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Deutsche Telekom AG (DT)

Q1 2006 Earnings Conference Call

May 11th 2006, 7:30 AM.

Executives:

Thilo Kusch, Head of Investor Relations

Kai-Uwe Ricke, Chairman, Chief Executive Officer, Chief Operating Officer

Karl-Gerhard Eick, Chief Financial Officer

Analysts:

David Brundish, UBS Limited

Laura Mills, Merrill Lynch

Justin Funnell, Credit Suisse First Boston

Andrew Beale, Arete Research

James Golob, Goldman Sachs

Stuart Birdt, Exane BNP Paribas

Graeme Pearson, Lehman Brothers International

Stefan Borscheid, WestLB

Brian Rusling, Cazenove & Co.

Frank Rothauge, Oppenheim Research

Mark Cardwell, Sanford C. Bernstein & Co.

Richard Prentiss, Raymond James

Guy Peddy, Deutsche Bank AG

James Ratzer, New Street Research

Peter Kurt Nielsen, Cheuvreux

Chris Fremantle, Morgan Stanley

Tim Taylor, HSBC

Operator

Good afternoon, and welcome to Deutsche Telekom’s Q1 2006 Results Conference Call. On our customer’s request, this conference will be recorded.

This presentation contains forward-looking statements that reflect the current views of Deutsche Telekom’s management with respect to future events. They include statements as to market potential and the planned T-Online merger and the target 2006/2007 statements at the end of this presentation. Forward-looking statements are based on current plans, estimates and projections. You should consider them with caution. Such statements are subject to risks and uncertainties, most of which are difficult to predict and are generally beyond Deutsche Telekom's control, including those described in the section Forward-Looking Statements and Risk Factors of the company's Form 20-F report filed with the U.S. Securities and Exchange Commission.

Among the relevant factors are the progress of Deutsche Telekom's workforce reduction initiative and the impact of other significant strategic or business initiatives, including acquisitions, dispositions and business combinations, with the exception of the planned merger with T-Online, which we assume to become effective in the year 2006, of the purpose of our forward-looking statements, such events, however, being subject to uncertainties. In addition, stronger than expected competition, technological change, litigation or regulatory developments, among other factors, may have a material adverse effect on costs and revenue development.

If these or other risks and uncertainties materialize, or if the assumptions underlying any of these statements prove incorrect, Deutsche Telekom's actual results may be materially different from those expressed or implied by such statements. Deutsche Telekom can offer no assurance that its estimates or targets will be achieved. Deutsche Telekom does not assume any obligation to update forward-looking statements to take new information or future events into account or otherwise.

In addition to figures prepared in accordance with IAS/IFRS, Deutsche Telekom presents so-called non-GAAP financial performance, measures, e.g. EBITDA, EBITDA margin, adjusted EBITDA, adjusted EBITDA margin, adjusted EBT, adjusted net income, special influences, free cash flow, free cash flow before purchase of network assets and spectrum in the U.S., leverage, net debt, and net debt adjusted EBITDA. These non-GAAP measures should be considered in addition to, but not as a substitute for the information prepared in accordance with IAS/IFRS. Non-GAAP financial performance measures are not subject to IAS/IFRS or any other Generally Accepted Accounting Principles.

Other companies may define these terms in different ways. For an explanation of some of these terms, please refer to reconciliation to pro-forma figures under the publications heading on Deutsche Telekom's Investor Relations webpage at http://www.deutschetelekom.com/. None of these figures in this presentation have been audited.

Now, please listen to the reports of Kai-Uwe Ricke and Dr. Karl-Gerhard Eick. Afterwards, you are welcome to ask your questions. May I now hand you over to Mr. Thilo Kusch.

Thilo Kusch, Head of Investor Relations

Yeah, welcome to everybody. We are starting with a detailed analysis of our results from Kai-Uwe Ricke and Dr. Karl-Gerhard Eick. And after that we have time for questions.

Kai-Uwe Ricke, Chairman, Chief Executive Officer, Chief Operating Officer

Thank you, Thilo. As you will have seen from this morning’s announcement, Group results for the first quarter of the year are satisfactory, despite a very competitive environment, particularly in Germany.

Revenues have increased by nearly 4% to just under €15 billion, while adjusted EBITDA has risen by nearly 3% to €5 billion. In addition, we had a strong bottom line performance with an 11% increase in earnings before taxes, and net income up by almost 10% to €1.1 billion for the quarter.

To meet the challenges facing the industry and our businesses, we have set ourselves two clear objectives for this year, investing in and stimulating revenue growth and, at the same time, implementing a range of cost-cutting measures to secure our EBITDA guidance. In that context, let me comment on the current status of the negotiations with the trade unions.

Given the economic conditions and in particular, the considerable difficulties facing the fixed line business in Germany, I am quite frankly astonished that the wage increase of 6% has been even considered, let alone put forward. It goes without saying that we would not even contemplate such a proposal. In the current regulatory and competitive environment, we have to focus on real efficiency gains rather than simply adding to the cost base.

Back to our Excellence Program. As you know, each of the divisions has developed a program of specific initiatives, supported by an integrated set of measures. These are built into the framework of our Excellence Program, which we successfully launched at the start of 2005 and which has now been sharpened into 10 key initiatives that will be critical to the implementation of our strategy.

Let me now go into more detail on the implementation of these within the different parts of the business. The strong growth in broadband that we saw throughout 2005 continues. Net adds in Q1 2006 amounted to nearly 650,000, an increase of 11% compared to the growth in the first quarter of 2005.

Most of the growth in the first quarter of 2006 came from resale, with new retail customers only amounting to just over 80,000. Total first quarter growth takes domestic DSL customers to over 8.6 million, of which Deutsche Telekom’s retail share stands at 75%.

The objective of defending our minute market share is on track. For the fourth quarter running, our minute market share has increased. And this now stands at the most, 65% on average.

Triple Play is all set for the scheduled mid 2006 launch, contracts and/or MOUs with significant number of TV channels have already been signed and there will be more to come. The suppliers for the set-top boxes have been appointed, and 12,000 cable distributors for the first 10 German cities have been upgraded at a run rate of 200 per day. The rest will be completed by mid 2006.

