsche Bahn awarded us the contract to deliver tens of thousands of terabytes of data to supply the ICE fleet with fast Internet. This makes us one of the largest suppliers of data volumes for Deutsche Bahn’s new, free Wi-Fi service on board its trains. The service requires a fast, resilient network in which we have continuously invested along the ICE routes.
  • At the end of December 2016, Swiss National Railways (SBB) and T-Systems signed another corporate customer agreement. After T-Systems Switzerland successfully transferred some of SBB’s applications to the cloud in the reporting year, the entire SAP infrastructure is now to follow. In the future, we will provide this as Infrastructure-as-a-Service (IaaS). In addition, Platform-as-a-Service (PaaS) services are to be pooled in a cloud-based platform in Switzerland in the future.
  • The UK telecommunications company BT is expanding its cloud ecosystem with T-Systems. The agreement, signed in December 2016, covers the provision of cloud-based SAP solutions from our data centers. From the first half of 2017, BT’s business customers will be able to purchase the new PaaS service “BT Compute for SAP.”

NEW PRODUCTS AND RATE PLANS

Of course, we again launched new products, services and rate plans on the market in the reporting year, some of which are presented below: For more information, please go to www.telekom.com/media.

  • At CeBIT in March 2016, we unveiled another central component of our cloud ecosystem with our Open Telekom Cloud. This secure online solution allows business customers to purchase not only tailor-made private cloud solutions, but also infrastructure, software, and applications as needed.
  • We have added to our security solutions in the MagentaSecurity portfolio. We have pooled all of the Group’s security units in our new Telekom Security organization, where we make use of both proprietary innovations and solutions offered in partnership with leading international security specialists.
  • MagentaOne has been available to consumers in all of our European integrated markets since March 2016. We employ an international marketing concept adapted to the local markets and their requirements to market our convergent product portfolio.
  • The MagentaMobil Happy rate plans, available since March 2016, provide our MagentaEins customers in Germany with a new top smartphone or tablet at a reduced price every 12 months when extending their contract. Since mid-April 2016, the MagentaMobil rate plans include even more features: In addition to larger high-speed data volumes, subscribers can benefit from an integrated HotSpot flat rate and a free EU roaming package for calls, text messages, and mobile data usage. We have redesigned our MagentaMobil Start prepay portfolios: Since October 2016, our customers in Germany have been able to profit from attractive offers, such as 50 percent bigger data volumes compared with the old rate plans and data speeds of up to 300 Mbit/s in the LTE network.
  • At the 2016 Hannover Messe, we unveiled our new Cloud of Things starter kit that provides companies with a simple entry-level digitization solution. It enables companies of all sizes to connect their machines, equipment, or vehicles and monitor them remotely without any costly installation. Our platform, which we operate in our secure data center in Germany, receives the data and makes them available to customers via an online portal.
  • In May 2016, we launched our new service EntertainTV – with a new design, new highly user-friendly interface, and new, elegant hardware. Customers can now use unique features: The “restart” option means they never again have to miss the beginning of programs that have already started. The “seven-day replay” function provides even greater freedom, allowing viewers to watch replayable programs for up to a week after their broadcast. EntertainTV combines live television, on-demand content, apps, and media libraries on one platform, and not just on television, but also on tablets and smartphones using the EntertainTV mobil add-on option.
  • Since May 2016, fixed-network customers switching to us from another provider have benefited from a personal switch advisor – complementing the service for owner builders and the moving home manager as an additional component for enhancing the customer experience and improving customer retention. In addition, since December 2016, we have offered two new services for our customer hotline: First, customers have the option of being connected with the same advisor; second, our hotline calls customers back within a previously specified waiting period.
  • Since June 2016, our mobile customers have been able to make calls on their smartphones via any Wi-Fi (WLAN) network in Germany or abroad with the free add-on WLAN Call. All they need is a WLAN Call-enabled smartphone and a mobile contract that includes Voice over LTE. The software needed for this add-on is installed in the smartphone, i. e., no additional app is required. WLAN Call is of particular benefit in places that for construction reasons do not have sufficient mobile reception, but do have Wi-Fi, such as underground garages or basements.
  • Together with the Fraunhofer Institute for Secure Information Technology (SIT), we launched Volksverschlüsselung – secure e-mail for everyone – at the end of June 2016. The Fraunhofer SIT is developing this user-friendly software, which generates a cryptographic key and configures the users’ e-mail programs. Volksverschlüsselung, which is free of charge, is part of an initiative we have launched together with Fraunhofer SIT to promote the widespread usage of end-to-end encryption among the general public and thus bolster the protection of electronic communications of consumers and businesses. 9
  • The PaketButler, our connected solution to make it easier to receive parcels and send back returns, has been in use across Germany since November 2016. We developed the PaketButler together with our partner feldsechs from Hamburg and launched it on the market in close partnership with DHL. But in principle all delivery companies can use it. The connected parcel box makes it secure, simple and convenient to receive and return parcels, even when no one is home. The customer simply places the box, with its integrated SIM card, outside their door and then secures it by placing the tear-resistant belt between door and frame. The delivery company places the parcel inside the theft-proof box, and the PaketButler then sends a push message to the recipient’s smartphone, informing them that their goods have arrived.
  • In September 2016, T-Mobile US launched the latest Un-carrier initiative: With the T-Mobile ONE and T-Mobile ONE Plus rate plans, customers can make unlimited calls, send unlimited text messages, and enjoy an unlimited high-speed 4G/LTE data volume. On T-Mobile ONE, video typically streams at DVD (480p) quality and tethering is at maximum 3G speeds. Customers on T-Mobile ONE Plus plans also receive unlimited high-speed 4G/LTE mobile HotSpot data volume, unlimited High Definition Day Passes, and up to two times faster speeds when traveling abroad in more than 140 countries and destinations.
  • Since October 2016, our new multi-IoT platform in the cloud data center in Biere has been bringing together the IoT platforms of various well-known companies, such as Microsoft, Cisco and Huawei. IoT solutions can thus be used across platforms and on any terminal equipment. Differing platforms and standards inhibit the market development of the Internet of Things. With our multi-IoT platform, we offer a cross-industry, scalable platform as well as the right complete IoT packages for fast entry to IoT.

AWARDS

We received a large number of awards again in the reporting year – among other things for our outstanding networks, our excellent service, our innovative marketing concepts, and for our extremely valuable Telekom brand. The following graphic summarizes the main awards received in 2016. For details on more awards, please go to www.telekom.com/media.  For information on awards received for our HR activities, please refer to the section “Employees“.

Chart: Awards in 2016