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Deutsche Telekom AG (DT)

Half Year 2006 Results Conference Call

August 10, 2006, 7:30 am ET.

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

Terence Sinclair - Citigroup

Michael Williams - Citigroup

Stefan Borscheid - WestLB

Thomas Friedrich - HVB

Laura Mills - Merrill Lynch

Simon Eaton - Goldman Sachs

Graeme Pearson - Lehman Brothers International

Justin Funnell - Credit Suisse

Jonathan - Bear Stearns

Andrew Beale - Arete Research

Stuart Birdt - Exane BNP Paribas

Peter Kurt Nielsen - Cheuvreux

Frank Rothauge - Oppenheim Research

James Ratzer - New Street Research

Chris Fremantle - Morgan Stanley

Guy Peddy - Deutsche Bank

Brian Rusling - Cazenove & Co

Presentation

Operator

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 that target 2006/2007 statements as well as our dividend out look. They are generally identified by the words, expect, anticipate, believe, intend, estimate, aim, goal, plan, will, seek, outlook or similar expressions and include generally any information that relates to expectations or targets, adjusted EBITDA or other performance measures. 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 combination. In addition, regularity ruling, stronger than expected competition, technological change, litigation or supervisory 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 expectations 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.

Deutsche Telekom does not reconcile its adjusted EBITDA guidance to a GAAP measure because it would require unreasonable effort to do so. As a general method Deutsche Telekom does not predict the net affect of future special factors because of the uncertainty. Special factors and interest, tax as depreciation and amortization including experimental assets can be significant to the company’s results. Among the adjustments to the made and determining adjusted EBITDA in 2006 and 2007 will be the cost of the groups workforce adjustment initiative which Deutsche Telekom estimates will result in costs and charges totaling approximately €3.3 billion. In addition to figures prepared in accordance with IFRS, Deutsche Telekom presents non-GAAP financial performance, measures, e.g. EBITDA, EBITDA margin, adjusted EBITDA, adjusted EBITDA margin, adjusted EBIT, adjusted net profit, free cash flow, gross debt and net debt. 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 further information relevant to the interpretation of these terms, please refer to the chapter reconciliation of performance figures of this reports, but it’s just also prove that Deutsche Telekom investor relation website at www.deutschetelekom.

Good after noon and welcome to the Deutsche Telekom Half Year 2006 Results conference Call. Operator instructions. Now please listen to the presentation 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

Hi, good after noon and good morning everybody. Lets go through the speeches and then move into the Q&A. Over to Kai-Uwe Ricke.

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

Thank you Thilo. Let me begin this afternoon by going through the main issues facing the business and most importantly by describing measures we have implemented in order to actively address them. Karl will then go through the numbers in more detail.

The operating environment had become increasingly tough during the first six months of the year and this is reflected in the results for the period. Although revenues grew by over 3% in the first half of the year, adjusted EBITDA, net cash provided by operating activities and net income have not materially changed. We need to look behind the headline numbers however, because the true picture is that of a business which is been impacted by two opposing trends. Internationally, we have growing operations across most of our markets but at home we’re having to defend our market leadership position in an increasingly competitive and difficult environment.

Let me quantify what I mean by this. In Germany combine revenues for the three divisions declined in the first half year by 4%, that is by almost €700 million. While adjusted EBITDA felled by nearly 6%, that is by €400 million. In the same period the international businesses saw revenues grow by over 13% and adjusted EBITDA by 4%. While the continuing success of Deutsche Telekom internationally means that over 45% of our revenues are now generated outside Germany. The margin in these and the new domestic businesses are not sufficient to compensate for the decline in traditional revenues. This trend has exhilarated in Q2. EBITDA growth of nearly 3% in the Q1 turned into 7% negative in the Q2. As with revenues, the major cause of this was the domestic markets where a decline of approximately 2% in Q1 year-on-year accelerated to approximately 10% in the Q2.

We are actively and immediately addressing the situation. Specific measures are being introduced accordingly to maintain our competitive position. I would like to stress that we have three clear objectives in determining our response. We will defend market share, we will place an ever-increasing emphasis on free cash flow management and we will vigorously attack our cost base and operating expenses. We must ensure that we meet our free cash flow targets for the year; at the same time it is necessary to make some changes in the outlook for 2006 and 2007, which I will turn to in a moment.

But let me start with a short overview of what is happening in the German market where the increasing competition has led to strong price erosion in all three divisions. The worsening situation domestically is reflected in the material changes that industry analysts and we our self have made in the forecast. The impact of all of this is that the assumptions underlying the business plans that we discussed with you at the end of last year have altered significantly. For example, the domestic mobile business we had, growth of 10% over two years. This has now been reduced to a growth forecast of only 1%, which translates into less revenues of €4 billion in 2006 alone and in addition, we have to deal with the ever increasing regulatory interventions from Brussels.

In the domestic fixed line business there has been an acceleration in the decline in DSL prices. We are already below €5 in terms of rate DSL internet user charge, a figure we had not anticipated on reaching until the end of 2007. The increase in line losses principally due to customers wanting bundled Internet and voice offerings, have continued at a quarterly rate of around 500,000. You will recall that I drew attention to this in May as our ability to respond had been materially effected by the delay in completing the T-Online merger. The total effect of the DSL price cuts, excess lines losses, voice over IP and international carrier services, revenues have been adversely impacted by €0.4 billion. And in the business customer divisions, we have seen the legacy data market decline by 9% rather than the expected 5% due to price reduction.

In total price decreases across the businesses amount to decline revenues of €0.3 billion. Against this background of a major slowdown in growth and increased competition domestically the management of Deutsche Telekom is quite clear that defending market share is a priority. Specific measures to deliver on this commitment include, in mobile the introduction in the coming weeks of new low priced bundled tariff packages that are aimed at insentivising customers to use in mobile instead of a fixed line phone. To achieve this we really introduced tariffs with an average price per minute of less that €0.10. We have seen in other markets that elasticity kicks in when the fixed to mobile ratio is between 3 to 5, fixed line -- to be substituted. It is our firm intention that we will have tariffs within the range this year, in addition we have also reduced significantly the prices for mobile data on HSTPA and WiFi, we have reduced by up to 16% the prices of our high end products that gives the customer 5GB of data volume plus 200 monthly hours of WiFi.

We are further improving our network beside building our leading WiFi network we are the only mobile network provider in Germany to compliment our 2G network with Edge, this upgrade is giving our customers 200kb per second even in those areas which are not covered by UMTS and HSTPA. I might add that total mobile customers now number more than 90 million. In the fixed line business we are introducing clear and simple tariff bundles, double play offering will retail at significantly below €40 per month and last week we have successfully launched our T-One duel phone. At the beginning of August in time for the start of German Bundesliga soccer league we launched our triple play offering including a full set of IP TV channels as well as Bundeslega games in a high definition quality, the full T-home offering including a DVD on demand will be launched in October.