We are also making good progress in preparations for the launch of the T-One Dual-Phone, which is also scheduled for mid 2006. The first user trials will start mid May.

This is all good progress. But I do need to stress that our ability to implement fully our broadband and fixed network strategy continues to be adversely affected by the delay in the merger of T-Online. This is reflected in both our low level of retail customers out of the total broadband net adds and in the increase in line losses, which have now risen to 500,000 in Q1, compared to approximately 400,000 in the fourth quarter.

The reason for the acceleration in line losses is principally due to customers wanting bundled Internet and voice offerings until the merger with T-Online is completed, we will not be able to provide the true bundled services the customer is asking for, and at a realistic price.

Post merger, we will be launching competitive double and triple play offerings, including combined voice and Internet flat rates, and on our new high-speed network, free TV, video on demand and video libraries on demand, including HDTV offerings.

We remain hopeful that the merger will be completed in the second quarter. In the meantime, T-Online is now providing a competitively priced combined Internet and Voice over IP flat rate offering for €9.95, which was announced on Tuesday.

T-Com has just launched a PSTN flat rate marketing campaign centered on our new flagship tariff, XXL Fulltime, which gives our customers an unlimited flat rate to the domestic fixed network for €19.90 monthly charge.

Coupled with our analogue T-Net access, consumers now can experience very clear voice telephony for prices as low as €35.90 per month. Customers signing up now will even get an additional discount of €10 and our welcome T-shirt.

If I turn now to the mobile division, you can see that we are executing the strategy that we announced in November. Despite the tough conditions in Germany, we have had a successful first quarter. Revenues grew by over 12% and adjusted EBITDA by 8%, reflecting the additional market investment. Total T-Mobile customers are now approaching 90 million.

T-Mobile U.S.A. continued its track record of superior execution in the marketplace. With more than 1 million net adds, growth accelerated compared to the already strong first quarter of 2005. Importantly, contract customers represented 70% of the net adds in this quarter. At the same time, T-Mobile U.S.A. increased its adjusted EBITDA in U.S. dollar terms by almost 40%, almost double the service revenue growth of more than 20%. Please note that this improvement in EBITDA occurred despite the significantly lower wholesale revenues from Cingular.

Increased EBITDA was supported by lower churn, with contract churn down to 2.1% and lower subscriber acquisition costs. Year-on-year, SACs per gross add decreased for both contract and prepaid customers. Here we can see the benefits of consolidation in the U.S. wireless market.

T-Mobile U.S.A. continues to improve its network. Over the last 12 months, the company added approximately 3,700 new cell sites, which amounts to a total of 33,600 cell sites at the end of the first quarter. As a result of the network improvements, T-Mobile U.S.A. received for the first time, the highest JD Power Call Quality Performance Ranking among all U.S. operators. We finished first in three out of six regions, which puts us in the same position as our leading competitor in terms of network quality in the U.S.

As expected, competition in Germany continues to be tough, and we have seen strong price reduction triggered by competition and regulation. Although it obviously takes time until the tariff reductions translated to increase usage per SIM card, we are at least satisfied that the minutes, overall, have grown by 9%.

As we announced, we invested more money into our customer base, which is reflected in the increased number of gross and net adds compared to the first quarter of 2005. This resulted in a modest EBITDA decrease of €35 million. However, overall, the margin remains relatively stable at 39.4%. Over the same period, there was a decline in blended SAC of around 15%.

Overall, ARPU decreased from €23 to €20 in the first quarter of 2005, while usage per customer remained stable. Calculated on exact numbers, ARPU decreased by 11.9% year-on-year. This decrease is exactly in line with the overall decrease in German mobile pricing. According to the German Federal Statistics Office, the mobile price index decreased by 11.5% year-on-year in March.

Contract ARPU decreased from €37 to €34, despite a usage increase of 4% per contract customer, while prepaid ARPUs decreased from €8 to €7. Prepaid ARPU was impacted and particularly by the intense price competition in the German prepaid market.

The objective of providing seamless services to our customers saw the introduction at the beginning of this year of T-Mobile@home, which already had over 0.5 million customers at the end of the first quarter.

In the U.K., we are making excellent progress in our objective of building sustainable subscriber and revenue growth and gaining market share to secure long-term profitability. The introduction of, and investment in the new Flext packages has led to a dramatic surge in customer growth, with more contract net adds in the first quarter of the year than in the whole of 2005.

Total revenues increased 4.5% over the period, and ARPU revenues even more strongly, by 7.4%. But obviously, there was a decline in adjusted EBITDA as a result of the record customer numbers and the additional market investment.

You will recall that this is exactly how Rene said the business would develop in his presentation to you last November. The additional market investment was reflected in the development of the subscriber acquisition cost per gross add. Specifically, contract SACs increased from €324 to €400 in the first quarter of 2005, reflecting the introduction of our new Flext tariff.

These new tariff packages are for 18 months, and have ARPU of at least UK£35 which, compared to previous initiatives like half line rental, means a significant improvement in the payback period for new customers. However, consistent with our focus on contract customers, prepaid SACs decreased from €46 to €33. Consequently, blended SACs also fell from €157 to €148.

The mobile success story is particularly evident in the developments in mobile data services. Non-voice non-SMS revenue increased by 50% to more than €317 million. This means that we have already generated the equivalent of 35% of the full-year 2005 revenues in the first quarter of 2006 alone.

A key contributor to the growth in non-voice non-SMS revenue is the growing popularity of our data plans, such as web’n’walk. As of the first quarter, we have sold almost 400,000 web’n’walk data plans, which we launched last summer. We have also introduced attractive new data tariffs, such as our unlimited laptop data card plans in Germany and the U.K.

We have now completed the HSDPA upgrade to 1.8 megabits per second in Germany, Austria and The Netherlands, and we are the first to fully implement HSDPA in these markets and will implement this in the U.K. in the second half of the year.

Moving on now to business customers, we are about to introduce a number of new projects targeting the telecommunications business. We have seen strong IT revenue growth for small, medium and large enterprises, with an increase of two-thirds from €81 million in Q1 2005 to €135 million in Q1 this year. This fully compensates for the decrease in traditional voice and legacy data revenues in the small, medium and large enterprise segment.

As you know, we got EU approval in March for the acquisition of the gedas system house business, which is part of the strategy of growing the ICT solutions business, gedas will be consolidated for the first time in our results for the second quarter.

