Stephan Eger - Senior Vice President and Head of Investor Relations
René Obermann - Chairman of the Management Board and Chief Executive Officer
Timotheus Hottges - Deputy Chairman of Management Board and Chief Financial Officer
Robin Bienenstock - Sanford C. Bernstein & Co., LLC., Research Division
Jonathan Dann - Barclays Capital, Research Division
Justin Funnell - Crédit Suisse AG, Research Division
Polo Tang - UBS Investment Bank, Research Division
Ryan A. Fox - Morgan Stanley, Research Division
Ottavio Adorisio - Societe Generale Cross Asset Research
Timothy Boddy - Goldman Sachs Group Inc., Research Division
Dominik Klarmann - HSBC, Research Division
Frederic Boulan - Nomura Securities Co. Ltd., Research Division
Deutsche Telekom AG (OTCQX:DTEGY) Q3 2013 Earnings Call November 7, 2013 8:00 AM ET
Disclaimer. This presentation contains forward-looking statements that reflect the current views of Deutsche Telekom management with respect to future events. These forward-looking statements include statements with regard to the expected development of revenue, earnings, profits from operations, depreciation and amortization, cash flows and personnel-related measures. 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.
Among the factors that might influence our ability to achieve our objectives are the progress of our workforce reduction initiative and other cost-saving measures; and the impact of other significant strategic, labor or business initiatives, including acquisitions, dispositions and business combinations; and our network upgrade and expansion initiatives. In addition, stronger-than-expected competition, technological change, legal proceedings and regulatory developments, among other factors, may have a material adverse effect on our costs and revenue development. Further, the economic downturn in our markets and changes in interest in currency exchange rates may also have an impact on our business development and the ability of financing on favorable conditions.
Changes to our expectations concerning future cash flows may lead to impairment write-downs of assets carried at historical cost, which may materially affect our results at the group and operating segment levels. If these or other risks and uncertainties materialize or if the assumptions underlining any of the statements prove incorrect, our actual performance may materially differ from the performance expressed or implied by forward-looking statements. We can offer no assurance that our estimates or expectations will be achieved. Without prejudice to existing obligations under capital market law, we do 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 the IFRS, Deutsche Telekom also presents non-GAAP financial performance measures, including, among others, EBITDA, EBITDA margin, adjusted EBITDA, adjusted EBITDA margin, adjusted EBIT, adjusted net income, 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 IFRS. Non-GAAP financial performance measures are not subject to IFRS or any other generally accepted accounting principles. Other companies may define these terms in different ways.
Thank you for your attention. May I now hand you over to Mr. Stephan Eger.
Well, good afternoon, and good morning to our listeners in the U.S. We're here to discuss our third quarter results with you, and I'm more than happy to have with me 3 members of our board, at least 2 existing and 1 future member of our board. We have with us René Obermann, hopefully shortly our CEO, who is on his way down here; and we've got Tim Höttges, our Group CFO, with us; and we've got also Thomas Dannenfeldt with us, who's currently the CFO of our German operation, and he's the CFO incoming for the group from January 1 onwards. And Thomas would be obviously more than happy to also tackle some of the more detailed questions on the operating segment of Germany. And so as always, I would suggest that we start with a quick introduction on our presentation, started by René and then followed after by Tim Höttges. And then about at halftime, we would be delighted to go into the Q&A, and both René and Tim will be happy to answer your question.
Having said that, I would like to hand over to René.
Thank you very much, Stephan. Good afternoon to all of you. Good morning in the U.S. The third quarter of 2013 at DT continued the positive momentum, which we already saw in our key markets in Germany and the U.S. in the second quarter. First of all, we are satisfied with our operational performance and particularly with the customer numbers in the second quarter. In a second quarter in a row, we won almost 1.3 million new postpaid customers, 152,000 new TV customers and some broadband net adds, 21,000, in the group in Q3. Our revenues grew organically by 2.4%, which is a slight improvement versus the 2% in the second quarter. Both the EBITDA and the free cash flow in the quarter are also slightly ahead of capital market expectation, and they're fully in line with our full year guidance.
In Germany, we again delivered good results, particularly if you compare our results to competition who published this morning. We kept good traction in mobile, winning 470,000, of which more than 160,000 were under our own brand, new contract customers. And in fixed line, we got an additional 119,000 fiber customers in retail and wholesale combined. Revenues for the segment Germany were again solid, even though down by some 1.2%. But again, that's a very small decline, and we hope to keep improving that. The main positive driver was a better performance in our fixed network revenues, whereas mobile service revenues, x MTR cuts, came in slightly weaker at minus 1% underlying, thereby still significantly outperforming the overall market. On the profitability side, we performed very strong with an EBITDA margin close to 42%.
In the States, we continued the very strong performance from the second quarter into the third quarter. You all saw the numbers of -- from T-Mobile USA in Q3 by over 1 million, of which 648,000 for branded postpaid net adds. And that's clearly out of a continued success of our uncarrier consumer proposition. This is the second quarter in a row that we had more than 1 million net adds if you exclude the MetroPCS consolidation in Q2.
The branded postpaid churn, slightly up versus Q2, which is due to normal Q3 seasonality; however, year-on-year was reduced by 60 basis points to 1.7%, and that does reflect the improving customer quality and satisfaction at T-Mobile US. On the back of this strong result, we have now increased our forecast for branded postpaid net adds for the full year from 1 million to 1.2 million to a now new range of 1.6 million to 1.8 million customers. Revenues grew by 31% -- 38%, sorry, 38% year-on-year and organically, i.e. without the impact of the Metro consolidation, by 12.4% in the quarter. And service revenues at T-Mobile US have also improved significantly versus Q2. The trends here have improved significantly. Despite higher branded postpaid gross adds, the adjusted EBITDA at T-Mobile US grew year-on-year by 15% due to improving SAC and CPGA.