With business customers there have been two significant developments, first we have been able to extend frame contracts but with the inevitable price ructions higher than we expected, which have impacted revenues by around €70 million. Second we are pushing our IP revolution to transfer all our business customers from legacy voice offering on to our IP platform, we will continue our IT push into the SME segment. Let me turn now to the international business where we continue to see strong growth. First however, let me just reassure you that there is nothing to be worried about in the net adds development in the US. The reason why Q2 shows a slight dip was first a combination of increased competition in prepaid which we were not prepared get involved in and second and importantly of course in April, we move from one to two year service agreements. While this resulted in lower our net add growth in that transitional month in June we had one of our best months of top line sales gain of the year. The gross run rate went from 763,000 in April to 874,000 in May and then 944,000 in June, which compared well with a monthly average in Q1 of 938,000. They are of course clear advantages in moving to the two-year contract model and particular in our drive to reduce customer churn to even lower levels in the medium term and thereby increase the lifetime value of the customer.

We will not however fully makeup for the April shortfall in the second half of the year. Now we now expect full year net adds in the US to be around 3.4 million mark. In the UK introduction also and investment in the new flex packages continues to drive the strong revenue growth with a record number of contract net adds of 363,000. By the end of June we had three quarter of a million Flext customers. But the strong customer growth is also evident in our other markets in particular in the Netherlands and Hungry which each had over 60,000 contract net adds and the Czech Republic with 118,000. Non-sms mobile data revenue in T-Mobile reached more than €600 million the first half year and total mobile data revenues amounted to close to €2 billion up 23% from the first half of 2005. The business customers division also shows strong international growth. International revenues including the consolidation of gedas in April grew by 14% nearly €1 billion with major customer gains for example Spain. Let me now hand over to Karl to talk about the results in more detail and then I would like to focus on our cost reduction and free cash flow generation program.

Karl-Gerhard Eick - Chief Financial Officer

Thank you Kai turning first to Broadband fixed network you can see that revenues remain under pressure in Germany. The impact of increasing competition has been to put pressure on prices an accelerate line losses. Overall, domestic revenue is decrease by 6.5% in the first half this year compared to the first half ‘05. Domestic adjusted EBITDA decreased by 7% reflecting the price erosion in revenue and strong market investments especially in the DSL market. However, due to cost cutting we were able to keep the domestic adjusted EBITDA margin essentially stable at 37.4% compared to 37.6% in the first half of ‘05. In contrast, international revenues increased by 2.7% in the first driven by an increase in investment in the French and Spanish Internet businesses. The resulting negative EBITDA of €74 million contributed to the fall in international EBITDA by 10.5%. We did, however, see EBITDA and revenues in Q2 over Q1. Nevertheless, revenues decreased by 5.5% in the first half.

Overall adjusted EBITDA of the division decreased by 7.3% in the first half. Looking more closely at the revenue development in the domestic operation of broadband fixed network the impact of the continuing decline in calling revenues remains clear. The decrease in calling revenue was driven by lower call volume with total call minutes down 7.8% in the first half and lower prices with the average price minute down 14.9%. Average prices decrease as we sight the higher penetration of calling plans and the reduction in the fixed mobile termination rates, which was pass on to the customer. We now have 14.6 million customers in optional tariff and had been very successful with our flat rate tariffs, which effected nearly 1.4 million customers within 9 months. Call volume decreased due to the continued line losses of 3000 in Q2 and to a lesser extend due to substitution of fixed line minutes and mobile and Voice over IP.

The share of Voice over IP minutes continued to increase moderately to around 5% to 6% compared to a total market voice minutes. Revenues from value added services decrease by 49% primarily due to a change revenue recognition of some value added services. Revenues from terminal equipment shrunk by 15.7% due to lower telephone list in business on the other hand revenues from data communications actually increased by 3.5% primarily due to a new allocation of revenue from the systems. Outside services decrease by 1.2%, here the increase in unbundled loops and broadband research services could not entirely offset the decrease in the rotational voice business. However, Q2 actually saw positive year on the year revenue growth in the segment of 2.2% let me remind you in that context although of the regulatory intervention. Cost reduction of the inter connect service announced on April 13th by 9.8% and effective from June 1st and secondary reduction of the DSL recent prices where the discount was increased from 11.5% to 20% as of June 1st.

Domestic DSL growth while seasonally down from Q1 remained strong with 402,000 net adds in Q2 compared to 367 in 2Q of ‘05. However, our retail market share was only 4% in Q2 with vast majority of DSL gross come from the sale, the net result of this a strong price decreases especially in DSL flat rates lead to a 3.8% revenue decrease in the IP Internet segment. In the mobile segment the situation domestically continues to be difficult with 175000 prospect net adds in Q2 we achieve a very strong beside versus competition. T-mobile at home is now more then 700,000 customer and gained approximately 200,000 net adds in Q2.

However, output revenues decreased by 3.1% in the first half driven by the termination rate cuts and competition. The adjusted EBITDA margin decreased from 41.1% the first half ‘05 to certain 9.4%. Encouragingly we saw no further deterioration in output compared to Q1. Q2 ARPU increased to €21 from €20in Q1. This increase was driven by a substantial increase in minutes of use. The increase in minutes while encourage was not sufficient to offset the continuous decline in mobile telephone pricing in Germany. The Germany consumer price in Deutsche mobile telephone was found 7.6% year on year June compared to minus 11.5% in March. Overall in mobile we saw essentially the same picture as in the other divisions with various phone calls in the international and the weak revenue picture in Germany.

Overall mobile revenues increased by 10.7% including the acquisition Tele Ring. This was driven by increased in international revenues of 16.7% partially offset by decreased in domestic revenues of 3.3%. Similarly adjusted EBITDA of the international operation increased by 8% while the domestic adjusted EBITDA decreased by 5.4%. Due to the still comparatively higher EBITDA margin in Germany that decreased in domestic EBITDA had a large impact on overall adjusted EBITDA, which grew by 2%. The US remains the strongest growth rival of Deutsche Telekom. Focusing on Q2 in local currency terms ARPU increased by 19.6% to $3.5 billion. ARPU revenue growth exceeded total revenue gross was 16.9% due to the expect is decrease in Cingular wholesale revenues. Despite the decrease in this very profitable wholesale revenues, the adjusted EBITDA margin remind essentially stable at 28.5% with a 16.4% year on year increase in absolute EBITDA in dollar terms. Contract ARPU increased from $55 to $56 year-over-year driven by the strong gross data ARPU. Data ARPU amounted to 11% of ARPU, up 3 percentage points from Q2 of ‘05. A key driver for data was the continued growth in the number of converged device users. The number of BlackBerry customers passed the milestone of 800,000 customers, up by 51,000 from the end of Q1 of ‘06. This growth was equivalent to 10% of the contract net adds in the quarter. Contract churn at 2.2% was down from 2.3%, the year before while seasonally up from Q1.