In a recent independent survey by McKinsey among CIOs from the top 100 Europe-based multinational companies, 97% of the participants saw integrated IT and PC offerings as key success factors for service providers in the future. In the same survey, T-Systems was recognized as one of the few companies, which already follows this business model.

Finally, let me add a few words about the Efficiency Program. As I said at the beginning, the objective is both, growth and cost-cutting. Related integral to securing the EBITDA guidance for 2006 and 2007, we announced back in November the objective of reducing personnel numbers in Germany by a total of 32,000 over the next three years.

We have already started to offer the announced severance payments and partial retirement programs to our employee base in Germany. The take up of this voluntary program is very encouraging, with approximately 3,500 agreements already signed or requested, compared to a three-year target of about 11,000.

On a gross base, approximately 1,500 employees left the company in Germany in the first quarter of 2006, of which 630 came from Vivento.

With regard to a solution for the civil servants at Deutsche Telekom, the company is working closely with the relevant ministries and anticipates a decision in the second quarter of 2006.

Beyond our personnel reduction program, we are implementing around €0.3 billion of further cost-cutting measures to help secure this year’s EBITDA target. We expect to improve our purchasing procedures, for example, in marketing and media, financial auditing and management consulting, and so on, and to reduce our internal IT costs.

As you will have seen, we have made further progress in the monetization of real estate in Q1, which we expect to continue. We are also continuing to address the potential for further efficiency savings, in particularly through an anticipated €800 million reduction in IT over the next few years, and network savings through NGN. With that, let me hand over now to Karl.

Karl-Gerhard Eick, Chief Financial Officer

Thank you, and good morning US, good afternoon, Europe. In broadband/fixed network we saw a continuation of the same overall trends of last year. Revenues, which decreased by 6.1% were impacted by further decreases in calling revenues and accelerated line losses. This was only partially offset by higher revenues from DSL growth and wholesale services. The strong growth at T-Online also led to a strong growth in internal revenues at T-Com due to DSL sales, which, however, were consolidated at the level of BBFN.

Adjusted EBITDA decreased by 6.8% while adjusted EBITDA at T-Com was relatively resilient with a decrease of €90 million or 3.8%, adjusted EBITDA at T-Online declined strongly by €44 million or more than 50% year-on-year. However, this decrease can be entirely explained by a change in accounting.

From the first quarter of 2006, DSL modems are accounted for as subscriber acquisition costs in the P&L, rather than depreciated over two years. This effect alone had an EBITDA impact of €45 million. Excluding this effect, adjusted EBITDA at T-Online would have been flat and on the EBIT level that accounting change has no relevant impact.

Let’s look at the revenue development of T-Com in Germany in greater detail. As of the first quarter of ’06, the revenue segments within T-Com have been slightly reorganized. Network communications, now excluding revenues from T-Com’s retail DSL customers, which are shown as IP/Internet, contributed revenues of €2.9 billion or 55% of the total domestic T-Com revenues.

This segment was the principal cause of the total revenue decrease at T-Com. And within network communications the decrease was almost entirely due to lower calling revenues. Here, a higher penetration of calling plans and the mobile termination rate cuts lowered the average price per minute.

Also T-Com’s total minute volume decreased due to access line losses, Voice over IP, and fixed-to-mobile substitution. Revenues from value-added services decreased by €39 million, or 14.3% due to a shrinking market for premium rate services.

Terminal equipment revenues increased by €16 million, or 16.2%, due to the strong DSL resale business with T-Online. Revenue from data communications decreased by €23 million, or 6.7%, due to price cuts and reduced demand.

Wholesale services contributed €1.2 billion, or 23% of T-Com’s total domestic revenue. Revenues in this segment increased by 0.7% due to higher revenues from unbundled local loop and DSL resale, which more than compensated for a decrease in interconnection revenues.

Finally, the increase in DSL and unbundled local loop wholesale revenues go together with the decrease in IP/Internet revenues due to the churn of T-Com DSL retail customers to T-Online and other carriers.

Coming to mobile, as Kai mentioned, mobile saw very strong revenue growth of 12.3%. This was driven by a strong customer growth of 10.9% to almost 88 million customers. T-Mobile U.S., once again, was the star performer with 29.1% revenue growth in euro terms.

Revenue in the U.K. grew by 4.5%, while in the Netherlands, growth amounted to 5.9%. T-Mobile Central and Eastern Europe saw revenue also grow with 8.9% -- excuse me, 8.4%.

In Germany, revenues decreased by 3.4%. This is due in particular, to the termination rate cuts in December, which contributed €45 million to the total revenue decrease of €70 million. In addition, we are observing that, despite significantly lower prices, usage has not yet picked up significantly. The experience from other markets makes us confident that overtime lower prices will translate into significantly higher usage, but unfortunately, this will take some time.

Turning now to adjusted EBITDA, we see the impact of the higher market investments that we had planned for ’06. Of the total additional market investment of €700 million, we spent approximately €150 million in the first quarter of ’06 in T-Mobile alone. This is particularly noticeable in the U.K., where adjusted EBITDA decreased by 40% on the back of record contract customer growth.

In Germany, adjusted EBITDA decreased by 4.2% in line with revenues. The adjusted EBITDA margin decreased slightly to 39.4% in the first quarter from 39.8% in the first quarter of ’05.

In the U.S., on the other hand, adjusted EBITDA increased by more than 50% year-on-year in euro terms. This increase was driven by scale effects due to the strong customer growth over the past year, in addition to lower customer acquisition costs and lower churn. Overall, adjusted EBITDA increased in mobile by a respectable 8% to €2.3 billion.

Coming to business customer segment. Here, revenues decreased by 3.1%. While revenues from small, medium, and large enterprise customers increased slightly by 0.2% due to strong growth in IT revenues, revenues from the top 60 customers decreased by 4.8%. Both computing and desktop services and telecommunication services experienced strong pricing pressures.

The first-time consolidation of gedas as of the second quarter, and further expected big deals, will help us deliver the revenue guidance. In ’05, you will recall gedas had revenues of approximately €600 million. Also, we have seen an improvement in the order entry in March, which also supports the expected revenue outlook.