Europe, in a still tough economic environment. We again delivered good customer numbers for our main growth areas, in particular more than 100,000 new TV adds, 68,000 broadband adds and 178,000 mobile contract net adds. Organic revenue trends improved even though still somewhat negative, but they improved further in Q3 to minus 3.4%, whereas the organic adjusted EBITDA was affected -- clearly was affected by the changing revenue mix, as well as higher market invests in some of our countries. Please remember that we deconsolidated Hellas Sat as of April 1 and our Bulgarian business Globul and Germanos as of August 1.
Third point, Systems Solutions. The order entry for T-Systems increased by almost 12% year-on-year to EUR 1.8 billion, and the market unit returned to an organic growth rate of 2.7%, driven by the public area and large accounts. Overall, T-Systems revenues increased by 1.8%, also driven by the anticipated and flagged catch-up effect at Telekom IT. Organic revenue growth, excluding the impact of deconsolidated businesses and currency, would have been 5%. A significant improvement was also delivered on the EBITDA side, with the margin improving to almost percent [ph] on the back of strict cost discipline and the conclusion of the costs in transition and transformation phase in several of our big deals.
A few brief remarks on our headline financials. Revenues and adjusted net profit grew for the first 9 months of 2013, with the revenue growth accelerating in Q3. The EBITDA declined almost half versus the previous quarter, driven by a strong performance, particularly in Germany and Systems Solutions. The free cash flow is clearly down for the quarter compared with an exceptionally free cash flow which was strong in the third quarter last year, but it came in slightly ahead of capital market expectation, and we are really well on track to reach our full year guidance of around EUR 4.5 billion. And as flagged, our net debt clearly was reduced to below EUR 40 billion from the Q2 peak.
Since this is my last presentation to all of you of the quarterly results and the next quarter will already be presented by Tim, early 2014, I would like to thank you all very much for a very good and -- a good communication and good relationship. And I'm pretty sure that Deutsche Telekom, under the leadership of Tim, will continue to be very strong. Thank you very much, and hope to see you soon in a different environment. I think I'll miss you.
Thank you, René. You have never been so quick, by the way, 7 minutes. So with this, I'm just heading into the German business here, and very clearly, we are pleased with our operational and the financial performance in Germany. In the third quarter, revenues declined by 1.2% year-on-year. Main positive driver were core fixed line revenues, which declined at 2.7%, thereby showing an improvement versus the previous quarters. The mobile service revenues declined underlying, including x MTR cuts, by 1%, thereby still significantly outperforming the overall market. The slight deterioration versus the second quarter is a result of the flagged intense competition, as well as new EU [ph] roaming cuts in the summer and less visitor revenues being billed specifically in Q3. We expect an improvement for the fourth quarter on the basis of what we are seeing so far.
Wholesale revenues at minus 5% year-over-year were pretty much in line with the underlying trend of the second quarter. Adjusted for regulation, the underlying revenues were down by 4.7% year-over-year in the quarter. The adjusted EBITDA declined by 1.1% year-over-year, resulting in a strong margin of 41.9%. Main driver here was the OpEx reduction of almost 2% year-over-year despite rising personnel and energy costs.
In German fixed, we saw, all in all, another satisfying quarter, in line with previous quarter. I would like to highlight a few things: an improvement in line losses despite 21,000 LTE wireless broadband customers added in Q3; continued strong growth of new fiber customers with 119,000 net new additions, of which 50,000 came from wholesale, driven by our contingent model, which is developing nicely; broadband net adds were still negative at minus 47,000, burdened by the normal seasonal churn increase of the max tariffs of porting cuts [ph] is coming up for renewal; a late start of our Entertain to go product; and a slower start into the cooperation with Sky. This is clearly not satisfying, and we will tackle this with the following initiatives: first, push Entertain. We have to be more agile in promoting our new product features, Entertain to go. The Sky cooperation, after a slow start in August, is now running already on full speed; and an optimization of customer retention, as mentioned already at the Q2 results; and thirdly, as of 2014, an increased focus on VDSL and, later, on vectoring.
Turning to mobile. The German mobile market service revenues decreased by 4.7% year-over-year in Q3 according to our market estimates. This is a clear deterioration versus the previous quarter. Despite us still outperforming the competition, our underlying service revenues in the quarter decreased slightly by 1% for the following reasons: intense competition, as already flagged at our Q2 results; new roaming cuts implemented in summer; SMS revenue decline accelerating to 30% year-over-year; significant lower visitor revenues billed in Q3 versus Q2. And due to the seasonality and timing of the billing with other operators, this swift -- shift from one quarter to another can result in almost EUR 10 million service revenue swing in one quarter. On the other hand, we had a very strong increase of almost 31% in our mobile data revenue, driven by the increased smartphone penetration and an increasing number of LTE customers with new data tariffs. By the end of Q3, we already had over 2.1 million LTE customers on our network, an increase of over 2 million year-on-year. Operationally, we continued our strong performance with 407 -- 470,000 mobile contract net adds, of which 164,000 were own-branded net adds; a continued smartphone momentum with almost 1.2 million sales, including strong sales of Android and iOS devices and the best-in-class contract churn at 1.1%.