Besides the US, the UK was also a strong driver international revenues at T-Mobile. Our market investment especially the launch of the Flext tariff is showing positive results. Driven by contract net adds of 629,000 in the first half, up from just 44,000 in the first half of ‘05, ARPU revenues grew by 8.4% in the first half. Contract ARPU stood at €64, stable year-on-year, while contract churn decreased to 2.1% from 3% in the first half of ‘05. The market investment clearly impacts the adjusted EBITDA which fell down to €336 million. This was driven by the sheer volume of contract gross as well as on year-on-year increase in the contract SAC per gross adds to €435 in the first half of ‘06. On the other hand, the prepaid SAC per gross add stayed essentially flat at €35 demonstrating our focus on growing the contract customer base.

Total market invest in the UK increased from €437 million in the first semester ‘05 to €718 million in the current year. Driven by the increase in customer acquisition cost and customer retention costs. We rolled out new shops as announced, which incurred additional costs. This additional costs preset margin of the UK business in Q2 were stable compared to the last year’s Q2. We do expect an increase in the EBITDA margin in the second half of the year with an adjusted EBITDA margin of around 20% for the year as a whole. In the business customers division, overall revenues were down 2.7% in the first half with internal revenues down 4.3% and external revenues including gedas down by 2%. Excluding gedas, external revenues would have been down by 5.3%. Adverse growth drivers like IT services for the SME segment however, increased by 67% and the international business was up by 13.7%. However, these increases could not compensate for the overall development in Germany. Adjusted EBITDA was down 18.2% driven primarily by the deterioration in market prices due to increased competition.

Revenues in the SME segment declined by 1.9% while the top 60-plus customer segments decreased by 3.1%. The top 60-plus customer segment was supported by the consolidation of gedas which contributed €160 million in revenues and €10 million in EBITDA.

Turning now to the key value rival of free cash flow you can see that Deutsche Telekom continued to generate strong net cash flow. Net cash provided by operating activities amount to €5.7 billion in the first half compared to €5.8 billion in the first half of ‘05 underlying the strong cash generation capabilities of the company. Through lower tax and invest payments we were able to almost offset the decrease in top line cash flow driven by the lower adjusted EBITDA. Reported CapEx decreased from €4.9 billion to €4 billion. Due to the decrease in reported CapEx reported free cash flow increased from €0.9 billion to €1.7 billion in the first half of ‘06. However, reported CapEx in the first half of last year included as you will remember €2.1 billion from network assets and licenses in the US in connection with the acquisition of the Cingular network in California and Nevada and Auction 58.

Normalizing CapEx of this investment CapEx increased by €1.2 billion based on normalized CapEx and excluding €0.2 billion of redundancy payments which we have seen in the first half of ‘06 adjusted free cash flow decreased from €3 billion to €1.9 billion in the first half of ‘05. Net income both reported and adjusted was in line with the trend in EBITDA. Reported net income decreased from €2.2 billion to €2.1 billion in the first half of ’05 while adjusted net income declined from €2.2 billion to €2 billion. Deutsche Telekom continued to deliver very solid net profits of approximately €1 billion per quarter. In terms of the P&L details I would like to highlight just two things. First, income tax is benefited from a tax gain of €440 million due to a reversal of rate tax provisions. This reversal however only had an impact on the P&L and was not recorded as a cash flow which you can easily see if you look into the cash flow statement. This tax gain was partially offset by a slight deterioration in the net input expense the background of this is that the net interest expense for the first half of ‘05 contained interest gains, derived from the reduced net debt following the improved rating of Deutsche Telekom coming out of the step-up language of some of our bonds.

Our balance sheet continues to be in excellent shape both the gearing and the equity ratio are better than our stated leverage targets. Net debt stay at more or less flat at €38.8 billion compared with €38.5 billion at the end of ‘05. This was impacted by a number of sectors. We spent €1.3 billion on the acquisition of Tele.ring, €3 billion on the dividend while the purchase of gedas increased net debt by €0.4 billion. This was offset by €2.1 billion from the expiration of the mandatory convertible, the free cash flow and positive currency impacts which amounted to €0.5 billion in the Q2 along. In this context let me mention that we intent to buy back the 63 million shares issued in connection with the merger of T-Online in the Q3 as promised. The Q2 have used the favorable market environments to issue a total of €1.75 billion in bonds and medium term notes. With this I would like to hand over back to Kai.

Kai-Uwe Ricke

Thank you Karl, as I mentioned earlier the net effect of the worsening situation in Germany has let us to make a number of adjustments to our outlook. These have affected both the revenue and EBITDA lines as you can see from the slide. As you will recall we made some divisional revenue adjustments in May but we did not change revenues at the group level or the EBITDA. At that time we believed that the worsening situation in BBFN domestically would not impact the EBITDA. However, on the basis of the six-month figures and the first results of the planning process we now have also had to make adjustments to the EBITDA. As I mentioned, we are looking at a similar picture in our other German businesses and this has reflected in the changed outlook for the other divisions accordingly. Taken together this results in changes of revenue and EBITDA guidance at the group level. For 2007, we see moderate growth in-group revenues nevertheless the underlying trends in the businesses are expected to continue and therefore EBITDA will be at a similar level to 2006.

We do however expect to see a significant growth in free cash flow of 20% from at least €5 billion for this year to at least €6 billion in 2007. These numbers are after redundancy payments of around €1 billion per year. Please note that our free cash flow targets do not include any 3G spectrum and infrastructure investments in the US. In the first part of my presentation, I covered the aggressive measures that we have introduced to ensure that we maintain our domestic market share across three operating divisions but that is only part of the story. Equally important are the measures that we are and will be introducing to reduce our cost base and to meet our cash flow targets. In the current and future environment this company has to become more efficient, we have to radically attack our cost base. The same time we will look into measures to improve free cash flow generation. The starting point is firm CapEx discipline. We have accordingly adjusted CapEx for 2006 excluding any 3G spectrum and infrastructure related CapEx in the US to around €9 billion instead of €10 billion and for 2007 CapEx will be adjusted in line with EBITDA expectations. That doesn’t mean that we are going to stop the businesses but it does mean that all investments must be certain of earning an appropriate return. So for example, we will only take the VDSL investment beyond the 10 major cities. If there are clear signs of customer demand for the product which incidentally we do expect there to be. The targeted launch in these 10 cities is an ideal platform to test customer’s reactions. In the context of VDSL you will recall that on the 17th May the government introduced in the Parliament the necessary draft changes, in particular communications law without which we would not be willing to proceed with the investment.

Next, let me highlight the cost cutting measures that have been implemented. We announced back in November that we would be reducing personnel numbers by 32,000 over the following three years. This program is progressing well. As of today, 5100 agreements for severance payments or partial retirement had been requested or agreed since the beginning of the year. The German government has sent a draft law into the parliament, which once implemented will allow us to start with the planned earlier retirement of civil servants. We expect this law to come into force into Q3. The additional cost savings we announced in Q1 are progressing well. As of today we have implemented measures that should result in €4 billion of cost savings this year. As part of T-Mobile save for growth program savings of €900 million have already been achieved. That is what has already been announced or put in place.