Adjusted EBITDA, which decreased by 13% or €51 million, was also impacted by the revenue decrease and additional market investments, especially in the area of small, medium, and large enterprises. Going forward, the acquisition of gedas will also contribute on the EBITDA side. In 2005, gedas generated EBITDA of approximately €50 million.

As you would expect with an EBITDA which increased only slightly, also cash flow on a group’s perspective was very similar to last year. Nevertheless, net cash from operations improved to €2.8 billion from €2.2 billion, mainly due to working capital improvements and lower tax payments.

As in the first quarter every year, working capital was impacted by the annual unchanged contribution to the civil servants’ pension fund of €0.8 billion.

Reported free cash flow increased to €0.8 billion from a negative €0.9 billion, due to lower reported cash outflows for investments in intangible assets and property, plant, and equipment.

Underlying free cash flow in Q1 was only €0.5 billion compared to €1 billion in Q1 last year, because the reported CapEx, and thus the reported free cash flow in Q1 last year includes €1.9 billion for the Cingular transaction, whereas the CapEx in Q1 this year excludes €0.3 billion for the acquisition of gedas.

Consequently, underlying CapEx increased from €1.2 billion in the first quarter last year to €2.3 billion in the first quarter this year, in line with what you would expect following our guidance of approximately €10 billion for this year. For completeness sake, let me state again that our guidance, of course, excludes any 3G investments in the US.

All divisions contributed to this CapEx increase, with T-Mobile increasing its CapEx by €0.5 billion, mostly driven by a spill-over of payments for Q4 investments and increased investments in the network rollout in the U.K. and the U.S. BBFN and T-Systems increased CapEx by €0.3 billion each, for the fiber network rollout and the acquisition of gedas.

In terms of reported and adjusted net income, the increase in EBITDA was offset by a slight increase in both depreciation and amortization and income taxes. Accordingly, adjusted net income stayed essentially flat. Reported net income improved by almost 10%, due to special influences.

By far the biggest special influence in the first quarter was the capital gain from the payment for the sale of Celcom in Malaysia, which amounted to almost €200 million. This effect was partially offset by a number of smaller special influences, including €38 million additional provisions for restructuring and staff reduction charging and expenses for partial retirement, and €40 million from the expensing of subscriber acquisition costs at T-Online from earlier quarters.

As I described before, these were previously capitalized. All special influences, combined, had a positive after-tax impact of €116 million on reported net income.

Coming to the balance sheet, here this remained very solid, with a further sequential increase in shareholders’ equity and a sequential decrease in net debt. Net debt decreased in line with free cash flow, with foreign exchange effects and the proceeds from Celcom offsetting the acquisition of gedas.

Gearing improved slightly to 0.75 times from 0.78 times at the end of ’05, while the equity ratio decreased slightly to 38.5% as a result of a higher balance sheet total following the successful issuance of a US$2.5 billion bond and a €1 billion medium-term note, which led to higher liquid assets and higher gross debt. With this, I give back to Kai.

Kai-Uwe Ricke, Chairman, Chief Executive Officer, Chief Operating Officer

Thank you, Karl. We have made some changes for 2006 within the divisional revenue guidance to reflect recent developments within the business. These amount to a decrease in broadband and fixed network revenues from a range of €25.4 billion to €25.8 billion, to €24.8 billion to €25.2 billion.

We have, however, increased the revenue guidance for mobile from a range of €30.9 billion to €31.3 billion, to a new range of €31.9 billion to €32.3 billion. Of this, only approximately €250 million to €300 million is due to the consolidation of Tele.ring.

Group revenue guidance remains unchanged, but the inclusion of Tele.ring means that we are now expecting revenues to come in towards the upper half of the range. We are comfortable with our EBITDA guidance and with the guidance for 2007. With that, let me conclude. We now look forward to your questions.

Thilo Kusch, Head of Investor Relations

Yeah, let’s go straight into questions.

Question-and-Answer Session

Operator

Thank you very much Mr. Kusch. Operator Instructions. Mr. Brundish from UBS, may we have your question, please?

Q - David Brundish

Yes. Good afternoon. Three questions, if I can, please. Firstly, could you provide an update on where the E.U. investigation into your VDSL rollout stands, what impact that might have in terms of the pace of your rollout? The second question relates to the AWS auctions in the U.S. We have seen recently a number of comments by other operators suggesting a reduced interest in the auction process. If it does look as though the cost spectrum is lower than expected, would you look to spend the same amount of money and acquire more spectrum, or maybe spend less money than you were previously considering on the amount of spectrum you had previously planned for? And the final point, within the EBITDA guidance for the full year, after the strong positive figure in GHS in the first quarter, is there any kind of switch or change in the mix of that EBITDA guidance with maybe a lower negative figure for GHS for the full year? Thank you.

A - Thilo Kusch

Let me probably start, and apologies for the AWS auction. As you are probably aware, since yesterday, the quiet period started with AWS. There are very strict communication guidelines associated with that. So, we are actually not able to answer any questions related to AWS. So, we will have to say no comments, unfortunately just if somebody else asks any questions, we cannot answer any of these questions. But let’s move onto the other ones.

A - Kai-Uwe Ricke

When it comes to the VDSL rollout and the reaction from Brussels, let me just describe where we are. There is still a lot of support here in Germany from the German coalition. We are now expecting the draft of the legislation and the respective parliament discussions for the next -- for this quarter, for Q2. When it comes to Brussels, no position change. Karl, do you want to answer the question on GHS?

A - Karl-Gerhard Eick

Well, about GHS and this nice first quarter and its impact on the guidance, as you will see in our last charts, the EBITDA guidance and its compositioning for this year is unchanged. It could theoretically be that we are doing better in GHS as expected. Same could theoretically be true for revenue reconciliation and EBITDA reconciliation due to lower intra-group revenues. But guidance, so far, is unchanged. Nevertheless, this makes us more confident that we achieve our group’s guidance.

A - Thilo Kusch

Okay. Next one.

Operator

Laura Mills from Merrill Lynch. May we have your question, please?