Coming to the U.S. We are very satisfied with another very strong quarter in TMUS, winning 648,000 branded postpaid net adds, an improvement of more than 1.1 million net adds versus last year. With 643,000 branded postpaid phones net adds, T-Mobile US led the U.S. wireless industry again. Overall, we added more than 1 million of new customers with both prepaid and wholesale net adds contributing positively to this number. In the third quarter alone, we sold 5.6 million smartphones, a new record of T-Mobile US, ending the quarter with over 16.5 million smartphone users or 77% of the total base. As indicated, the branded postpaid churn increased slightly quarter-over-quarter, but the impact was much smaller than anticipated. Year-over-year, the churn rate declined by 60 bps to 1.7%, reflecting the improving customer quality at T-Mobile US.
Let me give you some more KPIs on customer quality in the third quarter. With 53% of our equipment installment plans, receivables are regarded as prime, up from 43% by the year-end 2012. The bad debt expenses decreased by 32% year-over-year, and the average application credit score is up 31% year-over-year. And importantly, the porting ratios against all major competitors in the market continues to be strong. The adjusted EBITDA increased year-over-year and quarter-over-quarter, also on a pro forma basis despite the higher branded postpaid gross adds, mainly driven by improving SACs and CPGA trends. Please note that due to the different job accounting under IFRS and U.S. GAAP, there's quite a difference between the IFRS EBITDA and the U.S. GAAP EBITDA, with IFRS being even higher.
Branded postpaid ARPU decreased by 7.8% year-over-year due to the rapid customer shift to Simple Choice and Value plans, which now account for already 61% of the branded postpaid base, up from 50% at the end of last quarter. The branded prepaid ARPU continued to grow by 30% year-over-year and driven by the inclusion of the MetroPCS customers, who have a higher ARPU.
Let me provide you also with a bit of detail on the underlying development x MetroPCS in that quarter. Underlying T-Mobile US revenues, excluding the impact of the first-time consolidation of MetroPCS, increased by 12.4%, driven by stronger handset sales but also a significant improvement in service revenue. However, also the underlying service revenue saw a significant improvement, declining by 4.8% versus 8.3% in Q2. This is a reflection of the better customer growth offsetting the impact from the continuing migration to Simple Choice and Value plans. Underlying EBITDA, excluding the impact of Metro, was down 16.7%, again driven by firing on all cylinders with our uncarrier strategy and the strong customer growth.
Let me give you an update on 2 of our core initiatives in the U.S., which were quite relevant for us during the course of the communication, the rollout of our LTE network and the MetroPCS integration. By the end of Q3, we already have covered 202 million POPs in 233 metro areas in the U.S., thereby achieving our initial 200 million POPs coverage goal 1 quarter earlier. We have modernized over 25,000 sites and cover already 91 of the top 100 markets in the U.S. with our super-fast LTE network.
The MetroPCS integration also is ahead of plan. Our TMUS colleagues reflected this in their synergy outlook update for 2013 on Tuesday already. Network CapEx synergies are on track to beat plan by EUR 200 million to EUR 250 million for May to December. OpEx synergies are on track to beat the plan by EUR 50 million to EUR 100 million. And integration expenses, mostly CapEx here in this regard, are on track to beat plan by EUR 100 million to EUR 125 million. We have launched 15 new Metro markets with more than 1,300 distribution points in these markets by the end of Q3 under the so-called Apollo 15 program, and 4G LTE spectrum covering approximately 50% -- 15% of MetroPCS network POPs will be refarmed by the end of 2013. On November 21, T-Mobile plans to launch the Metro brand in 15 additional new markets, bringing the total of expansion markets, then, already to 30, which is significantly above our original plan.
Finally, let me also remind you that we were able to refinance USD 5.6 billion of the Deutsche Telekom debt in T-Mobile at attractive conditions on the debt market. This is another important step to transform T-Mobile into a self-funding platform.
Let's move to Europe. Revenues in our European segment declined organically by 3.4% in Q3, the best performance since Q1 2012, by the way. The underlying decline, x deconsolidation, regulatory effects, foreign exchange, special taxes, consolidation and onetimers, improved to minus 0.6%. The negative mobile regulation effects were driven mostly by Poland, Greece and The Netherlands. The decline in the traditional telco business, mainly voice and SMS, was partly compensated by higher device revenues, particular in Poland, the Czech Republic and The Netherlands. Still, the single biggest negative impact for the Europe segment revenues came from Greece with declines in the fixed and mobile voice business. However, underlying revenue trends actually sequentially increased in Greece, supported by significant trend improvements in fixed revenues, as well as in mobile service revenues. Also, the operational performance was very strong in the quarter here in Greece. OTE [indiscernible] reached 218,000 TV customers by the end of Q3, much above the original expectation; 12,000 retail broadband net adds; and an LTE coverage already reaching 50% of the POPs. The adjusted EBITDA in the segment fell stronger than in Q2, mainly driven by the following reasons: an increased market invest in Netherlands, which resulted in strong operational KPIs like 57,000 contract net adds, thereby again outperforming the incumbent; and a highly competitive market environment in the Czech Republic and Croatia, where the revenue decline couldn't be compensated sufficiently with cost savings yet. This is clearly not a satisfying performance, and we will have to work much harder on cost discipline in some of our countries, especially in Croatia on the indirect costs, in order to compensate for the difficult market economic environment and the revenue shortfall.
We continue to demonstrate good momentum in our growth areas in Europe, which is very important for us. We showed again good growth in TV with 110 net adds -- 110,000 net adds now reaching almost 3.5 million TV customers, including newly consolidated 251,000 DiGi TV customers in Slovakia. We delivered 68,000 broadband net adds in that quarter, mobile contract net adds of 178,000, and mobile data revenues growth accelerated again to almost 15%, excluding currency effects, thereby overcompensating the decline in SMS revenues.
