COMBINED MANAGEMENT REPORT DEUTSCHE TELEKOM AT A GLANCE CORPORATE RESPONSIBILITY AND NON-FINANCIAL STATEMENT GROUP ORGANIZATION 82 Aspect 1: Environmental concerns 32 Business activities and segment structure 84 Aspect 2: Employee concerns 34 Management and supervision 86 Aspect 3: Social concerns 91 Aspect 4: Respecting human rights GROUP STRATEGY 93 Aspect 5: Fighting corruption MANAGEMENT OF THE GROUP INNOVATION AND PRODUCT DEVELOPMENT 40 Finance strategy 94 VTI strategy: We enable today’s business and shape 41 Performance management system the future 95 Innovation priorities THE ECONOMIC ENVIRONMENT 96 Three-pronged innovation strategy 44 Macroeconomic development 98 Innovation governance 45 Telecommunications market 48 Major regulatory decisions EMPLOYEES 99 Supporting people. Driving performance. DEVELOPMENT OF BUSINESS IN THE GROUP 99 Our HR work based on the priorities 50 Statement of the Board of Management on business 102 Headcount development development in 2019 51 Comparison of the Group’s expectations with actual FORECAST figures 104 Statement by the Board of Management on the 53 Results of operations of the Group expected development of the Group 58 Financial position of the Group 104 Economic outlook 105 Expectations for the Group DEVELOPMENT OF BUSINESS IN THE OPERATING 108 Expectations for the operating segments SEGMENTS 64 Germany RISK AND OPPORTUNITY MANAGEMENT 66 United States 114 Board of management’s assessment of the aggregate 68 Europe risk and opportunity position 72 Systems Solutions 115 Risk and opportunity management system 73 Group Development 117 Risk assessment and risk containment 75 Group Headquarters & Group Services 118 Risks and opportunities DEVELOPMENT OF BUSINESS AT OTHER DISCLOSURES DEUTSCHE TELEKOM AG 131 Significant events after the reporting period 76 Results of operations of Deutsche Telekom AG 131 Accounting-related internal control system 78 Financial position of Deutsche Telekom AG 132 Corporate Governance Statement in accordance with § 289f and § 315d HGB 132 Legal structure of the Group 135 Compensation report Deutsche Telekom. The 2019 financial ey ar. = p q Combined management report 30 DEUTSCHE TELEKOM AT A GLANCE NET REVENUE Net revenue We look back on a successful 2019 financiale y ar and are well on track to meeting our growth billions of € forecast:Net revenue increased by 6.4 percent to EUR 80.5 billion. On a like-for-like basis, i.e., 90 excluding exchange rate effects and effects of changes in the composition of the Group, net 80.5 74.9 75.7 revenue was up by EUR 2.2 billion or 2.8 percent. 60 Our United States operating segment posted an increase in revenue of 10.7 percent; also in U.S. dollars, the continuing success of our U.S. operations was evident in revenue growth of 30 5.0 percent. Our Europe operating segment recorded revenue growth of 2.4 percent and revenue in our 0 Germany operating segment also edged up by 0.9 percent. 2017 2018 2019 The inclusion of Tele2 Netherlands also made a substantial contribution to the increase in revenue in our Group Development operating segment. Adjusted EBITDA ALa ADJUSTED EBITDA ALa billions of € Adjusted EBITDA AL rose by 7.2 percent to EUR 24.7 billion, with contributions from all operating segments.Adjusted for exchange rate effects and the slightly positive effects of 30 24.7 changes in the composition of the Group, adjusted EBITDA AL rose by EUR 1.0 billion or 23.1 20 4.2 percent. Adjusted EBITDA AL in our United States operating segment increased by 10.4 percent. In U.S. 10 dollars, this constituted growth of 4.7 percent in our U.S. operations. Our Europe operating segment recorded an increase in adjusted EBITDA AL of 5.0 percent 0 n.a. and our Germany operating segment an increase of 2.4 percent. Substantial increases in 2017 2018 2019 adjusted EBITDA AL were likewise recorded by the Systems Solutions and Group Development operating segments – the latter also due to earnings contributed by the acquiree Tele2 Netherlands. EBIT At 30.7 percent, the Group’s adjusted EBITDA AL margin increased slightly against the prior- billions of € year level of 30.5 percent.The adjusted EBITDA AL margin was 39.8 percent in Germany, 32.9 percent in Europe, and 27.5 percent in the United States. 