Q - Laura Mills

Thank you very much and good afternoon. The impact you had within GHS in the first quarter, I believe about €0.2 billion of positive impact on property sales, can you give us some idea of how much for this year including in the guidance for the full year? That would be my first question. Secondly, on domestic mobile, E-Plus, when they reported their results earlier in the week, were seeing increases in minutes of use in the range of about 30%, yet I think you said your minutes of use in German mobile are still falling. Can you shed any light on why you think that might be? And then thirdly, the mandatory convertible that is going to convert in June, do you have any thoughts about whether you would consider buying back the shares to offset the dilution there? Thanks very much.

A - Karl-Gerhard Eick

Let me start with, first, the GHS question about -- which was how much of the revenue gains is included in the guidance. We do budget our real estate sale without gains, which also means that there is no significant gains from retail -- from real estate sales included, sorry for that. That means we have not more included than what was now already in the first quarter achieved. And let me go straight forward to your third question, which was about the mandatory convertible, no decision is made so far.

A - Kai-Uwe Ricke

When it comes to the usage, the figure I mentioned, I do not have a figure in hand for new customers now. The figure I mentioned for contract customers was that we saw an uptake of 4%. At the same time as that, on pre-pay, we had a reduction which basically -- a reduction of total revenue, which was basically due to the fact that inactivity is and has been rising. When it comes to our estimates for the price elasticity, we are still very careful because, when you look into it, the drastic price cuts did not occur earlier than the last six months. It takes time for customers to adjust their pattern to the price cuts. And, specifically, it takes time to have a reflection of these price cuts then on usage. When it comes to the big bases, we are talking about 30 million customers, which is by far bigger than the E-Plus base.

A - Thilo Kusch

Okay. Next one.

Operator

Justin Funnell from Credit Suisse. May we have your question, please?

Q - Justin Funnell

Thanks. Yes. As we move towards, hopefully, the merger of T-Online and T-Com, I just wondered how we could expect your pricing to evolve. Obviously at the moment there is a sort of ISP fee for T-Online charges, should we expect that ISP fee to gradually come down to zero in the same way that it seems to be doing with United Internet? Secondly, any update on the mobile termination rate cut that the Reg TP has asked, the interim cut during the course of this year, above and beyond what was put through at the end of last year? And then finally, you submitted in the annual report discuss the potential for you not be able to actually offer your soccer rights over IPTV, what do you think they mean by that and do you agree with that comment by them? Is this sort of legal definition issue with your Internet rights of the football?

A - Kai-Uwe Ricke

Okay. Let me take the last one first, because there is misunderstanding. It’s not the question whether we can use the rights for our IPTV offering or for DSL, I mean this is a clear issue. What we’re talking about is, and where we have different opinions is, whether we can transfer and use the signal to be transmitted via cable and satellite. So, we do not foresee a situation where we could not offer the Bundesliga for our DSL offerings. Second question was MTC. What you have read is probably true, that there will be -- the regulator is now stepping in because, apparently, E-Plus did not agree to what had been offered to them. So, what I expect is that the regulator now is stepping into that issue. What I also expect to happen is that there is a clear reduction in what the two new kids -- so-called new kids around the block, both new kids are now around the block for the last 12 years, receive on top comparison to what Vodafone and T-Mobile receive. When it comes to the merger, let me be very explicit and let me try to explain what is going on now and what is going on after the merger. To put it in a nutshell, as per today, we cannot offer what the customer really wants us to offer, which is the combined PSTN, DSL and flat-rate very free telephony or surfing, be it on analogue or DSL. It is this combined offering which is lacking, and this combined offering which is, on one hand, reducing our retail share when it comes to new adds DSL, and on the other hand taking away PSTN customers from our T-Com network. So, what you should expect after the merger is the bundling, the further bundling of offers, where you have a combination of PSTN, DSL and flat rate offerings. What you see right now, and this is the situation pre-merger, is a more intense reaction from T-Online when it comes to offer their DSL package which basically means that you get the double flat offering voice and surfing for €9.95, as per Tuesday this week and what you also see is that T-Com is heavily selling their PSTN only, very free offering, which is the flat rate for PSTN, this €19.95 offering for PSTN. But again, the world after the merger will look different because we are heavily attacked on this side.

A - Thilo Kusch

Okay, next question.

Operator

Mr. Andrew Beale from Arete Research. May we have your question please?

Q - Andrew Beale

Hello. Can I ask a question about the net rental agreement and a second one about mobile termination rates? On the net rental agreement, can you explain how it is that you managed to provide higher wholesale discounts to larger ISPs in a non-discriminatory way, and how you defend that to the regulator this month, I guess? And secondly, I'm interested in understanding whether you’ve passed on the December ’05 mobile termination cuts to your fixed line customers, in terms of lower prices on the fixed line to call mobile? And, if not, what you expect the likely future impact of that to be? Thank you.

A - Kai-Uwe Ricke

So, when it comes to the net rental agreement, let me just state that it is in a non-discriminatory manner and it has to do with clear volume commitments, which depend on how large those ISPs are.

A - Karl-Gerhard Eick

And for the MPC, yes, it’s right that the reduction has been passed through to the fixed network customers.

A - Thilo Kusch

And the next question please.

Operator

Mr. James Golob from Goldman Sachs. May we have your question please?

Q - James Golob

Hello. Could I ask a couple of questions? One is if you could give us any thoughts on the likely evolution of U.K. contract SACs and U.K. margins for the rest of the year and then, if we could just disentangle the organic and inorganic growth elements within the guidance for business systems, I guess gedas is within the existing guidance, but you mentioned some other large deals pending, are those necessary in order to meet the guidance, or are those incremental?

A - Kai-Uwe Ricke

Yes, James. T-Systems, when you recall 9th of November we always said that we planned three big deals, which are included in the guidance. And there is no change to the guidance, not at all. When it comes to the U.K., let me elaborate a little bit because I am fairly conscious that people had a second look at it. First of all, when you go back to 9th of November, Rene explicitly said that we will change our product offering and he explicitly said that, when it comes to the U.K., we want to follow what he called “a best value strategy”. And he also explicitly said that he wants to invest in the marketplace but do it in an intelligent way, by focusing on what the customer receives in terms of services and tariffs. That’s what I call the pull effect. And he said that, if possible, we want to surprise the market. We want to make sure that things are not easily copied. So, one result of this strategy is the Flext tariff. These Flext tariffs are money bundle, as you guys probably know, a money bundle, it’s not a minute bundle, which offer a lot of flexibility to the customer. At the same time, give to us a certain £35 per month on an 18-month period, which does not account for any additional minutes, which would then even increase the additional -- the average ARPU per month. So, what I’d like to pass over to you guys is that it is a very conscious path we are on. And it has to do with the fact that we want to go away, and get away from these special promotion offerings, want to get away from half line rental offerings, and want to increase the profitability per customer recruited. When I then talk about the forecast for the U.K., we will be continuing this path this year, and one reason for increasing the overall revenue guidance for T-Mobile overall is that we expect a relatively higher service revenue from the U.K.