Let me give you again a quick update on the progress being made on the revenue, as well as the technology and cost transformation in the segment Europe in that quarter. We made again progress on the revenue transformation. The share of total revenues from our growth areas increased by 3 percentage points year-over-year to 22% now. The share of the fixed revenues from Connected Home grew by 0.6 percentage points year-over-year to 21%, driven by TV revenues. The share of mobile data revenues of overall mobile revenues grew by 3 percentage points to 17%, and the share of B2B/ICT revenues as of total revenues increased by 0.4 percentage points to almost 3%. Progress on the cost and efficiencies side included the All-IP share of all fixed network access lines, grew by 10 percentage points to 26%, mainly driven by Croatia, Slovakia and Hungary. LTE sites in service more than tripled year-over-year to 2,800. We have LTE networks in commercial use now in 6 countries already. And homes connected with fiber to the home grew by 33% year-over-year to around 160,000. And the number of full-time employees was reduced by almost 7% year-over-year to 55,000, which, however, included the deconsolidation of the Bulgarian business with 1,900 people. So what you could see is we are very focused working on improving our situation in Europe.
Turning to Systems Solutions. Q3 results showed some solid improvements. The revenue increase of 1.8% was driven by the return to organic revenue growth of 2.7% at the market unit and the expected and flagged catch-up at Telekom IT. Order entry was strong, up almost 12% to EUR 1.8 billion. Also, the adjusted EBITDA and EBIT showed a continued improvement, driven by successful efficiency measures and the conclusion of the cost-intensive transition and transformation phase in several of our big deals. The EBIT margin of Systems Solutions improved to 2.3% in the quarter, the EBIT margin of the market unit to 3.8%. As planned and communicated, Telekom IT delivers on reducing the IT cost. For the first 9 months, the IT spend was reduced here internally at Deutsche Telekom by EUR 250 million.
Let's move now to the group financials, and turning to free cash flow. Actual free cash flow at EUR 1.4 billion is down compared to last year. Main drivers here were: cash generated from operations declining stronger than the EBITDA due to the working capital impact of EUR 500 million, mainly from the Value plans in the U.S.; the cash CapEx increase of EUR 350 million, driven by the LTE network rollout in the U.S.; and the adjusted net income decrease by 11.4% year-over-year in the quarter, with the main drivers being a decline in financial result, driven by currency translation and the valuation of financial instruments, as well as the interest being impacted by the high-yield debt of Metro; and a tax increase versus the low tax rate in Q3 2012 following the unwinding of T-Mobile US as assets held for sale at that point in time.
Compared to the negative return on capital employed in Q3 2012, as a result of the impairment at T-Mobile US, we saw a good improvement for the group return on capital employed to 5.1% at the end of Q3, driven by a significant improvement of the NOPAT, net operating profit after tax, year-over-year after the impairment last year; a decrease of the net operating assets on average by EUR 6.2 billion.
Earnings per share improved as well slightly year-over-year by almost 2% to EUR 0.55, with the main drivers being the well-flagged lower depreciation and amortization in our business. As flagged and expected, the free cash flow in the third quarter and the sale of the Bulgarian asset Globul and Germanos led to a sequential reduction of the net debt to, again, below EUR 40 billion. The EUR 492 million other position included EUR 200 million dividend payments to minorities and EUR 107 million spectrum payment in Poland.
Turning to our balance sheet ratio. Net debt to adjusted EBITDA decreased again slightly to 2.3x as a result of reduction of the net debt. The equity ratio also improved to 27.8% due to the slightly lower asset base and the increased shareholders' equity. With regard to our comfort zone ratios, we are in the green with regard to all ratios, and our rating remains stable at BBB+ level with the major agencies and stable outlooks. As a result, we continue to get excellent funding conditions in the debt capital markets. And as we already said, we confirm our guidance on all items laid out.
With this, René and I are now ready for your questions.
Thank you very much, Tim. Now we start with the Q&A part. Just about halftime, as I promised. [Operator Instructions]
First is Ms. Robin Bienenstock from Bernstein.
Robin Bienenstock - Sanford C. Bernstein & Co., LLC., Research Division
Two questions if I may. First, I'd like to know what you think about Spark and its ability to restore Sprint's competitiveness in the U.S. And separately, I'd like know a little bit about what you think about the necessity of FTTH in Germany given that vectoring and pair bonding and G.fast seem increasingly to be offering faster speeds and reasonably reliable ones. I'm just wondering if you have any new thoughts on that.
Okay. On the first part, Robin, on the first part, I don't think I should talk about this new reselling model there. I think it's something you should talk to John about. He probably has also more insight into this competitive impact than I have. And I also shouldn't talk about T-Mobile US in that level here. For Germany, the current situation is really FTTH is not that aggressively sold yet. VDSL is meeting much better acceptance than FTTH so far, so customers' readiness or the private customers' needs seem not yet as developed that people are really crying out -- many people are crying out for FTTH. I think most people are happy when they have like 16 megabit and beyond. With 50 megabit, we can currently serve most needs of customers. Yes, there are some exceptions, but the majority is really still fine with it. This will change over time, over the next couple of years, so we are well advised to keep building it out and, from a VDSL, well-built-out VDSL network, take the next step then, but not at this point in time. It's not such a big problem yet.