We are now transforming the company into the next generation telecom. Introduction of an all IP environment will result in the substitution of transport integration platforms like ATM, SDH and X.25 and Frame Relay and provide us with significant OpEx saving. They serve a dual purpose of both building the platform for future growth and at the same time rationalizing the cost base, the NGN we also require less personnel. In addition, we have identified key IT savings that will unable us to reduce internal IT spending by nearly around € 0.8 billion to around € 4 billion by 2008. We will detail the full program of these and other cost cutting measures in November. We’re also concentrating on taking out other non-personnel cost. The real estate portfolios again being analyzed and we are revaluating rest of the asset base with the expectation that there will be other non-core elements that do not earn an appropriate return.

The emphasis on free cash flow generation is both a necessity for the business in the current difficult environ, but is also demonstrative of our clear commitment to ensuring an attractive return to our shareholders. We need to invest to ensure both that organic business development continuous and to maintain a strong competitive position by continuously working on rationalizing the business. It is also the intention of the management board to continue to pay an attractive dividend, which again means at least at the level of the 2005 dividend. The ability to pay an attractive dividend is based on our ongoing commitment to free cash flow management and the strength of the company’s finances and balance sheet, with that let me conclude.

Thilo Kusch - Head of Investor Relations

Okay, let’s move into Q&A just to repeat you know about the situation AWS auction, you know we are participating and we will not able to answer any questions beyond that so, probably to save us time, it’s not worth of trying because unfortunately we are not allowed to say anything. With that please let’s start with the questions.

Question-and-Answer-Session

Operator

Thank you very much Mr. Kusch. The question and answer session will be starting now. [Operator instructions]. Mr. David Brundish from UBS, your question please?

David Brundish - UBS Limited

Thank you, good afternoon, number of questions if I may, the first one last November your guidance, you said at the time to safe guard the strategy of long term profitable growth and this time the guidance you got to safeguard the customer basis at across all three business areas. Is there any reason to believe now that the visibility is any better and on the outlooks than it was last November, and what gives you that comfort? And the second question, as no divisional guidance is being provided for 2007 as yet, but what do you read into that, is this the 2007 outlook very much a top down and if not where do you see the cut coming through and on the CapEx side of things you had some very specific programs identified to increase in CapEx. Which program you either differing or not investing in? So my question therefore being is it more deferral -- cost of CapEx, a brief final question on 3G within the US, I mean you mentioned that the CapEx is not in numbers, is there any sort of EBITDA pressure or any sort of I guess operating costs that are also not reflected necessarily in the EBITDA guidance, thanks very much.

Thilo Kusch

Okay, let me give it a start, the first question regarding the outlook what I would like to do, I would like to explain the process a little bit. As you know, we reduced the guidance on revenues in the Q1 in T-Com based on what we saw. We saw then a worsening of the underlying trends in the Q2, we started the planning process and we had quite firm view after the bottom up plan to then give you the new guidance for 2006 and the indication for 2007. We see that this revised guidance now is exactly at the right time. It is not too late and it is early enough, so it is not in autumn, it is now and it is based on a bottom up planning process. And I think that it also answers the second question, which was the question on divisional guidance, because what I said was, we want to give you an indication, a firm indication derived from bottom up planning on how we see 2007. When it comes to CapEx investment, what we will do, we will review all projects and we will be quite tough when it comes to questioning the returns in a changed environment -- specifically in Germany. And what I also would like to add, we are going to shift priorities. Yes, you are right you said, David, in November we believe in market invest and growth. Now we shift to sustaining revenues and go for rationalization investments, which means that when it comes to priorities in our investment budgets we are going to shift priorities. Please also note that we have a track record in managing CapEx, and please also note that there is quite some room once you acknowledged that the company plan -- originally plan to invest the €10 billion this year to reduce CapEx in a manner where it does not harm revenues. Let me add two additional remarks. First, David, divisional guidance, yes, this is not yet included but as always we will deliver divisional guidance at the end of our budgeting closes which is now you know, taking place and at the end of it IE is always in November when we talk about Q3 results. We will then come up with a precise divisional guidance also for ’07. So as for my second remark, as Thilo was rightly saying we cannot give any more details about this difficult 3G and spectrum things in the US, but let me make one thing clear. The EBITDA target for ‘07 as well as the free cash flow target for ‘07 will also be achieved including the CapEx spending for 3G in the US to be very firm and very clear year.

David Brundish - UBS Limited

So just to confirm, the greater than €6 billion free cash flow number for ‘07 that you said that it will be unharmed or unaffected by the 3G CapEx in the US.

Thilo Kusch

This is right and this contrary to what I’ve said in my speech.

David Brundish - UBS Limited

Great. Okay, thanks very much, it’s very clear.

Thilo Kusch

Okay, next question.

Operator

Mr. Terence Sinclair from Citigroup, may we have your question please?

Terence Sinclair - Citigroup

Good morning, I wondered if you could just go back and -- so that the CapEx cuts between (inaudible) T-Mobile and I wondered if you could tell what past the €9 billion CapEx -- relates to maintenance CapEx since you reap -- you got no leeway on whether you spend it or not and what past the €9 billion is commercial CapEx, which has been scaled back?

Karl-Gerhard Eick

Well I think it’s a difficult question, which is not so easy to be answered. Let me give you a more general answer. You know, this is a CapEx reduction across all businesses not excluding any CapEx spending at all. It certainly gives a more significant focus on the rationalization to what I think we have originally intended, but we are still talking about €9 billion you know, that’s a huge number and I think we have proven for two years that with a €6 billion CapEx -- per CapEx we can easily manage and easily run the organization even if we go for gross. So what I would like to say is, first, it does not exclude anything in our CapEx budget, but people should not be concerned that the company is now running at growth, think what we have to do for growth in terms of CapEx spending, we can do and will do it despite the CapEx cuts over billion.

Terence Sinclair - Citigroup

Could I ask the question the other way, in some of your businesses you loss customers that will make it easiest to spend less on the CapEx. To what extent does that €1 billion cut reflect the loss of customers?

Karl-Gerhard Eick

It certainly will reflect the development of our German business, specifically the fixed-line business. Next question, please.

Operator

Mr. Michael Williams from Citigroup, may have your question please?

Michael Williams - Citigroup

Yeah good afternoon everyone. You were proposing cuts in excess of 50% in permanent pricing in German mobile, at least that appears to be the case so far and have use of no compensated per price cut. I wondered what elasticity affect, you are actually factoring into your guidance on the mobile side of the business, thanks?

Karl-Gerhard Eick

You and I, we both know that it is very difficult to foresee elasticity. We did extensive market research and the prices and the pricing model we want to introduce as per the IFA, which is a fair in Germany within the next two weeks is going to reflect the results of this market research, we believe that not only T-mobile, but also the total market has lot of room to improve when it comes to mobile originate calls.