A - Thilo Kusch

Okay. Next question please.

A - Karl-Gerhard Eick

Perhaps to add on what Kai was saying, I think it is important to understand that the blended SACs in the U.K. went down by, I think, €9, which is important to bear in mind, really in order to understand what this does. Kai, I think, has also made clear that this is kind of a relatively stable ARPU you are getting. And if, James, you are asking what kind of margins would we expect for full year, then this undisputedly and undoubtedly is going to be only and solely dependent if SACs on a blended basis are going down, on the success of the new tariffs. Because the EBITDA reduction, which is in line -- which is leading to the reduced EBITDA margin is predominantly or only impacted and influenced by the significantly increased customer numbers. I think one has really to look specifically into what impact the customer growth has, in order really to understand is it right, is it successful, yes or no but that’s also why I think an EBITDA margin forecast for full year really is difficult, because at the end of the year dependent on the numbers of new customers coming in.

A - Thilo Kusch

Okay. Next question please.

Operator

Stuart Birdt from Exane BNP Paribas. May we have your question please?

Q - Stuart Birdt

Hi. Thank you very much. Just a few quick questions. First, on the GHS, you talked about the real estate and also reversal of accrual. Could you just let us know the breakdown between those two items? Second question, Kai, when you were talking about the EBITDA investment in 2006, you mentioned €115 million out of the €700 million at T-Mobile, could you say how much of the €400 million at BBFN was spent in the first quarter? And then, finally, on T-Mobile USA, the lower churn in the first quarter. Do you see that as being sustainable? Thank you.

A - Karl-Gerhard Eick

Let me start with GHS. Split between real estate and reversal of accruals, it’s more or less 50/50. Both numbers are at around €80 million positive each.

A - Kai-Uwe Ricke

Stuart, it’s very difficult for me to forecast the churn rates for the U.S. now. What we see, from my point of view, is a combination of two things. One, over the last years, I would say, we really improved in managing the customer base, and you see that constant reduction in churn. On the other hand, there is this external effect that competition is less intense in the U.S. than it used to be, due to the fact that there have been a lot of mergers. So, I don’t want to forecast and don’t want to give you a new figure on the churn. When it comes to market invest, as we said, total market invest now comes up to around about €250 million, whereof €150 million is T-Mobile and another €100 million more or less is T-Com. So, when it comes to the EBITDA development, I also would like EBITDA development of T-Com, I would like to give you some more fruits on what has happened on further cost cuts, because I find that very important, specifically in the light of the revenue developments. When you look into first quarter results, EBITDA was affected by cost reductions for rentals. This was about €50 million minus. EBITDA was also impacted by improved conditions for billing collection in IT services of minus €20 million. There were lower bad debt losses of around about €15 million, and an overall reduction of revenue-related costs, like MTCs or the ICCs for the interconnections, and increased and better procurement conditions of €200 million. There are also effects which are working against those positive effects. But what I’d like to give you confidence on is that we’re continuing and continuously working on the cost front, on the EBITDA front, on the OpEx front, sorry, on the OpEx front of T-Com.

A - Thilo Kusch

Next question please.

Operator

Mr. Pearson from Lehman Brothers. May we have your question please?

Q - Graeme Pearson

Oh, thank you. Good afternoon. There's been some speculation that you're looking at network outsourcing on the mobile side in the U.K, just wondering if you can give some more details around the scope of that, and what the potential impact on margins might be. Secondly, what's the latest on timing re bit stream access? And then thirdly, can you just remind us of your balance sheet target in terms of net debt to EBITDA, and perhaps comment on the size of any potential acquisitions? Thanks very much.

A - Karl-Gerhard Eick

Well, size of acquisitions, there is no guidance and I think that’s quite obvious that you can’t give any guidance there. Our targeted balance sheet ratios are unchanged since quite a while. Predominantly, net debt to EBITDA between 2 and 3, Gearing should be between 0.8 and 1.2 but an equity ratio at around 25%, or between 25% and 35%. That’s more or less the main ratios we do want to be into. I know that we are doing better in more or less all of those ratios, but this does not put any pressure on to us to make silly things, which really means that we are not under pressure. And when it comes to the question about network outsourcing, I don’t know that there are -- I'm not aware, at least, that there are special rumors now in the U.K. about network outsourcing. Nevertheless, what we do, and this is certainly something you have to do if you do want to reduce your remnants costs, you have to look into all kind of venture options, be it outsourcing, be it network outsourcing or be it what have you, but this is normal work in progress and no decision is made in any respect.

A - Kai-Uwe Ricke

And probably relating to the bit stream access, the process is as follows, you know at this stage that we had the hearing by the regulator, and now we are in a phase where basically we have to come to an agreement with our -- or with the people who would like to have the bit stream access. And depending on the outcome of these discussions, further steps will then be decided; either the regulator will step in or not.

A - Thilo Kusch

Okay, next question.

Operator

Stefan Borscheid from West LB. May we have your question please?

Q - Stefan Borscheid

Yes, thanks. Good afternoon. Two questions, please, first on the Excellence Program, could you give us any guidance in terms of your additional measures you mentioned to be implemented - IT costs, network costs and real estate, what you expect in terms of savings from these three areas this year? And, in particular on real estate, how much potential do you still see in optimizing and monetizing your current real estate portfolio and what can we expect for this year? That’s the first question. The second one is on usage in German mobile. Please could you give us any update on when we can expect the usage to increase finally? Thanks.

A - Kai-Uwe Ricke

I give it a start with the cost program and, Karl, you add to real estate. What we initiated last autumn, basically, and which is now in full swing, is overhead reduction, cost reduction program. That’s where we now are up to round about €300 million additional cost savings, which are meant to secure our EBITDA guidance. Before I take the usage, Karl?