Let me add one point, Robin. Definitely, we are working on all, let's say, ways to improve the speed for our customers. On the mobile side, it is -- on the handset side, it is Cat 4 and even Cat 6. We have MIMO as one technology which we test in the field. And on the fixed line side, we have now the vectoring, which is under deployment, which is coming. We even know about, let's say, G.fast as one technology which brings the fiber even closer to the households. I think if you would only focus on FTTH at that point in time, it would take too long, by the way, to get a high propagation across our customer base. So the fastest and most effective way is now moving the fiber more and more closer to the customer, and that is what we are doing. And by the way, with full speed next year, everything is under preparation, even our hybrid routing services. So that is, let's say, the plan, and I think that is absolutely the right thing to do.
Mr. Jonathan Dann from Barclays.
Jonathan Dann - Barclays Capital, Research Division
It's just one question for me. At the end of the T-Mobile call, it became clear that they filed to raise debtor equity. As T-Mobile's biggest shareholder, can you just update us with your thoughts?
Look, this is Tim here. I think it is absolutely consistent with what public company peers are doing. The T-Mobile is filing an S-3 shelf registration statement to facilitate potential access of the capital markets in the future. That is what we're looking for. On the debt side, we always said it should be a self-funding business, so they should carry with their debts on their own. And the second one, when it comes to the equity side, the question is if there might be opportunities upcoming with regard to spectrum. This might occur, which we're then going to be able to refinance from a stand-alone perspective.
Mr. Justin Funnell from Crédit Suisse.
Justin Funnell - Crédit Suisse AG, Research Division
Back to Germany, 2 sort of topics, really. The first is, again, the pricing question. Liberty Global seemed to be trying to lead the market up on price and talked about that as really a medium-term strategy, would like to move the market more into -- the business more into more of a mix of market share and price increasing. So question I've asked a few times now, just wondering how your thinking is evolving in this area. And any comments on the recent court decision that the change in the contracts on data caps might be not legal in the view of that course? And secondly, any more updates on the All-IP strategy in Germany? When could you start actually moving lines over to All-IP and start to get the cost savings from that, please?
Okay. Let me start with this court decision. I think there is an opportunity in there because, first of all, it's not that data caps are illegal. It's just that the court has ruled that flat rates in fixed line need to be either flat or they are not allowed to be called flat rates, and the customers need to be provided more clarity. And quite frankly, we look at this from a customer point of view and try to figure out where the opportunities are in there because it's not just us being affected. It's the entire industry. And if you think about it, it -- I think it can provide guidelines to redesign not only tariffs but, more importantly, the marketing programs around it. And ultimately, I don't think it is possible to provide ever more capacity and volume, data volume and speed for ever lower prices. But it may well be that tariff names and product names are being restructured and, ultimately, customers will be provided more clarity, but not just from Telekom but from the entire industry. So I think there is an opportunity in there. We haven't yet published our final answer. But amongst us here, and we're clearly a small group of people, only 100 people on the call, we are not necessarily challenging this decision. We will probably turn it into a marketing opportunity, but soon, more details. Thomas?
Your question with regard to Liberty Global and their attempt in Germany, first, what you obviously now should take into consideration is that the cable operators are, today, more expensive for the end customer than our proposition because our proposition is fully integrated already. It's one price. Why, they have even an additional fee, which is paid to the landlord. And so that is something we expect. The second thing is, I think what the cable operators are facing is the build-out, which we are doing, even especially in their areas, and what they even see is that we are coming with more attractive offers as well in this triple- and even potentially in the quadruple-play area. So therefore, I would not be so worried about their attempt. They definitely have to do something future-wise. But don't forget, even these guys have to earn back their capital costs and the money which has been paid. So therefore, I'm not worried. The opposite, we are quite confident that with vectoring and with what we are delivering in these areas where we cannot compete today, that we are quite competitive and quite strong.
This is Thomas Dannenfeldt speaking. On the third question was an update on All-IP in Germany. I think firstly, it's important to note again that All-IP is a very important element for our network transformation to move over into a much leaner and more agile and efficient infrastructure. So that's really important for us in terms of transformation of the company. Detailed figures in Germany, we're expecting, for this year, roughly 1.5 million customers, consumer customers being migrated. And on IP, and also speeding up, by the way, in the next year to do a fast as possible migration of the customers and come to that leaner and more agile infrastructure. Cost savings, unfortunately, before you see that cost savings, you need to invest. That's what we're doing right now. To migrate the customers, you need to add costs here by switching customers by putting the right network infrastructure in place. And so for the time being, what we do see is not a cost saving but an increase of costs embedded in the figures you see right now. And obviously, we're doing that to gain cost savings, then, on a mid-term perspective.
Mr. Polo Tang from UBS.
Polo Tang - UBS Investment Bank, Research Division
I've actually got 2 questions. So the first one is on T-Mobile US. Strategically, is T-Mobile U.S. core to the group? Or would you consider crystallizing the value and selling down because, if you look at what you've done by selling down the T-Mobile into company debt with T-Mobile making that shelf filing, doesn't this give you more flexibility for M&A? So that's the first question. And the second question is really on German mobile. Your guidance implies flat mobile service revenues in Q4, so I'm just trying to understand the moving parts that give you the confidence that service revenue growth can recover in Q4 in Germany.