Michael Williams - Citigroup

Thanks, maybe I can just follow up. I think on Vodafone last conference call they talked about undisrupted markets, elasticity being less than one. Would you agree with that, and if not why?

Karl-Gerhard Eick

My personal believe is that once you reach a level of two to three to six plan minute prices you will see positive elasticity.

Michael Williams - Citigroup

Thank you.

Karl-Gerhard Eick

Okay, next one, please.

Operator

Mr. Stefan Borscheid from WestLB, may we have your question please.

Stefan Borscheid - WestLB

Yeah, thanks. Good afternoon, first one is on your new fixed bundle prices, which are known to be significantly below €40. Could you give us a few more details of what exactly it’s going to be included in those bundles, so what are -- for bellow €40 also get the voice flat rate and how that’s going to impact your ARPU? And secondly I don’t know if I got you right in the presentation. So you said you are now no aiming at 3.4 million subscriber additions for T-mobile US. In the first half you got 1.65 millions. So normally Q4 is quite a strong quarter, would that mean that we shouldn’t expect much more in Q3 than we had it in the second? Thanks.

Karl-Gerhard Eick

First question, please understand that I do not want to give any more details on the new price scheme of T-Com, also because I know there are a lot of competitors in the call. Second question, I feel very comfortable with the 3.4 million net adds for the total year. Okay, next question please and -- sorry if you also would not try to ask a question after you asked I feel that will be great because we have quite a lot of people wanting to ask question, thank you very much.

Operator

(Inaudible) from JP Morgan, your question please.

Unidentified Participant

Yes, good afternoon. Just two questions regarding the German mobile, you indicated that you would for some bundles aim for an average tariff of below €0.10. I wondered if that was going to be for the majority of contract bundles and whether we should be thinking of this as an average tariff that you are aiming towards or whether it’s going to be, say a limited offer for a certain bundled customers. Secondly, given that E-Plus is now publicly going for 25% revenue market share in Germany, I wondered whether you had a view as to what kind of market share you would want to claim for yourselves.

Karl-Gerhard Eick

Let me -- when it comes to tariffs, let me not be too precise, but let me assure you that we will do it intelligently. So when I say below €0.10 per minute I say there are bundles reflecting that and we would do it in a manner that it is dealt intelligently. When it comes to revenue market share in Germany I do not want to throw a new number before we really have gone through the planning process, finalize the planning process until November next -- until November this year. Okay, next question.

Operator

Thomas Friedrich from HVB, your question, please.

Thomas Friedrich - HVB

Thank you good afternoon everybody. I have some questions regarding the VDSL rollout. First of all, some kind of confirmation, did I understand you correct, Mr. Ricke, that you mentioned the rollout of the network beyond the ten metropolitan areas depends on customer demand and did you not mention the favorable in regulatory environment anymore, and was this on purpose? Next question would be what kind of technical problems are you going to be experiencing with the product and yeah, when can we expect the full marketing of the whole product? Thanks.

Kai-Uwe Ricke

Just to confirm what I said earlier and I always said that and I repeated so that we are all on one page. I always said that the fiber rollout will not only depend on regulation, but also on customer demand. I deliberately stress at this time because the demand, because I got the impression that some people still think that we would just roll it out even if there is no customer demand. So it is customer demand and regulation. Technically the only piece which is missing is the piece of video on demand, the time shift TV, and the recording, the automatic recording everything else works so what we launched so far is IPTV about 70 channels plus -- including I would rather say the Bundesliga, what we did not to and do not intend to do on short term is to do a full blown big boost marketing introduction because, let’s face it, we are talking 10 cities, we are talking 3 million customers, we are talking processes which need to work and that means that we need to be very careful in what we do to not spoil the product. So we will be following the normal or I should better say a normalized starting curve. What I’m talking about is we are following a starting curve of the project, which if customer deduct demand is there, one day it might have -- might have the reach and scale of what’s mobile had or DSL had once it was introduced to the marketplace. So don’t let yourself be spoiled, misunderstood by the press. Okay, next question.

Operator

Laura Mills from Merrill Lynch, your question please.

Laura Mills - Merrill Lynch

Thanks very much I have four actually, sorry for that. On the guidance for 2007 first of all, comparing to what you originally set back in November it looks like we are leading over €2 billion of revenues which is about the same as the EBITDA downgrades you’re talking about today. Given that there is going to be some cost associate with this revenue loss and given your cost cutting as well. Can you let us know specifically what cost do you see rise in the business. The second question is on German mobile, you really have no evidence at all so far from your own customer base as safe on elasticity so it seems a little brave to me to cut prices in half. Can you give us specific evidence for market where this has happened to proves that if you cut prices by this magnitude you really get a volume effect coming through? Thirdly, it should be a quick one, can you say why your systems integration EBITDA is down from €44 million last quarter to €2 million this quarter? And lastly, can you let us know on your thinking on M&A given the new competitive environment you’re saying in some of the market you’ll break in? That’s very much.

Kai-Uwe Ricke

Okay, I’ll start, Karl, and you help me out because I didn’t get the third question. When it comes to the cost, specifically cost reduction program I really would like to refer to November when we come across with the very detailed cross reduction program. When it comes to the minutes and the elasticity, we see and we know that it differs very much on a country-by-country basis but what I would like to refer to is some of our experiences in the US and in the UK, but also the experiences we have based on our market research in Germany. Karl, you probably will answer this third question again, I haven’t got it. I would like to do and make a very specific statement on your M&A question. And I think I was very explicit, I was explicit this morning with the press too. Deutsche Telekom has lost €700 billion compared to last year on revenues Germany and it has lost €400 billion EBITDA compared to last year in Germany. So we have a job to do and I would call it homework -- I said house of garment in Germany. The job we have to do in Germany is we have to vigorously fight for market share, we have to reduce the cost, the cost base specifically in Germany and I talked about it early on, when I said we need to fight the redundancy cost in our German business. And we have to steer investments appropriately. This is what we are going to focus on. Now, when it comes to acquisition there is no change in acquisition policy, but I say it again, we will focus on our German issue.

Karl-Gerhard Eick

I think I do not -- I do not yet have a precise answer to your very detailed question about system integration if I understood you correctly. The only thing what I think I could say is that especially to systems EBITDA margin was heavily impacted by the price reduction which have influenced not only the revenue, but in the same amount also the EDITDA in total, as well as EBITDA in margin, that’s a general explanation for the systems and sorry, I don’t have now any specific answer about systems integration. If you would allow, we would like to come back with -- from IR department from Thilo Kusch and his team with the most specific answer, about system integration if we may.

Laura Mills - Merrill Lynch

Okay, and sorry, but if you could restrict your questions to one that would be great because the list of people is quite long, thanks.

Operator

Mr. Simon Eaton from Goldman Sachs, may we have your question please?

Simon Eaton - Goldman Sachs

Thank you, yes on the UK would you mind giving us a view of the outlook for the margin to the second half and then commenting on whether you’re getting good value for your rather high rather looking contract tax?