A - Karl-Gerhard Eick

Well, let me make some remarks about what you could expect in -- from real estate disposals. This goes very much in line with what I have said already about network outsourcing, because selling assets and outsourcing assets, opening these kind of assets for third party use, is certainly the ways -- different, the ways you can go in order to reduce your remnants costs. And if you look into our real estate portfolio, you will find altogether end of last year a balance sheet total of approximately €11 billion. €9 billion out of this €11 billion is domestic, another €2 billion comes from abroad, or outside of Germany, excuse me. Now, clearly we do want to sell as many real estate pieces, as we do not -- no longer use. Only if you can reduce the usage of these real estate pieces, then you can reduce the remnants costs. It’s not only about financing, it’s not in -- off-balance, it’s not in-balance. It’s a question how much of this real estate portfolio is going to be vacant either today, or in our convergence into the new technology, or how much of these assets you can open for third party use in order really, again, that goes in line with network outsourcing, how much of those remnants costs underlying with these assets you can reduce. We have not given guidance so far. Nevertheless, I would say there is accelerated efforts about this thing but I only can repeat now guidance.

A - Kai-Uwe Ricke

When it comes to the price elasticity question, honestly I do not know when price elasticity will occur. As we all know, it takes time for people to change their pattern. As we also know, there is price elasticity. We just have to look into what has happened and still is happening in other countries - the U.S., the U.K., et cetera. Please take into account that the real price cuts did not occur earlier than September last year, so that is a relatively short time. I know that T-Mobile is doing everything to stimulate usage, to stimulate price elasticity, to provoke price elasticity. T-Mobile@Home, I already said that as per today we have recruited about 500,000 customers. Relax, so it will come. The question is when, and I do not know.

A - Thilo Kusch

Okay, let’s move on. Can I please ask you to restrict your question to one, and maybe really use the time of Mr. Ricke and Dr. Eick to ask some questions. Any detailed question we can also answer afterwards in the IR Department. Thank you, and next question please.

Operator

Mr. Brian Rusling from Cazenove. May we have your question please?

Q - Brian Rusling

Yeah. Well, one question would be your DSL retail market share with 83,000 adds out of the 643,000, how much of a frustration is that, and should we be expecting that sort of level of market share over the next couple of months, until the merger is completed?

A - Kai-Uwe Ricke

Quite frankly, it’s a lot of frustration because it is by far too low. And, as I said earlier, it depends on the merger. It depends on how rigorous and fast we are after the merger, to bundle the products the customer really wants.

A - Thilo Kusch

Okay, next one.

Operator

Mr. Frank Rothauge from Oppenheim Research. May we have your question please?

Q - Frank Rothauge

Hello, everybody. I have a question on cost-cutting, in particular for T-Com, it looks that your cost-cutting program progresses quite well, can you tell us how is the run rate of established cost-cutting, so year-over-year cost reduction which you already realized at T-Com? That’s the first question. And the second question is on T-Mobile distribution systems, you stated last year that you wanted to see considerable investment into build-out of your shop network and the distribution system in the U.K., could you say where you stand in this respect, and maybe give us an indication of fixed costs which have occurred due to this investment?

A - Thilo Kusch

Okay. The second question, if we may, can come back to you because we don’t have that information present. But I think for the first question, we can.

A - Kai-Uwe Ricke

Yeah. But still, Thilo, when it comes to the rollout and the investment in retail in our own shops, be it in the U.K., be it in Germany, we are committed. I do not have the figures in hand now, but I know that we are really going for it. When it comes to the first question, what I would like to do, I would like to repeat the numbers I already put forward to Stuart. Cost reduction for rentals, improved condition for billing collection, lower bad debts, this amounted in the first quarter to around about €120 million. When it comes to the overall company-wide cost reduction program, again, what I said for the year, as per today we have implemented, so we know that results will come, a cost program which shoots for more but has now guaranteed €300 million in additional cost savings.

A - Thilo Kusch

Okay. Next one please.

Operator

Mr. Mark Cardwell from Sanford Bernstein. May we have your question please?

Q - Mark Cardwell

Yes, thank you. I want to go back to the question of competitiveness in German mobile, if I can. If I understood the things you said in November right, your goal really is to hold market share there on a revenue basis. And we've talked about usage but, on a straight revenue basis, it looks like you're still losing share, given that E-Plus is growing and we’re still shrinking in Germany here on service revenue. Obviously, we have more results to come in. But I guess the question I really want to ask is, if that turns out to be the case, can we expect you to be more aggressive still in Germany, and to do whatever it takes to hold market share there on a revenue basis, through the course of this year in mobile? And is pricing likely to have to continue to be adjusted throughout the year?

A - Kai-Uwe Ricke

Look, and we all know that, it is a more question of ARPU and price elasticity than it is a question of trying to exchange customers from one end to the other, or from one network to the other. And when it comes to ARPU, when you look into it, when you look into the ARPU revenue effect, the majority of it is price related. But about 40% of these price-related issues are from the MTC revenue effect. And that’s where we need to stimulate - I'm not talking MTCs only but also MOCs - we need -- and this is a market issue, and this is directed to the guys from O2 and Vodafone, who certainly are listening now. We need to stimulate, we all need to stimulate the usage. And what actually is happening in Germany, and quite honestly I'm happy that it is happening, at least from the mobile point of view is that the price perception in the marketplace is changing. And I am then certain that this one day also we will then have a reflection in the usage figures, but again I do not know when.

A - Thilo Kusch

Okay, next question.

Operator

Mr. Rick Prentiss from Raymond James. May we have your question please?

Q - Richard Prentiss

Yes, thank you, gentlemen. The question is on handsets in the United States, kind of a two-part question. One, with Auction 66 coming up, and I appreciate you can’t talk directly about the auctions, what are your thoughts as far as when there will be availability for handsets in the United States that will provide the 1.7 or 2.1 frequencies with your existing handsets? And the second handset question is a lot of discussions in the United States about broadcast TV. Any thoughts about your interest in providing that on the handsets you sell? Thank you.

A - Thilo Kusch

And, Rick, I'm terribly sorry, but even a question like this, we are not allowed to answer -- sorry, the first part of the question we will not be able to answer, so I apologize for that. But I think for the second one, we can say something.