This is Thomas again, and I think let's start with the second question, and then Tim might take over or René. Let me be clear. First of all, in terms of the guidance in terms of service -- mobile service revenues, it's not about Q4 being flat, but it's about the year -- the overall year being flat. That's our guidance underlying across the whole year. So that means more positive development in Q4 as well, but the guidance is not on Q4. It's, I believe [ph], the overall year. And as Tim mentioned already in his short speech, we see some seasonalities in here, especially on the visitor side, but nothing we are worried about, so we are extremely confident that based on the huge differentiation we see right now in terms of network quality, on one hand, that's what we see in all the tests being performed by third parties in the marketplace, but as well as on the service side, the differentiation that takes place, the customers are being convinced. Churn is in a very, very positive situation -- position here. So we are very convinced that we can get to that mobile service revenue flattening across the year based on that.
With regard to the shelf registration here, I think I said that it's consistent with the public company peers here, what we are doing. Never forget we even have a lock-up period for our stock here, so if you bet on that one. Coming back to our U.S. strategy, our strategy in the U.S., look, we started 1 year ago with a market share of $15.60 in the U.S. market, developing it with a great management, with a great new marketing story, with huge investment into LTE buildout and even a good handset lineup into a very value-creation story. And If you would take the $22 billion and take the $18.2 billion on top of that, this company is, from an enterprise value, in the vicinity of $40 billion. Just remember, that is the value which we had when we talked about the AT&T deal at that point in time. Our story has driven value creation in the U.S. That is, let's say, the story we are talking about, and that is, let's say, what we are bringing forward. We have sufficient capacity at that point in time. We have sufficient bigger head [ph] POP for our current market approach in the U.S. situation, and therefore, our story is about value creation in the U.S. We always have said that on a mid- to long-term perspective, this market needs more consolidation in the U.S. when it comes to additional capacity, and we see the bifurcation in that market from AT&T and Verizon being very strong in their footprint. So if there is the opportunity and the possibility for a consolidation in the mid- and long-term perspective, we always said that we're open for this.
Mr. Ryan Fox from Morgan Stanley.
Ryan A. Fox - Morgan Stanley, Research Division
I've got 2 questions. Firstly, on Germany and on margins in the domestic business, you said that OpEx was down 2% year-on-year. Could you please give some more color on the moving parts there and how much scope there is for further OpEx reductions going forward? And secondly, just on the group strategy, could you please give an update on how the review process is going for Everything Everywhere and Scout24?
I'm going to start with the EE question, and look, the first thing is we are very satisfied and happy with the development in the U.K. Just remember where we are coming from as Deutsche Telekom, but let's say, more or less stranded asset on the #4 position in the U.S. -- U.K. market and now being the market leader. Just this week, we had a very prominent drive test voted as #1 in the London area for the first time in history. So therefore, our LTE buildout is paying off. We have more than 1 million customers than the next follower on these 4G services here. And what you even have seen is that we are working very hard on further cost reductions to improve the margin in this market. And over the last quarters, we were quite successful on that one. That said, we said this business is under strategic evaluation because we have 2 shareholders here sitting on that business, and it is a value-creation story here as well. Do we have to sell the business? Do we have to IPO the business? No. It's a question, what is the best time for creating value out of this entity, and that is something which is under observation, together with our shareholders. There is no must-sell situation for Deutsche Telekom. We're following on the situation. I could say, this year, nothing is going to happen on EE. With regard to next year, we will decide on the operating performance of that business, and we will even decide on the windows in the markets we might see, whether we consider any kind of strategic step for our U.K. business.
On the first question around the Germany margins, we said last year in December in the Capital Market Days that we want to achieve a margin of around 40%. I think we're doing pretty well so far. And obviously, looking at the OpEx, the main focus area for us is the indirect OpEx, it's not the direct OpEx just to cut down marketing. It's easy one, but unfortunately, not in the long run the right way to do it. So it's about the indirect OpEx. And we do know that, especially looking at topics like energy tax and all that kind of stuff where we see increases, we need to push forward in all the areas where we can really improve. That's what we have done, so in the last quarter as well, for instance, in areas like logistics, like platform efficiencies and all that kind of stuff, and as well some areas where we've been very successful to compensate that kind of increases in indirect OpEx. So -- but again, basically, it's about keeping the margin around that 40% level. I think that's working well so far.
There was one missing part in my answer with regard to the Scout business. Let me say it this way. I hope that Deutsche Telekom and its team here gets -- deserve some credit for M&A activities. I think we should not put ourselves under pressure. We have said we have the strategic evaluation. There was a lot of noise in the market with regard to a potential sale of the business. Yes, definitely, we are in discussion with partners on that one. But we do this kind of negotiations under values and not under other any kind of timing constraints. And therefore, it is moving in the right direction, and I hope to inform you shortly on the next steps here.
Mr. Ottavio Adorisio from Societe Generale.
Ottavio Adorisio - Societe Generale Cross Asset Research
This is Ottavio Adorisio from Societe Generale. A couple of questions. The first is on cash and the second is on European operations. The one on cash, you basically clear stated that the rationale to dispose T-Mobile that was to make the asset self-financing. So the question is that what do you do with the liquidity given the low return on cash and the fact that you have enough liquidity to finance debt maturity, as you stated in the Slide #18. And moving to Europe, your recent quarter, trends in European operations have partly negated the improvements that you recorded in Germany and the U.S. Now most of this operation were quite a long time ago, and I was wondering if you still consider all this operation as core. And given a rising appetite for telco assets, would you consider some sale [ph] to carry a review of the asset portfolio in Europe to assess amortization through asset sales might generate more value than the current status quo?