Karl-Gerhard Eick

Well let me -- Simon, let me try to give an answer. First, I think what we are doing now is what we have precisely indicated and announced because we have made it clear, having seen the take off O2 by Telefonica that now we have to go organically in the UK market, that’s exactly what we are doing right now, we have significant organic market investment. Kai has made it clear that this is also naturally influencing out EBITDA significantly as far as our EBITDA margin that as well. He as also made it clear that we do expect the EBITDA margin to recover in the second semester we have been at 16% in Q1 in the first semester. We do expect approximately 24, 25 rounds in the second semester and we have not yet given up our EBITDA margin target for the UK which was always around at least 30%. This is still in place and we see good recovery in the second semester and progress is coming.

Thilo Kusch

Okay, next question.

Operator

Graeme Pearson from Lehman Brothers your question please?

Graeme Pearson - Lehman Brothers International

Oh, thank you, I’m going to, just a moment try to play. Firstly, what are your latest thoughts around the needs for fixed offering in the UK and secondly, when do you think you will be able to show an improving trend in your share of ads in German -- thanks.

Kai-Uwe Ricke

Short answer on your first question T-mobile UK will focus on the mobile only offering and only in case be ready to cross so by cooperation with one of the Internet providers. DSL based on the introduction of the new tariff scheme I expect to have improvements in Q4 2006.

Operator

Mr. Justin Funnell, Credit Suisse, your question please?

Justin Funnell - Credit Suisse

Thanks, I guess trying to get two questions in as well, right away. Yes, your -- your lag of guidance on 3Gs that is something -- you don’t know how much you’re going to spend until you have the spectrum. Can we question whether you guys are to stay in the US, is that an area of potential value for shareholders. It kind of makes sense in a way if 3Gs isn’t working in Europe to sell out before you have to build it there. Second question, would we see any sort of retrenchment of video strategy costing you to investment more in Germany?

Karl-Gerhard Eick

Slight correction before Kai gives an answer. We know what we know, what we do spend in US, we only are not allowed to share it with you, it’s -- that’s a slight correction I wanted to give, but -- I said I’ll hand it back to Kai.

Kai-Uwe Ricke

Yeah and the second sentence to the question is, that we are absolutely committed to the US, Kai help me, what was the second question?

Justin Funnell - Credit Suisse

The video sale and rollouts.

Justin Funnell - Credit Suisse

Videos sale rollout. Uh-huh, okay sorry, okay I got it, yeah-yeah. So video sale, I repeat what I said and then I would refer to audio also. Video sale, I regarded it as a test ten cities we see how it works, we believe in it. We look at customer demand and regulation and then we continue to work with it. Audio sale will be roll out, anyway it’s a very cheap methodology. We are in the middle of reviewing the investment stands on areas with Plus, but we will and we are committed to go areas with Plus anyway because there it’s fairly cheap.

Operator

Jonathan Dann from Bear Stearns, may we have your question?

Jonathan - Bear Stearns

Hello, Jonathan here. Can you walk us through how you arrive at €6 billion cash flow target starting at the -- I guess the bottom line of the EBITDA figure sort of EBITDA, CapEx, interest tax and redundancies, working capital, etc. And then second one is more of kind of concept. If you sort of manage this very successful hold CapEx down for the last three or four years and it hadn’t resulted in operational last four months. How will keeping CapEx lower result in operational out performance going forward and if you could comment on that I would be very grateful.

Karl-Gerhard Eick

Let me start and Kai certainly is -- then afterwards going to jump in. Operational performance in line with our CapEx budget and I think we have to put also our actual say, situation into a perspective. And in doing so, I think we really have proven first we can manage CapEx because for two years we have bog down our CapEx down to €6 billion at the same time we have improve our EBITDA margin. So, I think it requires us a certain correction to say our CapEx spending does not lead to operational performance and this year we are still spending €9 billion, which is a huge number if you compare it with our historic performance and again I think we have proven what I called, in managing our CapEx budget as well as managing our free cash flow. And this €9 billion to certain extend Jonathan also gives to an answer to your question about the €6 billion free cash flow indication, from indication guidance for next year. First an foremost I think we, we have to bring our total budgeting process to an end and then if needed and required to achieve our €6 billion free cash flow target we have to further bring down our CapEx budget. It is as easy as that. And I think we know how to make it. This gives me a quite significant coincidence that we are not only going to achieve our €5 billion free cash flow for this year, but also our €6 billion free cash flow number for next year. One has to have in mind that we are not only spending €9 billion CapEx in this year. But also a €5 billion total amount of subscribe acquisition cost and customer retention cost. In line with that we are spending significant taxes and interest expenses, which clearly means that we have huge numbers to work with in order, really to achieve the free cash flow numbers we are guiding.

Kai-Uwe Ricke

Let me add to that. If you -- if we don’t see the growth there is no reason to invest in growth. So what we are saying is, that we are shifting, that we’re changing our financial strategy away from investing in growth, investing in rationalization, reducing redundancy cost and make sure that there is an attractive dividend for the shareholders.

Operator

(Inaudible) from ACF, may be have your question, please?

Unidentified Participant

Yes, regarding the attractive dividend, when will we know that attractive dividend and also is compatible, we -- problem because other competitors, for example Telefonica or Telecom Italia they have higher levels of their returns, are executed in -- looking to the currency prices, difficult to understand why after you know the results of the US spectrum -- buy back sales (inaudible) your line operation. Thank you.

Kai-Uwe Ricke

If the question is, why don’t we do a share buy back? If this is the question you’re asking us then I think first and foremost, due to the fact that we do want to use our free cash flow first and foremost for developing organically our operations. For example, you know such as spectrum investments in the US, but we also have to do some cash flow spending in order to reduce our legacy cost. That’s why I am saying, we have to also use our free cash flow for organic performance. Second, we do want to use our free cash flow for an effective dividend because that’s implement and that’s -- the mean, how we do want to participate our shareholders at our free cash flow and last but not least, what I think we also have to do is to safeguard our rating. And what we also have seen that the rating agencies are motivated to change their standings to all of the companies, if the company is changing it’s distribution philosophy to our shareholder and they think it is the right thing to be done in the actual situation to go on with not only consistent distribution philosophy but also to go on with our consistent financial discipline and financial policy when it comes to our financial ratios.

Unidentified Participant

Okay, thanks we have I think about 14 questions left if you could really stick to one question that would be very nice thank you, next question.

Operator

Andrew Beale from Arete Research, may we have your question?

Andrew Beale - Arete Research

Hi, when you look at the successful mobile challenges in Europe, hardly any of them seem to use that very sort of blunt messages, very high -- just to buy customers, so I’m really just wondering why in the UK you think you do have the rights to actually, particularly when the third party channels that you are still using you know, just using that to discount your already discounted Flext offer and also to make profit themselves so that’s the main question and just one clarification CapEx for ’07, you can’t show ‘07 you -- €2.5 billion and you said you are going to compensate, so are you saying that CapEx in ‘07 will be about €7.5 billion?

