Deutsche Telekom Beats Despite Lower Sales

| About: Deutsche Telekom (DTEGY)

German telecom behemoth Deutsche Telekom (DT) announced first-quarter results with adjusted (excluding special factors such as staff-related measures and non-staff-related restructuring) earnings per ADS of 28 cents beating the Zacks Consensus Estimate of 17 cents.

Adjusted net profit of €891 million (US$1.24 billion) represents a 36% annualized increase. On a reported basis, Deutsche Telekom registered a net profit of €767 million (US$1.07 billion). The carrier posted a net loss of €1.12 billion (US$1.5 billion) in the year-ago quarter when results were dragged down by a €1.8 billion (US$2.4 billion) impairment charge on goodwill of its British unit T-Mobile U.K.

Group Revenue & EBITDA

Revenues slid 0.6% year-over-year to €15.8 billion (US$22 billion), on account of weak contribution from the carrier’s domestic and US operations. However, sales beat the Zacks Consensus Estimate of US$20.6 billion.

Domestic revenues fell 2.9% year-over-year to €6.74 billion (US$9.4 billion), while international revenues increased 1.3% to €9.1 billion (US$12.6 billion). Approximately 57% of the revenues were generated outside Germany in the quarter. Adjusted EBITDA increased 1.6% year-over-year to €4.9 billion (US$6.8 billion).

Results by Segment


Revenues fell 2.2% year-over-year to €6.2 billion (US$8.6 billion) as a result of sustained erosion in fixed-network lines and regulatory pricing pressure. German fixed-network and mobile communications operations were combined following operational restructuring in late 2009.

Fixed-network revenue declined 4.1% year-over-year to €4.5 billion (US$6.3 billion), while mobile communications revenue grew 2.5% to €2 billion (US$2.8 billion) boosted by higher service revenues (up 3.3%). Wireless data revenues grew 39% year-over-year.

Fixed-line voice subscriber base continues to contract (albeit at a slower pace) as reflected by a 6.9% year-over-year decline in fixed-network lines, reaching 25.8 million lines. Broadband business remains on the growth track as total retail broadband lines grew 6.4% year-over-year to 11.7 million, with 188,000 lines added in the quarter. Mobile subscriber base declined 1.3% to 38.5 million.

United States (T-Mobile USA)

Revenues at Mobile Communication USA (T-Mobile USA), the fourth-largest US wireless carrier, dipped 7.8% year-over-year to €3.8 billion (US$5.3 billion), impacted by unfavorable exchange rate (Euro versus U.S. dollar) movements. In dollar terms, revenues declined 2.2% year-over-year to $5.28 billion on account of lower voice access revenues.

Blended ARPU was US$46, down from US$48 a year-ago (flat sequentially), as growth in data was offset by lower voice revenues. Blended churn (customer switch) remained flat year-over-year and improved sequentially at 3.1% as a result of reduced postpaid churn.

T-Mobile USA lost 77,000 customers in the quarter due to the exodus of its branded customers. The loss compares to a net gain of 371,000 customers and 415,000 customers in the previous and prior-year quarter, respectively. The entity served 33.7 million mobile subscribers at the end of the quarter, up 1.6%. Number of customers using 3G smartphones climbed to 5.2 million from 1.5 million a year ago.

T-Mobile USA plans to upgrade its nationwide 3G network to the HSPA+ standard addressing 185 million people by end of 2010. Moreover, the entity targets to deploy the 4G network based on the Long-Term Evolution (LTE) standard in 2011.

However, T-Mobile USA faces a consolidating industry and is struggling to compete with its larger peers like AT&T (NYSE:T) and Verizon (NYSE:VZ). Deutsche Telekom is mulling over spinning off T-Mobile USA or launching an initial public offering for the unit.


Revenues for this segment (operations in the UK, Poland, the Netherlands, Austria and the Czech Republic) decreased 1% year-over-year to €2.4 billion (US$3.3 billion) on account of lower service revenues. The segment served 44 million cellular customers (flat year-over-year) at the end the quarter.

Revenues from UK (T-Mobile UK), the largest contributor to the segment’s revenue, decreased 6.3% year-over-year to €783 million (US$1.1 billion) impacted by mobile termination rate (inter-operator fees) cuts.

Following the approval of the European Commission in March 2010, Deutsche Telekom has merged T-Mobile UK with France Telecom’s (FTE) British subsidiary Orange UK on April 1, 2010, under a 50-50 joint venture. The combined entity has dethroned Spanish telecom giant Telefonica’s (NYSE:TEF) UK unit O2 UK as the largest wireless operator in the UK with a roughly 37% market share. Moving forward, T-Mobile UK will be excluded from the consolidated income statement.

Southern and Eastern Europe

The segment reported revenues of €2.6 billion (US$3.8 billion), up 21.5% year-over-year, fuelled by the inclusion of the Greek operator OTE group, in which Deutsche Telekom holds a 30% stake.

At the end of the quarter, the segment served 34 million (up 5.3% year-over-year) mobile customers and 3.68 million (up 15.7%) retail broadband connections. Effective Apr 1, 2010, Deutsche Telekom has merged its Europe and Southern and Eastern Europe segments into one reporting segment “Europe”.

Systems Solutions (T-Systems)

Revenues rose 1.2% year-over-year to €2.1 billion (US$3 billion), boosted by the segment’s international businesses and 7.3% year-over-year growth in new order bookings. Telecommunications revenue fell 4.4% year-over-year, while computing services and desktop services revenues increased 9% and 5.5%, respectively.


Deutsche Telekom plans to pay at least €0.70 (97 cents) per share as dividend between 2010 and 2012. The carrier targets to return roughly €3.4 billion (US$4.7 billion) per year to shareholders in the form of dividend and share repurchases through 2012.


Deutsche Telekom has reiterated its outlook for 2010, expecting an adjusted EBITDA of €20 billion (US$27.9 billion) and a projected free cash flow of €6.2 billion (U$8.6 billion), including OTE’s contribution. The adjusted EBITDA forecast excludes the effects of the merger between T-Mobile UK and Orange UK. The carrier expects capital expenditures of €9.1 billion (US$12.7 billion) for the year.

The company continues its aggressive cost-cutting initiatives under the “Save for Service” program, which generated total savings of approximately €5.9 billion (US$8.7 billion) at the end of 2009. Moving forward, the program is expected to deliver additional savings of €4.2 billion (US$5.8 billion) by 2012.