Okay. I think I understand your question such that you're asking whether we would dispose of European assets. And the answer is that we have made it clear that, over time, we look at each portfolio item with regards to potential ROCE improvement or the need of ROCE improvement. But this is not to say that we look at things only short term. We're in the infrastructure business, and particularly in those markets where we have strong position already, after the -- at some stage, the economic crisis may improve, and then we would emerge from the crisis as a much stronger player, particularly in those markets where we are both in fixed line and in wireless and where we have significant shares. But anything else would lead into some speculation, which I would not want to trigger. But the one thing you can be certain is we look at items, portfolio items with a view to, over time, improve its return on capital, and each item has an obligation to improve, which is not yet satisfying. It has improve.
Let me answer your question with regard to the T-Mobile US. And by the way, it's even not a U.S.-specific question. It's even a philosophical question with regard to Deutsche Telekom's approach to audiences [ph]. Remember OTE. We have said we have minority shareholders in that business, and it should mean that an OTE is sacrificing its refinancing cost by asking the headquarters to do this. Therefore, we pushed OTE that time to improve their cash position, to sell noncore assets, as they did on Serbia, with Bulgaria and with Germanos in the satellite business. And at end of the day, OTE is today a fully refinanced business on a stand-alone perspective. The same holds true for the T-Mobile US business. And we always said our strategy is self-funding and derisking. And therefore, we have said, look, guys, at the time of the business combination, it was not reasonable for T-Mobile US to fund USD 11.2 billion in the high-yield market. So we gave T-Mobile US some time to gain traction in the market to build the credibility and even the professionalism around that one, and now the U.S. high-yield market is in a very good shape. And we tapped that market with this $5.6 billion notes, doing exactly what we always have said, a self-financing platform in the U.S. and de-risking of DT. This is the way going forward, and this was executed. So I hope you understand a little bit of that philosophy of what we have done and why we did it. And I think it is good that the U.S. business feels the pressure from the investments and from the operational framework in which they're working.
And just, Ottavio, for clarification, there is no liquidity inflow in that sense. The net debt doesn't change at all on the DT level, so that's not -- but we now have $5.6 billion cash inflow at DT, which we would then have to look at what to do with that. That's maybe for clarification. Well, let's move on.
Mr. Tim Boddy from Goldman Sachs.
Timothy Boddy - Goldman Sachs Group Inc., Research Division
I wanted to ask a bit more about broadband in Germany, where, obviously, there was a slightly weaker trend this quarter. Could you talk a bit about your market share in broadband within the cable footprint compared to outside the cable footprint? And it would also be really helpful to understand whether you're seeing much better share trends in areas where you've already rolled out DSL -- or VDSL or whether there's not a material difference. And then just to get you slightly talking about The Netherlands, you obviously decided to do an MVNO partnership with Tele2. Clearly, MVNOs have been, should we say, arguably contributed to a lot of the pressures the mobile industry is seeing in a number of markets. Can you talk about your decision to offer that MVNO?
I'll start with the first question in terms of broadband in Germany. Yes, there is a difference in terms of the market share within the cable footprint and outside, but it's not a huge difference. It's a small and slight difference. And I think what we do see, looking at our Q3 figures, we have that kind of natural seasonality we see every year in Q3 a little bit and, as Tim mentioned already, some activities undertaking to change the numbers and then bring them upwards again in terms of product attractiveness, in terms of promotional activity. But I think the most important one is the integrated network strategy. That's the strategy which, in a very fast way, enable ourselves to offer higher bandwidth, be it by mobile or by fixed line or by a combination, as we call it, hybrid. So that's what René said already, along that line of a slight increase but an increase of demand in terms of bandwidth. Not talking about hundreds of megabits like FTTH, but what we can offer in the integrated network strategy, that is what we see and that is why the VDSL areas will improve there in terms of the gross adds and the net adds. So we think it's right -- the right time now to foster that areas and to roll out as fast as we can. That's what we'll do. So we'll see this year another 1 million, roughly, households being supported by VDSL and a strong uptick within the year of 2014 and '15, as announced last year in the Capital Market Days.
Yes, I think the -- if you take a step back and look at the overall market, I think it's clear that cable has now grown by about 200,000, if I'm not mistaken, year-on-year, and they're now at 4-point-some million connections, whilst we are at 12.4 million. So overall, we are still very strong in the market, and we're improving from somewhat 40% VDSL coverage to 65% VDSL coverage. That means, in all those areas where we have VDSL and then coupled with vectoring even, we're highly competitive. And if you look at the overall package we're offering, from installation to customer care to value-add services, with our Sky and so forth packages, I think we're very competitive. And therefore, overall, our market strength is -- will continue, and I believe we can fight cable very effectively.
Agree. Let me answer the question on Tele2. In August 2013, we signed an agreement to share antenna sites in The Netherlands for 10 years. And we extended the existing MVNO roaming agreement for 2G and 3G for a period of 5 years. Now you might question why we're doing that. This is a high competitive market. This is, let's say, a market where our return on capital employed isn't satisfying. This is a market where scale measures from a cost perspective and whatever we could save is possible to improve, let's say, from a competitiveness or even from a network coverage perspective. With these deals, our first estimations show that a successful passive network sharing can result in potential benefits accounting for almost 30% of site cost over a 10-year period. And I think this is quite significant from the economic perspective. And that's the reason that we went into this Tele2 transaction.
Mr. Dominik Klarmann from HSBC.
Dominik Klarmann - HSBC, Research Division
Firstly, on regulation and the European single-market package, I understand the industry is currently in discussions with Brussels about filling that draft with real tangible details. Now I'm wondering how you would describe the dialogue at this stage. Is it constructive? Do you oppose it? And if so, what are the potential dealbreakers, in your view? And then secondly, on the fiber migration in Germany, do you have a target you're prepared to share with us in terms of fiber subscribers, say, end of next year. Looking at the 1.4 million you have today, is something like 2 million for end of next year a good reasonable target? Or you're -- are you even more aggressive than that? That would be helpful.