Thilo Kusch

So when it comes to your first question, Flext tariff have the better value for customer. You are right, we need to be careful that we don’t overdo it when it comes to the commissions paid in the market place. We already said that we were quite impressed by the success we had in the Q1, so we reduced commissions in the Q2. When it comes to your second question, investments budgets next year will not be above €8 billion.

Operator

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

Mark Cardwell - Sanford C. Bernstein & Co.

Yes, thank you, can you just comment on the redundancy payments beyond the €2 billion in the next 2 years, is that the whole program or do you expect this to continue for several years, can you give us the sense for the long term extent of the program and just a quick clarification on Mr. Ricke on the video sale regulatory side of things, are you still sticking to your point of view that the German government law as is not -- doesn’t matter with you say as long as the German law goes through?

Kai-Uwe Ricke

To take your second first, very difficult because you need to be more, I would have to be more precise, I try to answer it more general, we always said that we need a tighter version of the version, which actually came out of the cabinet. What was the first question again, €3.3 billion yes, well that’s quite clear the -- €1 billion this year and €1 billion next year is part of the €3.3 billion which we originally told you when we came out with our 32,000 plan.

Karl-Gerhard Eick

To be precise here the €3.2 or €3.3 billion is -- that the payments which are going to be received by the employees for the company and this is the €3.3 billion. Now if you deduct the then you come down with the text deduction to approximately €2 billion around and that is after taxes what we have included in our cash flow statement and cash flow for this year and next year.

Operator

Stuart Birdt from Exane, may we have your question please?

Stuart Birdt - Exane BNP Paribas

Thank you, just moving over to the German mobile market, obviously the strategy in the UK was Flext and lower pricing has lead to a pretty significant fall in margins from 30% down to 15% as you get more aggressive in the German market, how much of the fall in margins could we be looking at, thanks.

Kai-Uwe Ricke

Stuart, I do not want to go into this detail at this moment.

Operator

Peter Kurt Nielsen, Cheuvreux, may we have your question please?

Peter Kurt Nielsen - Cheuvreux

Thank you, question related to the guidance, your comment seems -- the changed outlook that is all related to Germany -- take it literally that even for 2007, you have not -- you want your major international markets, thank you.

Thilo Kusch

Sorry, do we understand the question right that in the guidance, we were indeed in Germany, but not internationally, is that what you are asking? Sorry, I assume that’s the question. I did not get the question now.

Peter Kurt Nielsen - Cheuvreux

Your comments on the changed outlook for ‘06 and ‘07 seem to indicate that the cost is all related to Germany.

Thilo Kusch

No, we are changing the guidance for the whole company.

Peter Kurt Nielsen - Cheuvreux

So you have also changed your view on -- your internal expectations for the major international markets?

Thilo Kusch

Let me address that we are on one page and that there are no misunderstandings. We went through a bottom up budgeting process, planning process for Deutsche Telekom as a whole and this is reflected in the guidance and the indication for next year.

Peter Kurt Nielsen - Cheuvreux

Thank you.

Operator

Mr. Frank Rothauge from Oppenheim, may we have your question please?

Frank Rothauge - Oppenheim Research

Hi, first question on T-Systems, you have quite significantly reduced your guidance. Can you explain a bit to what extent this refers also to price reduction for internal customers means T-Com and T-Mobile, how much does this contribute to your guidance reduction at the system and secondly, you indicated a new cost cutting program to be announced in November. Can you say already whether you will book or charge for this cost cutting program in Q4 then?

Thilo Kusch

First question I will answer and the second question Karl, you are going to answer. When it comes to T-Systems, when you look into the results of the systems of the first half of the year about €100 million of revenues out of the total €168 million what it was, is already a deduction and savings of internal IT revenues and what we intend to do -- we intend to work exclusively on benchmark levels internally so that is going to make the real IT costs and IT revenues, internal IT cost and IT revenues visible. Second remark, when you look into the EBITDA’s of T-Systems or the first half of 2006, you need to understand that T-Systems is the business arm -- the business segment arm for Deutsche Telekom over all. So what you see there is based on internal revenues and internal cost allocation from Telekom T-Com to T-Systems, the market pressure we have on the business customer segment because the pressure at T-Systems only partly can be offset by cost reductions at T-Systems is the charge in the last Q4 for the new cost cutting program being announced in November was your second question. As we talk and as we discuss, I don’t foresee that there is going to be a charge in Q4 for this new cost cutting program, however you now have that we are in the middle of our head count reduction program covering 32,000, this has already led to a charge and to a probation in the first semester, I do also foresee a charge in the second semester for this program dependent on the acceptance on the early retirement scheme and the other schemes but not coming out of the new cost cutting scheme being announced in November.

Operator

Mr. James Ratzer from New Street Research, your question please.

James Ratzer - New Street Research

Yes, the question regarding your guidance please, 2006 the low end of your EBITDA guidance seems to imply about negative €600 million in the GHS and reconciliation depicting for EBITDA. That seems quite negative given the run rate that was seen GHS running out in the last quarters. So should we be thinking that you’re targeting the high end of your EBITDA guidance range or is there greater losses to come in GHS in the second half and what your cash tax guidance would be for 2007 please, thank you.

Karl-Gerhard Eick

GHS–0.6 for full year in the light of what we have seen in the first semester I think it is fair to say there is nothing exceptionally not in terms of releases of provisions nor of gains from disposals or anything like this included that’s why you know this -0.6 could look like a little bit conservative but I think -- it is the normal run rate without anything special cash taxes, I would have to look what we have paid so far in the first semester in cash taxes you will see it -- ‘07 and for ‘07 I would not have answer, the question was -- I understood the question about the cash taxes for ‘06. For ‘07 I would not have a number and for ‘06 I should -- had to look into the cash flow statement to give you a better answer.

Operator

Chris Fremantle from Morgan Stanley your question, please?

Chris Fremantle - Morgan Stanley

Hi, yeah just -- Kai also give out your returns to shareholder policy. What you said in the past is that you wanted to pay in attractive dividend. Can you add any further to that it terms of your philosophy, your state of philosophy and particularly, can I ask you about pay out? Are you prepared to pay out more than 100% of your adjusted net income? Thank you very much.

Kai-Uwe Ricke

Let me make two general remarks. I think our dividend policy is unchanged, all what we have said in the past also is good for the future. And we always have made it clear that we do not want to make our definition what we mean is an effective dividend policy dependent only on one certain number. And this is -- is well also good for the future. That’s why -- we also do not want to make it dependent only on adjusted net profit. I think what -- what one has to have in mind is EBITDA development, free cash flow development and net profitability, but also the balance sheet is such in total in order to come finally to a wise and bright decision when it comes to the interpretation of what like this dividend policy means to the concrete decision about the pay out. I think we have proven this year that we are doing the right decisions I hope this is also going to be good for the future.

Operator

(Inaudible) Securities, may we have your question, please?

Unidentified Participant

Hi, this me.