A - Kai-Uwe Ricke

So, the second one was the IP -- was the broadcast. But it is all linked together, because the broadcasting you cannot offer before you do -- the real broadcasting you cannot offer before you don’t have the new, next generation networks in hand. Well, yes. So, let me be careful here, and Thilo is closing his eyes, so I’m very careful. The new handsets won’t be a problem at all. And when it comes to mobile TV offerings, we certainly will follow the path we are now trialing here in Germany.

A - Thilo Kusch

Okay. Next question please.

Operator

Mr. Guy Peddy from Deutsche Bank. May we have your question please?

Q - Guy Peddy

Yes, good afternoon, gentlemen. You kindly gave us a comment earlier, suggesting that one of the reasons for your more positive outlook in your mobile guidance for the full year was the fact you now expect stronger service revenue growth in the U.K. Given your -- the scale of your uptick in mobile, could you also detail us the other incremental drivers or positive moves that have caused you to increase your mobile guidance? And also, on the wireline broadband fixed net, the way you’ve trimmed your guidance target, is there anything specific you can associate that cut to? I’d be interested to see how things have changed in the last six months. Thank you.

A - Kai-Uwe Ricke

I have to admit I didn’t get the second part of the question but, Karl, you did, so you can answer. The first part I’d like to answer. When I look in the development of all our mobile assets, except Germany, I see good, solid subscriber numbers, specifically in the first quarter. As you all know, this is very, very important for the rest of the year. So, this is sound subscriber development, and that makes me very positive when it comes to the service revenue forecast for 2006.

A - Karl-Gerhard Eick

And the second question. There is no special reason for the revenue reduction in our forecast by T-Com. It’s not the line losses. I think you -- there was quite a significant reduction in our lines, which was more than expected, openly spoken. That’s why we really need so urgently the merge of T-Online with T-Com.

A - Thilo Kusch

Okay, next question.

Operator

Mr. James Ratzer from New Street Research. May we have your question please?

Q - James Ratzer

Yes, good afternoon. I was wondering if I could ask a question please about the U.S. business. It looks as if the rate at which underlying EBITDA margin has been increasing has actually started to slow a bit. And especially when the Cingular contract is removed, we might see margins come under pressure a bit. Do you see -- think we’re seeing a peak in margins approaching in the U.S., please?

A - Kai-Uwe Ricke

No, not at all. We continue to manage T-Mobile U.S. with a yearly EBITDA target, thereby maximizing the subscriber growth, which means profitable subscriber growth. So, it would be very easy to show better EBITDA margin, but that is not our goal. Our goal is to manage the budgeted EBITDA, and at the same time get as much and as many new customers as possible.

A - Thilo Kusch

Okay, next one.

Operator

Mr. Peter Kurt Nielsen from Cheuvreux. May we have your question please?

Q - Peter Kurt Nielsen

Thank you. Peter Kurt Nielsen from Cheuvreux. Yes, I guess my question is partly a continuation of Guy’s. Given the change to your adjusted revenue guidance for the two main business areas, there's been no alteration of your EBITDA outlook. I'm just trying to understand why the incremental revenue sort of loss/gain respectively has no impact on your EBITDA guidance. Or are we to take it that one is implicitly to be in the high end and the other in the lower? Thank you.

A - Kai-Uwe Ricke

This has to do with our commitment for 2006 and 2007, which is the commitment to go for a compound growth rate of 5%. So, when it comes to 2006, we feel very confident with the EBITDA margin of 20.2% to 20.7%. What is it, what we’re doing? We lay the ground for the revenue growth in 2007.

A - Thilo Kusch

Okay, next one.

Operator

Mr. Chris Fremantle of Morgan Stanley. May we have your question please?

Q - Chris Fremantle

Yeah, thanks very much. First of all, I’d like to know, did Blackstone have access to any non-public information pre its acquisition of a stake, or was it just based on public information? And secondly, could you talk a little bit about Web’n’walk and what kind of usage you're seeing? You haven’t -- you said that non-SMS revenues, I think, are growing 50%. But I’d like just a little bit more color on how exactly usage is developing with that product. Thanks very much.

A - Karl-Gerhard Eick

Blackstone’s decision was based on publicly available information.

A - Kai-Uwe Ricke

And the second question was more details on Web’n’walk proposal, we could do that by talking to you via the IR office. In general, let me state that Web’n’walk is a success story.

A - Thilo Kusch

Yeah. And I think we gave you a couple of numbers, I think we said, out of the tariff, we actually gained 300,000 of the 400,000 tariffs in Q1. We came up with a lot of data plan, data revenues are now growing to a substantial size under €135 million. Beyond that, we would need to come back to you if you have any further open question. Next question please.

Operator

Ladies and gentlemen, the conference is about to end. Should you still have further questions, we kindly ask you to contact the Investor Relations department. Now, today’s final question comes from Mr. Tim Taylor from HSBC.

Q - Tim Taylor

Thank you. Hi. How much longer do you think a single play mobile strategy in the U.K. and U.S. is sustainable, given the shift by competitors towards triple and quad play offerings in those markets? And what strategic options have you considered in that light?

A - Kai-Uwe Ricke

Look, first you have to take a decision what customer segment you want to address. And there will be, and is, and also in the future will be, always a customer segment for mobile only offerings. When it comes to the bundling, depending on the regulatory situation, for a mobile operator, it is relatively easy to bundle broadband offerings to its mobile offering. But that is a question you have to answer in the light of whom are you going to address in a respective marketplace.

A - Thilo Kusch

Okay, that’s apparently it. I thank you very much and if -- again, if any more questions arise, give us a call. Thank you very much. Good afternoon and rest of the day for you in the U.S. Bye-bye.

Operator

We’d like to thank Mr. Kai-Uwe Ricke, Dr. Karl-Gerhard Eick, and Mr. Thilo Kusch, as well as the participants, for participating at this conference. A recording of this conference will be available for the next seven days by dialing Germany, 49-69-920-533-33. I repeat Germany, 49-69-920-533-33. We are looking forward to hear from you again. Thank you and goodbye.

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Source: Deutsche Telekom AG Q1 2006 Earnings Conference Call Transcript (DT)
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