This is René speaking. Look, the -- you know me for being critical vis-à-vis regulations since many years, and I must say that we are seeing some improvements in the approach, but it's clearly still a mixed bag. There are some positive elements, and there are some negative elements. Clearly, negative is there are further attempts to cut into the revenue and profit pool of the industry, i.e. by cutting international calls and international roaming prices further. With regards to roaming, personally, I feel somewhat mixed. I still think we should, as an industry, be more customer-friendly, and over time, that would pay back positively. But clearly, I consider it most unnecessary to make further cuts into international calls. That just takes away potential revenues which we could need to reinvest. More on the positive side, though long term, are the ideas around spectrum. I think it's good to harmonize the spectrum approach across Europe in a very reasonable way. Also, the allowance of QS, Quality of Service management, on the side of partnering with Internet companies, as well as the confirmation of the intention to stabilize unbundled local loop fees to foster investments. So it's a mixed bag. The approval before April 2014 and the new election -- before the new election of the European Parliament seems ambitious. Generally speaking, I think the pressure on politicians to stimulate broadband investments is still growing. And you see some encouraging early thoughts, for instance, also in the -- what we are hearing from the German negotiations in the coalition with regards to their willingness to support broadband investments and the business environment for broadband investors. But let's wait for the final outcome. So it's a mixed bag. I'm slightly positive. I'm not enthusiastic, but I'm slightly positive, and I'm also positive about our future ability to compete with our VDSL/vectoring investment program.
Yes. And based on that and adding to the question about fiber migration in Germany, what I don't want to do is disclose now numbers for year-end 2014. We will talk about 2014, I think, next quarter -- first quarter next year. What we do and very aggressively do is what we announced last year in the Capital Markets Days. We will spend roughly an additional EUR 1 billion next year for the integrated network strategy. And I think that's very aggressive in terms of rolling out and, obviously, then, also looking out for the customers in the marketplace to make sure that we get a good utilization on that investment.
The last question for today is coming from Mr. Frederic Boulan from Nomura.
Frederic Boulan - Nomura Securities Co. Ltd., Research Division
Just 2 questions. Just firstly on Germany, talk a bit about what's happening on the fixed line side. We're seeing some small progress in terms of revenue performance. We are actually seeing a couple of incumbents now in Europe starting to grow fixed EBITDA with revenues. If you could comment specifically on, in your case, considering the ramp-up in VDSL plus vectoring and the headwinds on line loss and broadband momentum, when do you think growth is possible? And secondly, just on your overall midterm guidance, so I know it's not the usual forum for that, but the guidance provided at the CMD last year, strong full revenue growth, an EBITDA growth in 2014, so if you could comment on how you feel about that considering the current performance? And similar question for the EUR 6 billion free cash flow guidance you have for 2015.
On -- first of all, kind of reflection on what you said about Capital Market Day, what we announced there is that we will see a stabilization in 2014 with revenues, not a growth. Nevertheless, we would like to see a growth. Don't get it wrong. But we said we were committed to stabilize them. And part of that stabilization is and was, a, to see in mobile a slight increase in growth, on one hand, in the service revenues; and b, in the Connected Home revenues, an increase of around 2%. That was what we guided for 2015 related to 2012, and we're still committed to do so. And this is why Tim mentioned a minute ago that we're doing some activities and measures here additionally to the integrated network strategy and the rollout we do in there to keep the products attractive and make customers happy with the product.
Let me spend a sentence on 2013 and even on 2014. First, I think we're in a very good way to deliver on the 2013 targets which we have laid out, the EUR 4.5 billion and the 17.5 on the EBITDA side. So this is well on track, and we reiterate that we will do that even under higher customer growth number, which we're achieving in the U.S., because we could compensate that with better synergies and lower OpEx, as we have laid out. So I think that is the first growth metric. This is the starting point, then, for 2014 and beyond. And what we see today is there's no reason nor any kind of news that what we have said on the Capital Markets Day, that we're going to change that. I think in principle, what we're seeing is a very strong growth momentum in our used operations, a good track, unbroken from what we see moving on in 2014. What we see is a stabilization, almost, in our German environment with, let's say, a leading position, both on mobile and on fixed line, in its markets and, let's say, a good answer even from a market perspective. We're doing well on the network [ph] trends here looking forward and even from the network quality. And we have even a significant improved T-Systems business. Look at the numbers. We have an improvement of 18.5% on the EBITDA side. Even here, our OpEx and our CapEx is much better under control. The more challenging environment is Europe. There is a lot of market economic things which are hitting us, and even the regulators are here, to a certain extent, have been a bit unreasonable. And so therefore, we have to fight against that. We have to adapt our cost structure towards the revenue developments in these areas. And what we even have to do is that we focus on the areas where we could win. And this is why we're even stressing this in our presentations. And in the areas, being it TV, being it mobile data, being it the B2B area, in these areas, I think we've made good progress. And that is, for us, I think, a sign that in this difficult environment, we even find a way to fight back on the current trend. And with this, I think what we have said on the Capital Market Day stays around the relevant KPIs, even for your intention for the future.
Thanks, Tim, and that is basically the end of it, of today's conference call. I know there were some key people still in the waiting line. You'll be called up in the next 15 to 20 minutes by myself and the IR department. In the case of any further questions from the ones who haven't handed in questions, please contact ourselves and the IR department. Thank you very much, and speak to you soon. Bye-bye.
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