Kai-Uwe Ricke

Yes, I think so.

Unidentified Participant

Okay sorry, could you give us what kind of regulation impact you have included in your mobile guidance, roaming SMS regulation possibly? And then what do you feel about your Internet business in France. How can you be happy with that kind of thing and their impact on the profitability of your international business? Thank you.

Karl-Gerhard Eick

Yeah, let me answer the second question first and I do not want to add some more than what I answered already in the other calls we had. It’s -- that we are going to increase the value of that asset. And we are in the middle of increasing the value of that asset and this is -- we are going to continue. The first question, Kai, what was it. Can you repeat the first question?

Unidentified Participant

Yes what kind of regulation have you included in your guidance in mobile most of the -- any impact on the roaming and its regulation on SMS.

Karl-Gerhard Eick

Yes, it includes our views, but I will not the more detail now our views on international roaming MTC and also SMS regulation, potential SMS regulation.

Operator

(Inaudible) David, may we have your question please?

Unidentified Participant

Will it be possible to know your assumptions in terms of euro, dollar exchange rates in year 2006 and 2007 guidance, and also just to clarify concerning the fact that you don’t forecast investment below €8 billion in 2007, does it include the roll out of 3G network?

Kai-Uwe Ricke

Second question first while Karl will answer the first question. Again I would confirm what we said earlier during the call that the investment budget is including the infrastructure investment in the US, NGN infrastructure investment in the US.

Karl-Gerhard Eick

I don’t know whether I have on the -- I got your first question correctly, if it was about the expected exchange rates in ‘07 to come the only thing what I could say is there is no significant changes we see into what we have today.

Operator

Guy Peddy from Deutsche Bank AG may we have your question please?

Guy Peddy - Deutsche Bank AG

Yeah, good afternoon gentlemen just more of question on the strategy with your November presentation you highlighted to shift from saving from growth to growth and it now seems that after one quarter you decided to revert back to the original one, and am I interpreting that right or am I interpreting that you want -- you have decided to basically buy yourself more flexibility to be more aggressive with for example your -- Paris in your domestic market and in context of the strategy question. Why is it important to keep your credit rating as it is given that you are very -- and you will now focused on cash flow, thank you.

Kai-Uwe Ricke

First question, we have to acknowledge that the circumstances after November last year have changed, we have to acknowledge that and that must have consequences and that’s why I again would like to stress what I said earlier. It is that we want to safeguard our revenues, VR investments that we want to do more when it comes to rationalization, rationalization in the business specifically in Germany where as we all know we have to fight with legacy cost and we then want to safeguard remuneration to our shareholders. And that’s why I would clearly talk about a shift in strategy, we have to acknowledge, that our original plan, the plan we came up with in November failed.

Karl-Gerhard Eick

Well the question about rating, now first and foremost we are not yet under geared, because I have always made it clear that we do want to have a gearing between 0.8 and 1.2. We are now at 0.8 and I think everybody can make his own calculation where we are going to be at the end of this year including our cash out for the US spectrum. So second the rating for us has -- a very high important because we are in terms of funding and refunding depending on the bond market and in that respect rating for us is very high importance thing where I have always made it clear that we do want to be at a singular minus or to be plus rating level not below that. Third what we do want to keep our single a minus rating because we do want to keep our financial flexibility for all what is ahead of us and I think it would be not the right thing to be done to go down now or to risk to go down now -- last rating, because in doing so we then heads to continue doing for the next 12 or 18 months again but to deliberating. That’s why I think again it’s the right thing to be done and this is shared by the boards that we do want to keep all things minus rating again to keep all flexibility.

Kai-Uwe Ricke

Running a bit out of time but there are two questions or so left, if he could please restricted to one and we’ll also try to answer quickly that we get through, thank you. Next question

Operator

Mrs. Thomas (inaudible) may we have your question please?

Unidentified Participant

Okay, good afternoon. After having said that the US mobile business has returned to better shape at the end of the quarter and in July, could you confirm if that is also meant for the marketing share over net add, so in other words that this has increased relative to Q2.

Karl-Gerhard Eick

I do not want to give any confirmations for the second half 2006 specifically but I would like to reconfirm that net add is well in shape again.

Operator

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

Brian Rusling - Cazenove & Co.

Yeah gentlemen, just going back on the outlook issue here because I am still unclear, I realized things have changed since November 5, but I am unclear whether your change in guidance is related to a deterioration in the revenue outlook or is it related to you investing more and trying to protect our position. So if you look at 2006, you’ve reduced your revenue guidance by €0.6 billion and you’ve reduced your EBITDA guidance by €1 billion. Where -- are you investing more to protect your position or is the revenue line running away from you?

Karl-Gerhard Eick

Well the reason is more of the change in revenue compositioning. What we are doing is compensating reduction in domestic revenues with additional revenue coming from outside of Germany. And as a matter of fact, our revenue -- our domestic revenue attributes normally in EBITDA margin of between 35% and 40%. If you take a mobile in T-Com, taking this for a second out of consideration but this revenue with 35% to 40 % EBITDA margin then it’s going to be substituted or -- yeah substituted or replaced by revenue say from the US where we have a 28.6% EBITDA margin or the UK where we are actually having an EBITDA margin of 16% hopefully at the end of 20%. But this kind of shift of revenue compositioning I think gives you an answer to your question.

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.

Kai-Uwe Ricke

Okay, I believe there was one more question, is that right, in the pipeline?

Operator

(Inaudible) Capital, your question please.

Unidentified Participant

Hi, I mean just on the issue of your leverage ratios and I mean are we saying subtle shift in your ratios given that -- given your free cash flow expectations for ‘06 and ‘07. It seems you still have a certain amount of flexibility to do buybacks and maintain your credit rating especially when compared to some of your peers that higher levels of leverage and have been buying back stock.

Kai-Uwe Ricke

I do not want to come here too much to our peers because we are doing -- compared to some peers, certainly low but if you -- but there is no shift. If you take our today’s guidance of free cash flow for this year, which is €5 billion then you will deduct what we have to spend for the US spectrum as you would assume from the market consensus. Then you take what we have indicated in terms of attractive dividend payments to be paid for this year, and then I think you will easily lead to the conclusion that there is no shift to the leverage, also the funding policy at all. And I think this is also we are looking forward and again especially in today’s market environment -- cable market environment -- it is also very right to care about a stable rating outlook. That’s why we are convinced that we are doing the right thing not buying big shares in a significant amount we have said and announced that we are now going to buy big, 63 million shares. We do have to buy big in order to fully control the merge of T-Online into T-Com without further dilution, but what we do consider is to be our dividends, the rights instrument and mean to participate our shareholders at our free cash flow. This is good for this year and also for the year to come.

Thilo Kusch - Head of Investor Relations

Okay, with that we would like to conclude. Thank you very much for your attention. If they are any more questions and we will come back on the open questions, please do give us a call in the IR department and I wish you a very nice rest of the day. Bye-bye.

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