10 9.4 9.5 8.0 7.5 EBIT 5 EBIT increased by EUR 1.5 billion to EUR 9.5 billion. EBITDA AL was negatively affected by special factors of EUR 1.6 billion compared to expenses 2.5 of EUR 1.5 billion in the prior year. Higher special factors, relating mainly to the process of 0 obtaining the necessary approvals for the business combination with Sprint, were offset by lower 2017 2018 2019 special factors in connection with staff-related measures. At EUR 17.7 billion, depreciation, amortization and impairment losses were EUR 3.8 billion higher than in the prior year.This substantial increase is primarily attributable to the depreciation Net profit charge for right-of-use assets required to be recognized as a result of the application of IFRS 16. billions of € Depreciation of property, plant and equipment and amortization of intangible assets were EUR 0.5 billion higher than in the prior year, which had contained depreciation and amortization 4 3.9 3.5 on finance lease assets. Impairment losses had been EUR 0.3 billion higher in the prior year. 3 2.2 2 NET PROFIT Net profit increased by EUR 1.7 billion to EUR 3.9 billion. 1 Our loss from financial tac ivities decreased by EUR 0.7 billion to EUR 2.2 billion. Positive 0 measurement effects from embedded derivatives at T‑Mobile US were offset by increased 2017 2018 2019 finance costs resulting from the application of IFRS 16. The prior year had also contained a negative effect of EUR 0.6 billion in connection with a settlement agreed in the Toll Collect arbitration proceedings. Tax expense amounted to EUR 2.0 billion, compared with EUR 1.8 billion in the prior year. Profitt a tributable to non-controlling interests increased year-on-year by EUR 0.2 billion to EUR 1.4 billion. Adjusted earnings per share increased to EUR 1.04 from EUR 0.96 in the prior year. a The new IFRS 16 “Leases” accounting standard has been applied since January 1, 2019. This led to a change in the definition of some of our financial performance indicators.Comparatives for 2018 were calculated on a pro forma basis for the redefined ek y performance indicators. No AL comparatives were calculated for 2017. Deutsche Telekom. The 2019 financial ey ar. = p q Combined management report 31 NET DEBT Net debt Net debt increased from EUR 55.4 billion at the end of 2018 to EUR 76.0 billion. billions of € The recognition of lease liabilities in connection with the application of IFRS 16 raised net debt by EUR 15.6 billion. 80 76.0 Further factors in this increase included in particular the dividend payments – including to 60 55.4 50.8 other shareholders of subsidiaries – (EUR 3.6 billion), additions to liabilities in connection with 40 leases (EUR 5.5 billion), the acquisition of spectrum (EUR 3.2 billion), exchange rate effects (EUR 0.7 billion), and the acquisition of Tele2 Netherlands (EUR 0.4 billion). 20 The main factor reducing net debt was free cash flow of EUR 10.1 billion. 0 Dec. 31, 2017 Dec. 31, 2018 Dec. 31, 2019 CASH CAPEX Cash capex (including spectrum investment) increased by EUR 1.9 billion to EUR 14.4 billion. In the reporting year, payments were made for mobile spectrum licenses in the amount of Cash capex EUR 1.2 billion, primarily in the United States operating segment. Annual installments through billions of € 2030 were agreed for the spectrum licenses worth EUR 2.2 billion acquired in Germany in 2019; EUR 0.1 billion was paid in the reporting year. In the prior year, payments had been made for 20 19.5 mobile spectrum licenses in the amount of EUR 0.3 billion, again primarily in the United States. 15 14.4 12.5 Excluding the effects from the acquisition of spectrum, the increase in cash capex of 10 EUR 0.9 billion is attributable in particular to the United States operating segment, and mainly relates to the accelerated infrastructure build-out for the 600 MHz spectrum, which also lays the 5 groundwork for 5G. In the other operating segments, investments in building out and upgrading 0 our networks remained at a sustained high level. 2017 2018 2019 FREE CASH FLOW ALa (BEFORE DIVIDEND PAYMENTS AND SPECTRUM INVESTMENT) Free cash flow ALa Free cash flow AL was up by EUR 0.9 billion to EUR 7.0 billion. (before dividend payments and spectrum investment) Net cash from operating activities increased substantially as a result of the positive development billions of € of cash generated from operations, which benefited from the strong performance of our operating segments, especially in the United States. 8 7.0 The year-on-year increase of EUR 0.9 billion in cash capex (excluding spectrum investment) 6 6.1 had a negative impact on free cash flow AL. This increase related largely to the United States 4 operating segment. Currency translation effects had an overall positive effect on the development of free cash 2 flow AL. 0 n.a. 2017 2018 2019 ROCE Our key performance indicator ROCE (return on capital employed) increased by 0.4 percentage points in the reporting year to 5.1 percent. ROCE This positive trend was due to a substantial increase in net operating profit after taxes (NOPAT), % which posted stronger percentage growth year-on-year than the average amount of net operating assets (NOA).